The Tax Court of Canada recently confirmed in International
Hi-Tech Industries Inc v The Queen, 2014 TCC 198,
that in certain circumstances a secured creditor can commence or
continue a tax appeal on behalf of a bankrupt estate.
The Appellant was a bankrupt corporation. Prior to bankruptcy,
it granted a general security agreement (GSA) to its holding
company and other related companies. The appeal related to alleged
GST miscalculations of input tax credits (ITCs) by the CRA during a
GST audit and subsequent assessments. The Trustee in Bankruptcy
accepted the validity of the GSA, waived redemption of the security
and released its interest in the collateral charged by the GSA.
The CRA sought to quash the appeal on the basis that the legal
proceeding was not authorized or filed by the Trustee, and the
secured creditors had no legal capacity to bring an appeal.
The Court agreed that if the entity seeking to enforce the
taxpayer's rights of appeal were a general creditor of the
estate, a bankrupt or an alleged indemnitee under a pari
pasu or unliquidated claim, then no right to commence an
appeal would exist in the absence of the Trustee's consent or a
However, the Court found that the facts in the present case
supported the secured creditors' right to commence or maintain
an appeal. The secured creditors sought to prosecute the appeal
pursuant to the GSA, which had been vetted, verified, approved and
not redeemed by the Trustee. The Trustee could not authorize the
bringing of the appeal because the Trustee had no interest in
assets it covered and no right to any proceeds arising from ITCs.
The Trustee could only value the security, accept it (or not),
confirm it defeated his own rights, and release and deliver the
security to the secured creditors.
The Court further found that the GSA provided sufficient
authority to the secured creditors to commence and maintain the
appeal under the Rules of Court and relevant legislation. The GSA
was a standard GSA that transferred and assigned all of the
bankrupt's present and after acquired personal property, which
included, among other things, debts, claims, and choses in action.
The GSA also included the power to direct the payment of debts to
the secured creditors upon default and give the secured creditors
the power to take all steps necessary to exercise all incidental
powers in the debtor's name.
The Court also concluded that the definition of
"receiver" in the Excise Tax Act was broad
enough to include a situation like the present where the GSA
contained broad powers of appointment for a secured party or agent
to take steps to realize upon the property covered by the GSA.
Thus, the secured creditor qualifies as an "agent" under
the Excise Tax Act and can object to a GST assessment or
reassessment and maintain an appeal in respect of the property
(book debts) assigned to them and delivered by the Trustee.
While in practice, it may not be practical or beneficial for a
secured creditor to pursue an appeal in Tax Court, this decision
does provide another avenue for secured creditors to potentially
recover any debt owing by a bankrupt.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).