Canada: The Kitco Metals Inc. Decision: How To Restrict The Tax Authorities' Recourse To Set-Off In The Context Of A Restructuring

On February 1, 2016, the Superior Court of Québec delivered its judgment in the important Kitco Metals Inc. case 1. In her ruling, Madam Justice Marie-Anne Paquette refused to allow federal and Québec tax authorities (the "Agencies") to set off a tax debt that predated the commencement of the restructuring proceedings against GST and QST input tax credits/refunds that had been "earned" subsequent to the filing of insolvency proceedings, during a period in which the taxpayer enjoyed the protection of the Companies' Creditors Arrangement Act ("CCAA"). This decision is highly significant inasmuch as it considerably restricts the scope of the set-off or compensation mechanism that tax authorities routinely use in the context of insolvency. It should be noted, however, that the ruling is currently under appeal.


Kitco Metals Inc. ("Kitco") is in the business of purchasing scrap gold from various suppliers in order to extract and then sell pure gold from it. Although the sale of scrap gold is taxable for GST and QST purposes, the sale of pure gold by the refiner (or by the person on whose behalf gold is refined) is zero-rated. Kitco can therefore claim GST and QST input tax credits/refunds ("ITCs/ITRs") to recover the taxes it pays to its suppliers, including those that supply it with scrap gold.

In 2010 and 2011, the Agencies issued notices of assessment to Kitco in order to reclaim ITCs/ITRs for GST and QST that the company had allegedly never actually paid to its suppliers (the "Notices of Assessment"). The Agencies contended that Kitco had taken part in a fraudulent tax scheme involving several of its suppliers. Strongly objecting to the Notices of Assessment, Kitco challenged them before the Tax Court of Canada and the Court of Québec. The disputed tax debt is approximately $313 million (the "Disputed Tax Debt").

In June of 2011, as a result of the enforcement measures implemented by the Agencies to collect the $313 million, Kitco filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act ("BIA") and a notice of stay of proceedings. One month later, it was agreed to continue the insolvency proceedings under the CCAA instead.

In the meantime, during its restructuring, Kitco continued to operate and to claim ITCs/ITRs on a monthly basis. Those claims related to subsequent transactions with suppliers that are unrelated to the Disputed Tax Debt. While the Agencies do not challenge the validity of these ITCs/ITRs (the "Uncontested ITCs/ITRs") they have refused to pay the claims made since the commencement of the insolvency proceedings, preferring instead to set them off against the Disputed Tax Debt. The amount set off in this manner, and therefore not paid out to Kitco, totals approximately 1.8 million and is increasing every month.

Kitco, the monitor, as well as an important creditor that we are representing, challenged the validity of this set-off/compensation.


In its decision, the Court concluded that the Agencies could not set off the Uncontested ITCs/ITRs against the Disputed Tax Debt. Analyzing section 21 of the CCAA, which allows for set-off in the context of an insolvency on claims made against the debtor company, the Court held that set-off (or compensation) is only permitted where the claims stem from obligations incurred before the earlier of the commencement date of proceedings under the CCAA and the date of bankruptcy. This automatically excludes the Uncontested ITCs/ITRs, given that they relate to transactions Kitco entered into after the commencement of its restructuring proceedings under the CCAA.

The Court also noted that because the application of the set-off mechanism in the context of insolvency derogates from the underlying principle of equality among creditors, it must be interpreted narrowly. In D.I.M.S.2, the Supreme Court of Canada stated that there exists an implicit rule under the BIA whereby the set-off mechanism only applies to mutual debts incurred before bankruptcy. Seeing no reason to differentiate between the context of a bankruptcy and that of an arrangement, the Court ruled that this interpretation also applied under the CCAA. The Uncontested ITCs/ITRs and the Disputed Tax Debt are not mutual and are completely unrelated, except for the identity of the parties, and they relate to contexts, periods and transactions that are separate and independent. There cannot, therefore, be any set-off or compensation.

Finally, in obiter dictum, the Court rejected the presumptions created under tax laws and relied upon by the Agencies, according to which claims formulated in the Notices of Assessment would be deemed valid and exigible notwithstanding objections of the type Kitco had raised in this case. These presumptions go against the principle of equality among creditors and the Crown's status as an unsecured creditor under the CCAA and the BIA, and are not the subject of an explicit exception under these statutes. Without the benefit of these presumptions, the Disputed Tax Debt cannot meet the criteria of the certain, liquid and exigible test necessary to effect set-off, or compensation, under Quebec civil law.

The Court consequently ordered the Agencies to reimburse the Uncontested ITCs/ITRs totaling approximately $1.8 million.


Subject to a possible contrary ruling by the Québec Court of Appeal, one can expect that recourse to set-off will become increasingly difficult for tax authorities when a taxpayer is placed under the protection of the CCAA or BIA regimes. The mechanism will only apply to mutual debts incurred before the date of insolvency. Furthermore, the presumptions and priorities created under tax laws will no longer be applicable in the context of insolvency without an explicit exception in the CCAA or the BIA.

The authors wish to thank Sara Shearmur for her invaluable help in writing this article.


12016 QCCS 444.

2 D.I.M.S. Construction inc. (Trustee of) v. Québec (Attorney General), [2005] 2 S.C.R. 564.

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.

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