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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
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).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.