Canada: Alberta Court Of Queen's Bench Reiterates Court's Discretion To Grant An Interim Financing Charge "Super-Priority" Status In The Face Of A Deemed Trust Under The Income Tax Act

This blog's most recent post considered the Supreme Court of Nova Scotia's June 2017 decision of Rosedale Farms Limited, Hassett Holdings Inc., Resurgam Resources (Re) ("Rosedale") where the Court held that a deemed trust for unremitted withholdings under sections 227(4) and 227(4.1) of the Income Tax Act (Canada) (the "ITA") had priority over a charge for interim financing granted by a court pursuant to section 50.6 of the Bankruptcy and Insolvency Act (Canada) (the "BIA"). In Rosedale, the interim financing lender relied on the 2007 Alberta Court of Queen's Bench decision in Temple City Housing Inc. (Companies' Creditors Arrangement Act) ("Temple"), asserting, among other things, that a deemed trust is in substance a security interest and can therefore be subordinated to an interim financing charge pursuant to section 50.6 of the BIA (the "BIA"). The Nova Scotia Supreme Court disagreed with the decision in Temple and held that the language creating the deemed trust in the ITA clearly provides that a deemed trust created thereunder takes priority over any other security. As a result, and despite the terms of the DIP order issued in the case, the Canada Revenue Agency ("CRA") had priority over the DIP lender.

Earlier this month, the Alberta Court of Queen's Bench was also given the opportunity to consider the question of priority between a deemed trust under the ITA and a super priority charge for an interim financing lender in a post-2009 amendment landscape. In Canada North Group of Companies (Companies' Creditors Arrangement Act) ("Canada North"), the Court held that CRA's interest arising under the ITA was properly subordinated in favour of "super-priority" charges that can be granted under the Companies' Creditors Arrangement Act (Canada) (the "CCAA"). The Court initially distinguished Rosedale on the grounds that it concerned a BIA proposal scenario. It then went further and, in stark contrast to Rosedale, held that notwithstanding the differing federal insolvency regimes, Justice Romaine's finding in Temple that a deemed trust under the ITA was in essence a "security interest" was correct and concluded that a harmonious interpretation of the ITA and the CCAA provides that a court may, when appropriate, grant priority to charges necessary for restructuring.

The conflict between the Temple and Canada North line of authority, and the reasoning in Rosedale, is apparent in various aspects of the judgments. One of the initial points of differences is with reliance on the definitions of "security interest" and "secured creditor" in section 224(1.3) of the ITA. In Canada North, the use of the term "...a deemed or actual trust" in the definition led to the conclusion that the deemed trust was, in substance, a security interest and the provisions of the CCAA that empower a court to order that a charge for interim financing "rank in priority over the claim of any secured creditor of the company" can be applied to prime the CRA's claim. Rosedale rejected this interpretation on the grounds that the definitions were created in the context of s. 224(1.3), which concerns garnishment to collect, among other things, unremitted withholdings and held that the correct contextual interpretation is that the inclusion of the definitions is to give the deemed trust for unremitted withholdings priority over all security interests, including other federal and provincial statutory deemed trusts.

Canada North also holds that, despite the section 227(4.1) lead-in language expressly overriding any other provision of the ITA, the BIA and "any other enactment of Canada", the logical inference is that Parliament intended to create a co-existing statutory scheme that accomplishes both the goals of the CCAA and the ITA and such a statutory scheme must permit an interim financing charge to be granted priority over a deemed trust. The Court goes on to state that if Parliament had wanted to limit a court's ability to give priority to interim financing charges, it could have drafted the relevant provisions of the CCAA to expressly provide that the priority claim could not extend to statutorily created deemed trusts. The contrary position, as touched on in both the prior post and in Rosedale, is that the same interpretational rules may be applied to the ITA provisions so as to elevate the deemed trust above the super-priority rights contained in both the BIA and CCAA.

The most notable aspect of the tension, however, is in the competing interpretation of the Supreme Court of Canada's decision in Century Services v Canada ("Century"). While Rosedale cites Century for the proposition that inherent jurisdiction cannot override validly enacted legislation, Canada North seizes on the policy statements that confirm the CCAA is designed to avoid the social and economic consequences of liquidation and cites academic commentary that recognizes the essential nature of such charges in a successful restructuring. The decision in Canada North, which includes the resounding conclusion that "...the definitions of secured creditor and security interest in the CCAA and Fiscal Statutes support finding that the interests arising from the deemed trusts are security interests, not property interests" to ground a finding that such interests are capable of being subordinated, is encouraging to distressed companies, lenders, directors, insolvency professionals and any others that may rely on charges granted under federal insolvency legislation and will hopefully counter the chilling effect that Rosedale will undoubtedly have on restructuring proceedings.

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