Canada: Property Tax Priorities In Alberta Insolvency Proceedings: Current Uncertainty

Last Updated: November 16 2018
Article by Kelsey Meyer

Recent decisions of the Court of Queen's Bench of Alberta have put into question the priority of municipal property taxes in insolvency proceedings. Two such decisions are the subject of pending appeals. A third recent decision of the Court of Queen's Bench of Alberta has confirmed the scope of a special lien for municipal property taxes. This article is the first in a series addressing these issues.

Virginia Hills: Linear Tax Claims

In an order granted by the Honourable Mr. Justice Yamauchi of the Court of Queen's Bench of Alberta on June 20, 2017, in the Matter of the Receivership of Virginia Hills Oil Corp. and Dolomite Energy Inc., the Court ordered that:

"... pre-receivership linear tax claims of certain municipalities formed unsecured claims only against the debtors' property, did not constitute permitted encumbrances against that property upon the sale of the same, and that the municipalities had no further claims or remedies as against those properties, the proceeds of sale of the same, or the purchaser."

The debtors had been adjudged bankrupt on May 1, 2017.

"Linear property" is defined under the Municipal Government Act, RSA 2000, c M-26, as amended (MGA) to include, among other things, electric power systems, railway property, telecommunication systems, wells and pipelines.

In the application heard by Mr. Justice Yamauchi, the court-appointed receiver and manager, Alvarez & Marsal Canada Inc. (A&M), argued that the municipalities' claims for linear property taxes were unsecured under the Bankruptcy and Insolvency Act, RSC 1985, c B-3, as amended (BIA). A&M made several arguments. First, A&M referenced section 348 of the MGA, which states, in part, that

". . . taxes due to a municipality (a) are an amount owing to the municipality, (b) are recoverable as a debt due to municipality, (c) take priority over the claims of every person except the Crown, and (d) are a special lien (i) on the land and any improvements to the land, if the tax is a property tax..."

A&M argued that, based on principals of statutory interpretation, "property tax" within the meaning of subsection 348(d)(i) does not include linear property tax, and as such, section 348(d)(i) did not create a special lien for unpaid linear property taxes. Further, there was no other form of security for unpaid linear property taxes pursuant to the MGA. 

Second, A&M made reference to subsection 136(1)(e) of the BIA, which states:

(1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:

(e) municipal taxes assessed or levied against the bankrupt, within the two years immediately preceding the bankruptcy, that do not constitute a secured claim against the real property or immovables of the bankrupt, but not exceeding the value of the interest or, in the Province of Quebec, the value of the right of the bankrupt in the property in respect of which the taxes were imposed as declared by the trustee;

As such, in a bankruptcy, municipal taxes that are not secured claims constitute a preferred claim over the proceeds realized from the property over which the taxes were imposed, to the extent of the value of the right of the bankrupt in that property.

Third, A&M argued that even if the Court were to find that linear property taxes could be secured by way of a special lien pursuant to subsection 348(d)(i) of the MGA, any such special lien would be rendered invalid by virtue of section 87 of the BIA because the lien had not been "registered under a prescribed system of registration before the date of the initial bankruptcy event." Section 87 states:

(1) A security provided for in federal or provincial legislation for the sole or principal purpose of securing a claim of Her Majesty in right of Canada or of a province or of a workers' compensation body is valid in relation to a bankruptcy or proposal only if the security is registered under a prescribed system of registration before the date of the initial bankruptcy event.

(2) In relation to a bankruptcy or proposal, a security referred to in subsection (1) that is registered in accordance with that subsection;

(a) is subordinate to securities in respect of which all steps necessary to make them effective against other creditors were taken before that registration; and

(b) is valid only in respect of amounts owing to Her Majesty or a workers' compensation body at the time of that registration, plus any interest subsequently accruing on those amounts.

In the case before the Court, no registrations had been made with respect to the municipalities' linear property tax claims. 

A&M argued that municipalities could be considered agents of the provincial Crown, by virtue of being obligated to levy linear property taxes under the MGA, a duty which is delegated by the Province. A&M relied on Medicine Hat (City) v Canada (Attorney General), [1984] 3 WWR 535, in support of its argument, as well as the fact that linear property assessments are performed by an assessor designated by the Province of Alberta. Further, A&M argued that the municipalities are performing duties designated to the provinces in the Constitution Act, 1867.

Finally, A&M argued that even if municipalities had a valid special lien, they would be unable to enforce such a lien because pursuant to Division 9 of Part 10 of the MGA, the right to recovery of tax arrears is by distress warrant and sale of the goods of the tax debtors. In a bankruptcy, pursuant to section 73(4) of the BIA, the municipalities can recover their costs of distress or seizure and sale, but otherwise the proceeds of sale of goods subject to distress or seizure are paid to the trustee in bankruptcy.

Ultimately, Mr. Justice Yamauchi found in favour of A&M, although it is unclear from the order on what basis. His Lordship determined that a special lien pursuant to section 348 of the MGA only secures outstanding non-linear property tax. 

Certain municipalities appealed the order. The appeal was argued before the Alberta Court of Appeal on June 12, 2018. The decision is pending.

The outcome of this appeal could have significant implications for owners or licensees of linear property, including wells and pipelines, as well as other creditors of those parties. Specifically, if Justice Yamauchi's order is upheld and the Court of Appeal finds that linear property taxes do not constitute secured claims in a bankruptcy (or in other insolvency proceedings, based on the interpretation of section 348 of the MGA), that may significantly change other creditors' likelihood of recovery in an insolvency proceeding.

Further Uncertainty: Reid-Built Homes Ltd.

In reasons for judgment issued February 21, 2018, the Honourable Mr. Justice Graesser of the Court of Queen's Bench of Alberta held that The City of Edmonton's claim for property taxes had priority to court-ordered charges for receiver's fees and approved borrowings by the receiver. Here again, A&M acted as the court-appointed receiver and manager of Reid-Built Homes Ltd. and related debtors (collectively, "Reid-Built").

The City of Edmonton argued that it should have priority over court-ordered charges, and brought an application for an order exempting its property tax claims from the super-priority provisions of the receivership order.

Justice Graesser concluded that the City of Edmonton's position "may be properly subordinate to the Receiver's Fees, disbursements and borrowings as may ultimately be apportioned amongst the creditors". However, Justice Graesser held that the matter does not end there—the receivership order must fit the circumstances of the case, and the determinations are in the discretion of the court.

Notably, the Reid-Built receivership proceedings involved a liquidating process, not a restructuring. The City of Edmonton argued that there was no apparent benefit to it as a result of this type of receivership and therefore no reason why the City should be subordinate to any borrowings by the Receiver.

Justice Graesser concluded that "while the Court has the power to subordinate municipal tax claims to the costs of the receivership (as they may be apportioned to the municipality), this is not an appropriate case in which to do so. In this case, the Receiver's charge and the borrowing power do not rank ahead of Edmonton's property tax claims."

Justice Graesser held that:

  • "On the appointment of a Receiver under the BIA, or during the receivership, the Court has the jurisdiction to determine the priority of the Receiver's fees and disbursements, as well as repayment of any court-authorized borrowing."
  • "The Court has the power to grant a super priority for the Receiver's fees and disbursements ahead of secured creditors, including secured creditors with proprietary interests."
  • "This power must be exercised equitably, having regard to the purpose of the legislation and the purpose of the receivership."
  • "Creditors should not get a "free ride" in a receivership, paid for by other creditors."
  • "Court approved borrowings for the purpose of preserving and improving property may properly enjoy a priority over proprietary interests such as property taxes, mortgagees, and builders lien claimants in appropriate circumstances."
  • "Different considerations apply to liquidating processes than to restructuring processes under either the BIA or the CCAA."
  • "Ultimately, the apportionment of the Receiver's fees and disbursements is for the Court to determine at the end of the receivership, including repayment of any borrowings authorized by the Court."
  • "On the facts of this case, it being a liquidating process and there being no apparent benefit to Edmonton arising out of the Receivership, Edmonton's priority for property taxes is not subordinate to the Receiver's fees or approved borrowings."

A&M is appealing Justice Graesser's decision, arguing that the court-appointed receiver's reasonable fees, expenses and borrowings should constitute a first-ranking super-priority charge ahead of all other claims, including the claims of municipalities for unpaid taxes. The appeal is scheduled to be heard on February 7, 2019.

The Scope of the Security for Property Taxes: Regent Resources Ltd.

On June 22, 2018, the Honourable Madam Justice Horner of the Court of Queen's Bench of Alberta heard an application of Ernst & Young Inc. (EYI), the court-appointed receiver of the assets of Regent Resources Ltd., for an order declaring that the special lien asserted by Cardston County, Alberta, pursuant to section 348 of the MGA in respect of outstanding (non-linear) property taxes attached only to the specific property that was subject to those taxes, and not to all assets of the debtor, Regent Resources Ltd.

In that case, Cardston County asserted and had registered a special lien for non-linear property taxes pursuant to section 348 of the MGA. The receiver had paid the municipal property taxes owing from the proceeds of sale of the property subject to those property taxes. No assets of Regent located in Cardston County had been sold; rather, the receiver had disclaimed all of those assets.  However, Cardston County asserted that its special lien in excess of $118,000 attached to all assets of Regent, no matter where those funds were situated, and that its special lien over all assets of Regent had priority to all creditors, including secured creditors of Regent.

EYI pointed out that Cardston County was seeking to attach its lien extra-municipally to property in other municipalities, which would effectively apply Cardston County's taxation bylaws outside of its boundaries, in contravention of the MGA. Further, Cardston County's interpretation would result in Cardston County's lien extending to properties located in other municipalities on which the assessed property taxes had already been paid. A broad scope special lien would also be "an invisible superpriority charge" of which purchasers and lenders would not have notice.

EYI argued that Cardston County's argument would yield absurd consequences, and provided several hypothetical examples in that regard. Pursuant to statutory interpretation principles, absurd consequences are presumed not to be intended.

Madam Justice Horner agreed with EYI's position that that Cardston County's asserted special lien did not grant Cardston County floating security over all of Regent's assets, no matter where they were situated. Rather, the lien was restricted to the assessed property on which taxes are due, and by implication, and by operation of the MGA, the lien was restricted to property located within the municipality's boundaries. Madam Justice Horner also noted that a municipality is not left without a remedy if its special lien is limited to its own boundaries. A municipality can obtain a judgment for unpaid taxes and enforce that judgment against the debtor's assets, within or even outside Alberta if the judgment is extraprovincially registered.

Remaining Questions

It remains to be seen what the Court of Appeal of Alberta will find in the Virginia Hills and Reid-Built appeals referenced herein. The implications, in both cases, are significant for willing and unwilling participants in insolvency proceedings in Alberta.

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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