Canada: Alberta Court Of Appeal Ranks CCAA Super-Priority Charges Ahead Of CRA's Deemed Trust, But Uncertainty Remains

In a recent split decision, the Alberta Court of Appeal held that super-priority charges granted in a Companies’ Creditor Arrangement Act (“CCAA”) proceeding may take priority over statutory deemed trusts claims advanced by the Crown.  In Canada v Canada North Group Inc.1, the deemed trusts flowed from provisions of the Income Tax Act (“ITA”), Canada Pension Plan, and the Employment Insurance Act (collectively, the “Fiscal Statutes”). The decision offers the first Appellate Court consideration of the apparent conflict between the super-priority provisions of the CCAA and the Fiscal Statutes in connection with unremitted source deductions.

Background

In 2017, the Court of Queen’s Bench issued an order granting the debtor companies protection under the CCAA. As per sections 11.2(1), 11.51(1) and 11.52(1) of the CCAA, the initial order charged the debtors’ property with security interests in favour of the interim lender, the debtors’ directors and the insolvency professionals (collectively, the “Priming Charges”). The initial order expressly subordinated the Crown’s interest arising under any federal or provincial statute in favour of the Priming Charges.

The CRA, sought to vary the initial order. It asserted that its claim for unremitted source deductions were a property interest superseding all security interests, including court-ordered charges granted in CCAA proceedings.  Specifically, the CRA argued that section 227(4.1) of the ITA creates a deemed trust in favour of the Crown over property of a tax debtor for unremitted source deductions. The amounts deducted are deemed to be held separate and apart from the property of the taxpayer in trust for the Crown. Such amounts are owed to the Crown in priority over any security interests “notwithstanding” any other legislation.

The Chambers Judge dismissed the Crown’s application holding that the super-priority charges of the CCAA gave the court the discretion to rank the Priming Charges ahead of the Crown’s security interest arising out of the Fiscal Statutes. The CRA appealed.

Decision of the Majority 

Writing for the majority, Justice Rowbotham agreed with the Chambers Judge.  Rowbotham J. observed that adopting the Crown’s view would introduce “an unacceptable level of uncertainty” and “absurd consequences” into the insolvency process.

The majority first noted that the Crown’s deemed trust under the Fiscal Statutes is in the nature of a floating charge. Based on this position and a harmonious interpretation of the CCAA and the Fiscal Statutes, the majority characterized the Crown as a secured creditor. The Crown’s interest in unremitted source deductions could thus be subordinated by court-ordered super-priority charges under the CCAA which expressly provides for such subordination.  The crux of the majority’s reasoning is that the Crown ignored the remedial purpose of restructuring legislation for the sake of tax collection. Recognizing that lenders and insolvency professionals would be discouraged from participating in restructuring proceedings without super-priority, the majority reconciled the CCAA and Fiscal Statutes to facilitate the survival of business and maintenance of employment for individuals. This interpretation coincides with the goals of maximizing tax revenue.

Decision of the Minority

Justice Walkeling would have allowed the Crown’s appeal. In his view, a plain reading of the Fiscal Statutes bears only one possible meaning: the Crown is the beneficial owner of unremitted source deductions. These amounts must be paid to the Crown “notwithstanding” the security interest of other creditors including holders of super-priority charges.

He found that the policy reasons for encouraging restructurings cannot justify ignoring the ordinary meaning of the statutory text. If a strict interpretation of 227(4.1) of the ITA reduces the efficacy of the CCAA, that is a policy choice that only Parliament can address.

Implications

For now, Canada North provides greater confidence and protection for lenders and insolvency professionals in CCAA proceedings. However, some uncertainties remain, owing to the limited scope of both the majority and dissenting judgments.

The majority did not address in its reasons section 37 of the CCAA which would seem to nullify statutory deemed trusts in favour of the Crown once a CCAA proceeding is commenced, but explicitly preserves the source deduction deemed trusts arising under the Fiscal Statutes. This exemption arguably has the effect, in the circumstances at issue in Canada North, of treating the property of a debtor company as being held in trust for the Crown. This provision appears to reinforce the Crown’s priority under the Fiscal Statutes given that a court has jurisdiction to charge only property belonging to the debtor.

Also, the dissenting judge concluded that the Crown is not a secured creditor under the CCAA, but did not address the majority’s observation that the definition of “secured creditor” under the CCAA includes the holder of a “charge”, and that the Supreme Court of Canada has had occasion to describe the Crown’s interest in a deemed trust as a “floating charge.”  The dissent also did not explicitly reconcile its interpretation with the ITA’s definition of “security interest” which includes a reference to a deemed trust.

Based on these uncertainties and the importance of this issue to both the Crown and insolvency proceedings, it may be that the priority battle for source deductions is not finally settled.

Footnotes

1 2017 ABQB 550.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2019

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions