Canada: Scope Of GSA Held To Extend To GST Input Tax Credits And Related Rights

A recent decision of the Tax Court of Canada highlights the benefits of a broadly drafted general security agreement (GSA) in relation to a secured creditor's realization on a bankrupt borrower's intangible assets in the form of GST input tax credits (ITCs).

In International Hi-Tech¹, the Court fielded two procedural motions in an ongoing dispute between the Minister of National Revenue (MNR) and the parent corporation (Garmenco)² of a bankrupt borrower (Hi-Tech) over the ITCs of Hi-Tech. Garmenco was a secured creditor of Hi-Tech, having extended a $6 million loan to Hi-Tech secured by a GSA. During a GST audit and subsequent reassessment, MNR alleged that Hi-Tech had miscalculated its ITCs.³ Garmenco sought to assume control over Hi-Tech's appeal of that reassessment in accordance with the powers granted to it under the GSA. The MNR attempted to block Garmenco's assumption of control of the proceedings, arguing that only the trustee in bankruptcy of Hi-Tech (Trustee) could take on this role. However, the Trustee had accepted the validity of the GSA and released its interest in the collateral charged by the GSA prior to Garmenco taking any action.⁴

Justice Bocock undertook a detailed review of several standard provisions of the GSA. He noted that the GSA created a security interest in all accounts and all other present and future choses in action of the debtor of every kind, as well as all writings, papers and books of account, which the Court interpreted as including the ITCs and all documents relating thereto. Other provisions of the GSA established, in the Court's view, that (a) Garmenco was to be seized of all present and future books and records including the GST returns, (b) Garmenco had the power to direct payment of the secured accounts to Garmenco upon default, and (c) Garmenco was appointed as attorney to do all things necessary to exercise all such incidental powers in the borrower's name.⁵ The MNR had contended by a specific assignment to Garmenco of the chose in action represented by the ITCs was required in order for Garmenco to assume control of the proceedings. However, this position was rejected by the Court.⁶

As Garmenco would be the party exclusively entitled to the proceeds arising from any ITCs emanating from a successful appeal, the Court concluded that the Rules⁷ gave the Court the power to provide Garmenco with a procedural remedy to realize upon its rights to the ITCs by permitting Garmenco to assume the appeal of the MNR's reassessment. Thus Garmenco was authorized to continue Hi-Tech's appeal before the Court in order to have the appeal heard on its merits.⁸ In the Court's view, Garmenco's status as a secured creditor (rather than a general creditor or a creditor holding an alleged unliquidated claim against the bankrupt's estate⁹) was sufficient for it to be considered a "receiver" for purposes of the Excise Tax Act¹⁰ and to become the bankrupt's agent entitled to object to a GST reassessment and maintain an appeal.¹¹

Although it is a decision of the Tax Court of Canada, International Hi-Tech's confirmation of the breadth of a GSA may serve as a valuable tool in future disputes relating to security interests granted under a GSA over intangible assets that are not the subject of a specific assignment.

Footnotes

1 International Hi-Tech Industries Inc. v. R., 2014 TCC 198, 2014 CarswellNat 2309 [International Hi-Tech].

2 Hi-Tech had granted security to its parent and other related companies. Only the parent is referenced in this case comment for ease of reference.

3 International Hi-Tech, at para 2.

4 International Hi-Tech, at para 3 and 12. The Court noted that by releasing its interest in the collateral charged by the GSA, the Trustee no longer had an interest in the chose in action represented by the ITCs.

5 International Hi-Tech, at para 16.

6 International Hi-Tech, at para 12.

7 Tax Court of Canada Rules (General Procedure), SOR/90-688 [Rules].

8 International Hi-Tech, at paras 22 and 23.

9 The Court acknowledged that if the entity seeking to enforce the taxpayer's rights of appeal were a general creditor of the estate, a bankrupt or an alleged indemnitee under some pari passu or unliquidated claim, then no right to institute an appeal would exist in the absence of the Trustee's consent or a court order.

10 Excise Tax Act, R.S.C. 1985, c. E-15.

11 International Hi-Tech, at paras 16, 17 and 18.

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