In the recent case of Canada v. Canada North Group Inc.,1 a 5-4 majority of the Supreme Court of Canada confirmed that supervising courts under the Companies Creditors' Arrangement Act (the "CCAA") have the discretion to grant restructuring charges ("Priming Charges") priority over statutory deemed trusts ("Deemed Trusts") in favour of the Crown.
The decision produced four sets of reasons, with the majority ultimately dismissing the Crown's appeal and upholding the Alberta Court of Appeal's ruling that CCAA courts have the jurisdiction to grant Priming Charges priority over Deemed Trusts arising from the Income Tax Act (the "ITA") when it is necessary to achieve the CCAA's remedial purpose.
In 2017, the Court of Queen's Bench of Alberta issued an initial order (the "Initial Order") under the CCAA in favour of Canada North Group Inc. and its related companies (collectively "Canada North"). The Initial Order included, among other things, three sets of Priming Charges:
- an administrative charge in favour of counsel, the monitor and a chief restructuring officer;
- a financing charge in favour of an interim lender; and
- a director's charge in favour of Canada North's directors.
The Priming Charges were granted priority over the claims of all secured creditors, and the Court further ordered that such charges "shall not otherwise be limited or impaired in any way by any federal or provincial statutes."
At the time of the Initial Order, Canada North owed the Crown over $1 million for unremitted source deductions. The Crown applied to vary the Initial Order, arguing that the Priming Charges could not take priority over its Deemed Trusts for unremitted source deductions under section 227 (4.1) of the ITA.
The Alberta Court of Appeal dismissed the Crown's appeal. The Crown subsequently applied for, and was granted, leave to appeal to the Supreme Court of Canada.
The Supreme Court of Canada's Decision
Despite dismissing the appeal for different reasons, the reasons delivered by Justice Côté (Chief Justice Wagner and Justice Kasirer concurring), and the concurring reasons of Justice Karakatsanis and Justice Martin discussed the remedial, flexible and discretionary authority of the CCAA.
Reasons of Justice Côté (Chief Justice Wagner and Justice Kasirer Concurring)
In her reasons dismissing the appeal, Justice Côté observed the following:
- Section 11 of the CCAA confers broad jurisdiction on the supervising court to "make any order that it considers appropriate in the circumstances." This jurisdiction includes the authority to grant Priming Charges priority over the Crown's Deemed Trusts.2 The broad discretion provided to judges by s. 11 is only constrained by restrictions set out in the CCAA.
- There exists a "harsh reality" that it does not make commercial sense for lenders to act in the restructuring process when there is a high level of risk involved. Courts have the authority to grant super priority charges to facilitate the restructuring process, and have ensured that the CCAA is given a liberal construction to fulfill its broad purpose and prevent that purpose from being neutralized by other statutes.3
- Following a review of the CCAA, the ITA, the Statutory Interpretation Act and the law of trusts in both the civil and common law context, Justice Côté stated that s. 227 (4.1) of the ITA does not create a "beneficial interest that can be considered a proprietary interest" as it does not give the Crown the same common property interest a common law trust would. Accordingly, the Crown does not have a proprietary interest in a debtor's property that is adequate to prevent the exercise of a supervising judge's discretion to order super priority charges under the CCAA.4
- A court ordered Priming Charge under the CCAA is not a "security interest" within the meaning of s.224 (1.3) of the ITA. Court ordered Priming Charges are vastly different than the list of interests listed under that section, and had Parliament wanted to include such charges in the definition of "security interest," it would have done so.5
Concurring Reasons of Justice Karakatsanis and Justice Martin
In their concurring reasons, Justice Karakatsanis and Justice Martin agreed that the Crown's appeal should be dismissed, stating that s. 11 of the CCAA, as opposed to the other subsections, confers a broad discretionary power to a supervising court to rank Priming Charges ahead of Deemed Trusts.6 There is no conflict between the ITA and the CCAA, because the Crown's right to unremitted source deductions in a CCAA restructuring is protected by the requirement that a CCAA plan of compromise pay the Crown in full.7
Similar to Justice Côté, Justice Karakatsanis and Justice Martin identified a list of factors to consider when determining whether it is necessary to subordinate a Deemed Trust:8
- whether the interim lender has indicated, in good faith, that it will not lend to the debtor without ranking ahead of the deemed trust;
- the relative amount of the interim loan and the unremitted source deductions;
- the length of time, if any, the Crown allowed source deductions to go unremitted without taking action; and
- the prospect of a successful restructuring, and whether the CCAA is likely to be used to sell the debtor's assets.
A court will apply different considerations depending on the type of charge to be ranked ahead of a Deemed Trust. Ultimately, the court must weigh the balancing interests between Deemed Trusts, which are crucial to tax collection, and the interim lending process, which is essential to restructuring and maintaining the objectives of the CCAA.9
Dissenting Reasons of Justice Brown, Justice Rowe and Justice Moldaver
In their Joint Dissenting Reasons, Justice Brown and Justice Rowe allowed the Crown's appeal, pointing to the legislative history of s. 227 (4.1) of the ITA as evidence that Parliament intended Deemed Trusts to have "absolutely priority" over all other security interests.10
Justice Moldaver delivers separate dissenting reasons, generally agreeing that the relevant provisions of the CCAA and ITA work in harmony to direct that Crown interests must be given priority over court ordered Priming Charges.11
While the majority's ruling confirms that CCAA courts have discretion to rank Priming Charges ahead of Deemed Trusts, CCAA courts should exercise that discretion only when necessary to facilitate the restructuring process. A CCAA court should be satisfied that the baseline requirements of appropriateness, good faith, and due diligence are met before granting such priority to Priming Charges.
Note: summer student Kimia Jalilvand co-authored this blog with Noor Mann
1. 2021 SCC 30.
2. Ibid, at para 21.
3. Ibid, at paras. 30-31.
4. Ibid, at para 57.
5. Ibid, at para 67.
6. Ibid at para 80.
8. Ibid, at para 179.
9. Ibid, at para 177.
10. Ibid, at para 201.
11. Ibid, at para 259.
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