The Tax Exemption Tango: Ontario Court Grants Distribution Exemption For Monitor

On a motion to approve a holdback release order in One Bloor West Toronto Group (The One) Inc. (Re), (“One Bloor West”), the Ontario Superior Court of Justice (the “Court”) exempted the Monitor and chief restructuring officer from liability under certain tax legislation regarding the tax and withholding obligations of taxpayers’ representatives on distributions.^[1] The Court’s decision in One Bloor West was released less than two months after the Court declined to exempt a monitor from similar tax withholding obligations in Re: 1000156489 Ontario Inc. (“100 Ontario Inc.”).^[2] Read Fasken’s bulletin on 100 Ontario Inc. here.

Background Facts

The One group of companies (the “Debtors”) were involved in the construction and development of an 85-storey mixed-use tower located at 1 Bloor Street West in Toronto (the “Project”).

The Debtors were initially subject to receivership proceedings in which Alvarez & Marsal Canada Inc. (“A&M”) was appointed as receiver and manager (in such capacity, the “Receiver”). The Receiver retained SKYGRiD Construction Inc. (“SKYGRiD”) to act as an interim construction manager for the Project.

The receivership was transitioned to proceedings under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”), following which the Receiver was discharged, A&M was appointed as Monitor, and a Chief Restructuring Officer (“CRO”) was appointed in respect of the Debtors. The Receiver’s contract with SKYGRiD was terminated thereafter.

The Monitor subsequently sought, among other relief, the SKYGRiD Holdback Release Order authorizing the Debtors to pay to SKYGRiD amounts retained in respect of the Project and certain provincial lien legislation (the “SKYGRiD Holdback Amount”).

Similar to 100 Ontario Inc., the proposed SKYGRiD Holdback Release Order contained language shielding the Monitor and CRO from potential personal liability under certain tax withholding legislation. In particular, the Monitor sought declaratory relief that it and the CRO were not within the class of persons who might attract such liability and that the distributions pursuant to that order were not a “distribution” within the meaning of the applicable federal, provincial and territorial tax legislation, and exempting the Monitor and CRO from certain distribution requirements thereunder (the “Distribution Exemption”).

At the hearing, the Court invited the Monitor to provide additional submissions on the Distribution Exemption, in part due to the decision in 100 Ontario Inc. in which the Court declined to grant equivalent relief.

The Endorsement

The Court granted the relief sought by the Monitor, in substance, but modified the language of the proposed form of order to remove the declaratory provisions. As a starting point, the Court held that the CCAA confers jurisdiction to grant the Distribution Exemption. In particular, section 11 of the CCAA confers “broad” and “vast” discretion on the Court to make any order that it considers appropriate in the circumstances.

In exercising such discretion, the Court must be satisfied that the order being made: (1) is not restricted by the CCAA itself; (2) usefully furthers the remedial objectives of the CCAA; and (3) is consistent with the baseline considerations of appropriateness, good faith, and due diligence.

Here, the Court held that the Distribution Exemption met each of these objectives and should therefore be granted, for the following reasons:

1. The relief under the Distribution Exemption is aligned with the Initial Order granted in the CCAA proceedings, which establishes that the Monitor and CRO can only be liable for wilful misconduct or gross negligence when carrying out their mandates under the Initial Order. Similarly, the Distribution Exemption serves an important role in ensuring that the Monitor and CRO are not held personally liable for facilitating payment of the SKYGRiD Holdback Amount in circumstances where there is a statutory framework that creates the risk of such liabilities.
2. There has been no suggestion that there would be any tax liability associated with the contemplated payment of the SKYGRiD Holdback Amount. The Court observed that the relevant taxation authorities were served with the motion materials in support of the request for the SKYGRiD Holdback Release Order. While they did not provide their consent to the proposed order, none of those authorities took a position on the motion or contacted the Monitor in respect of such motion, nor was there any indication that they have opposed similar relief in other cases.
3. The Court further noted that the broad discretion granted under section 11 of the CCAA permitting the Court to affect rights granted by other statutes – such as in the case of construction statutes – also permits the Court to shield its officers from statutory liability that they might otherwise face. In this case, the Court was not being asked to extinguish entitlement of tax authorities to be paid taxes otherwise owing or to override such statutes; rather, the Court was asked to shield the Monitor and CRO from potential personal liability for not withholding taxes on certain distributions, in circumstances where there was no tax authority arguing that taxes should be withheld.

The Court noted that the concerns regarding the insufficiency of evidence and law in 100 Ontario Inc. did not arise in the circumstances of the requested order.

The Court held that, in the circumstances, the Monitor and CRO facilitating the restructuring proceedings should not face “even the prospect” of personal liability for not withholding taxes. Those professionals “are entitled to expect and demand protection from personal liability, or even the prospect of a future claim for such, when they are acting in good faith in performing their duties under a court order.”^[3]

Finally, the Court also found that the Distribution Exemption did not directly engage paramountcy issues or constitutional questions, nor did 100 Ontario Inc. go so far as to say that there is no jurisdiction to grant the requested exemptions.

While the Court granted the Distribution Exemption, the Court took issue with the proposed language under the SKYGRiD Holdback Release Order. In particular, the Court addressed the request for declarations, based on precedent orders, that neither the Monitor nor the CRO shall constitute a “legal representative”, “representative”, or a responsible representative” of the Debtors under the relevant tax statutes, nor are they “distributing” funds for the purposes of those tax statutes.

The Court held that this language is not necessary to achieve the desired objective of the Distribution Exemption, and revised the proposed language to reflect the following:

[8] THIS COURT ORDERS AND DECLARES THAT:

a.   the Monitor and FAAN Advisors Group Inc., in its capacity as Chief Restructuring Officer of the Companies (in such capacity, the “CRO”), shall not incur any liability under theIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.); the Taxation Act, 2007, S.O. 2007, c. 11, Sch. A; the Excise Tax Act, R.S.C. 1985, c. E-15; the Employment Insurance Act, S.C. 1996, c. 23; the Retail Sales Tax Act, R.S.O. 1990, c. R.31; the Corporations Tax Act, R.S.O. 1990, c. C.40; or any other similar federal, provincial, or territorial tax legislation (collectively, the “Statutes”) for facilitating the payment of the SKYGRiD Holdback Amount as contemplated by and in accordance with this Order, and the Monitor and the CRO shall not have any liability for any of the Companies’ tax liabilities under the Tax Statutes in respect of this payment, regardless of how or when such liabilities may have arisen; and

b.   the Monitor and the CRO are hereby forever released, remised and discharged from any claims against them under or pursuant to the Statutes or otherwise at law arising as a result of the payment of the SKYGRiD Holdback Amount.

Implications and Key Takeaways

The Court’s decision in One Bloor West is an example of increased judicial scrutiny of distribution exemptions that we expected to see following 100 Ontario Inc. On a fulsome record and with the benefit of further legal submissions, the Court confirmed the jurisdiction under section 11 of the CCAA to exempt a court-officer from liability in respect of withholding tax obligations, and ultimately determined that it was appropriate to grant such relief in the circumstances of this case. Further, the Court relied on that authority to fashion a remedy that shields court officers from personal liability without requiring sweeping declaratory relief regarding the interpretation or application of tax legislation.

Going forward, One Bloor West has established a legal basis for granting distribution exemptions under the CCAA. Nevertheless, this relief is discretionary, and court officers seeking protection from potential liabilities in respect of tax withholding obligations in CCAA proceedings must ensure that their request is appropriate and supported by a sufficient evidentiary record. Based on One Bloor West, court officers should ensure that relevant tax authorities have been served with court materials in support of a proposed distribution exemption, and address, among other things, the responses (if any) of the tax authorities, and whether there are any known or anticipated withholding or other tax obligations upon or arising from the distribution. Whether and to what extent the holding in One Bloor West will be applied in court-appointed receiverships or in proceedings under the Bankruptcy and Insolvency Act (Canada) remains to be seen.  

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