On July 28, 2021, the Supreme Court of Canada released its decision in Canada v Canada North Group Inc., upholding the priority of “priming charges” ordered under the Companies’ Creditors Arrangement Act (“CCAA”) over unremitted employee source deductions deemed to be held in trust under the Income Tax Act (“ITA”).
Background
Canada North Group Inc. (“Canada North Group”) sought protection from its creditors by filing a Notice of Intention under the Bankruptcy and Insolvency Act. Shortly thereafter, Canada North Group initiated CCAA proceedings. In the CCAA initial order, the Court of Queen’s Bench for Alberta approved super-priority “priming” charges in the amount of $1,650,000 (comprising a $500,000 administration charge, a $1,000,000 interim lender’s charge and a $150,000 directors’ charge). The administration charge was later increased to $950,000 and the interim lender’s charge to $3,500,000.
After the initial CCAA application, the federal Crown sought to vary the initial order to postpone the priming charges to a statutory deemed trust in favour of the Crown for unremitted employee source deductions in the amount of $685,542.93 arising under section 227(4.1) of the ITA, which provides that the amount deemed to be held in trust “shall be paid to the Receiver General in priority to all…security interests.”
The Crown’s application to vary the initial order was dismissed at first instance. The Crown’s appeal to the Alberta Court of Appeal was also dismissed. The Crown appealed to the Supreme Court of Canada. The Supreme Court granted the Crown leave to appeal, despite the Crown having recovered the unremitted source deductions in full at the time of the application for leave, as the case raised an issue of importance for insolvency proceedings across Canada.
The Decision of the Supreme Court of Canada
The Supreme Court of Canada was faced with the question of whether, and in what circumstances, priming charges granted pursuant to the CCAA could or should take priority over the statutory deemed trust created by the ITA.
The nine-judge panel of the Court split 5-4 on the answer to this question, with the five-judge majority holding that the priming charges granted in this case could, and did, prevail over the statutory deemed trust created by the ITA.
The Court issued four separate sets of reasons, with those of Côté J. (for herself and the two other Quebec judges, Wagner C.J. and Kasirer J.) and Karakatsanis J. (for herself and Martin J.) together comprising the five-judge majority.
The Lead Judgment of Côté J. (Wagner C.J. and Kasirer J. Concurring)
Justice Côté began her analysis by examining the remedial nature and the broad discretion provided to courts in insolvency proceedings under the CCAA. Justice Côté also noted the critical role that monitors, insolvency counsel and other professionals have in insolvency proceedings, and the chilling effect that the subordination of priming charges could have on professionals who would risk being unpaid for their services.
Deeming property subject to a trust does not in itself make the property subject to a trust or create a proprietary interest in favour of the Crown, Justice Côté held. Instead, the deemed trust must be examined pursuant to the trust principles of the common law (and, in Quebec, the civil law) to determine whether it removed the property deemed to be held in trust from Canada North Group’s “beneficial ownership.”
Justice Côté concluded that the deemed trust did not create a trust that removed the property from Canada North Group’s beneficial ownership. As a result, Canada North Group continued to own its property and the priming charges could attach to Canada North Group’s property in its insolvency proceedings.
Regarding the Crown’s argument that the ITA deems the unremitted source deductions to be secured by a “security interest” in priority to all other security interests, Côté J. determined that priming charges ordered under the CCAA are “utterly different” than the examples of security interests enumerated in the definition of “security interest” in the ITA. In particular, priming charges are created non-consensually by Court Order, in contrast to ordinary security interests, which are created consensually.
Also of importance to Côté J. was the fact that priming charges increase the recovery of all stakeholders in insolvency proceedings (including the Crown) by facilitating the operation of debtor companies as a going concern, and do not merely benefit the holder of the charge (as do “ordinary” security interests). Accordingly, Côté J. concluded that CCAA priming charges do not fall within the definition of “security interest” under the ITA and therefore are not statutorily subordinated to the deemed trusts created by the ITA.
However, Côté J. cautioned that courts should only subordinate statutory deemed trusts for unremitted employee source deductions to priming charges where necessary to ensure that insolvency professionals and lenders will act and to achieve the objectives of the CCAA. It may not, according to Côté J., be necessary to subordinate the Crown’s statutory deemed trust where the Crown’s claim is small or in liquidating CCAA proceedings.
The Concurring Judgment of Karakatsanis J. (Martin J. Concurring)
Justice Karakatsanis reached the same result as Côté J. regarding the disposition of the appeal, albeit by following a slightly different path in her reasoning. For instance, Karakatsanis J. contrasted the legislative and policy differences between a liquidation in bankruptcy pursuant to the Bankruptcy and Insolvency Act (“BIA”) and in CCAA proceedings, and noted that the CCAA deliberately provides supervising courts with a significant degree of flexibility that does not exist in bankruptcy.
Like Côté J., Karakatsanis J. cautioned that Court-ordered charges should only be permitted in appropriate cases. According to Justice Karakatsanis, the appropriateness of granting an interim financing or other charge priority over the statutory deemed trust in the ITA will be dictated by substantially the same factors governing the grant of interim financing generally, as set out in section 11.2(4) of the CCAA and with the addition of certain other factors, including whether or not the interim lender has indicated, in good faith, that it will not lend to the debtor without ranking ahead of the Crown’s deemed trust.
Takeaways for Insolvency Practitioners
The majority judgments, taken together, establish that a CCAA Court can, in principle, make an order which has the effect of giving certain Court-ordered charges (including interim financing charges, administrative charges and directors’ charges) priority over a statutory deemed trust pursuant to the ITA. However, both of the majority judgments are relatively open-ended as to when it will be appropriate to give such Court-ordered charges priority over a statutory deemed trust, and the reasoning employed by Côté J. and Karakatsanis J. is not identical on this point.
Both Côté J. and Karakatsanis J. focused on the policy imperative of facilitating going-concern restructurings pursuant to the CCAA, the importance of which is well established by the insolvency jurisprudence of the Supreme Court of Canada. This may leave open a question about the extent to which giving Court-ordered charge priority over an ITA deemed trust is appropriate in circumstances other than CCAA proceedings explicitly oriented toward a plan of arrangement.
Justice Côté commented that subordinating the statutory deemed trust to Court-ordered charges should occur “only when necessary,” and gave the example of a “liquidating CCAA” as a circumstance in which such super-priority may not be appropriate. Justice Karakatsanis was of the view that “no flexibility is needed in the [BIA] regime” and invited an inquiry into whether the requested super-priority charges are really necessary (or, for instance, whether an interim lender might be prepared to advance funds without the benefit of a charge that is explicitly given priority over the statutory deemed trust).
The leading Supreme Court of Canada cases regarding the treatment of the ITA deemed trust in insolvency proceedings have generally taken place in the CCAA context, and not in the context of more creditor-driven or liquidation-focused proceedings such as an interim receivership pursuant to section 47 of the BIA, or a national receivership pursuant to section 243 of the BIA. Although liquidation-focused insolvency proceedings (including so-called “liquidating CCAA” proceedings) have somewhat different goals and involve different matters of public policy, we respectfully suggest that in certain circumstances it will likely be necessary and appropriate for the supervising Court to create charges securing the fees, disbursements and required borrowings of receivers (or other Court-appointed insolvency professionals tasked with liquidation) that rank in priority to the statutory deemed trust created by the ITA.
For instance, in many instances of liquidation, the debtor has not kept adequate records or maintained adequate communications with its lender, such that the lender is unable to make any educated assessment whatsoever of the amounts which might be impressed with the statutory deemed trust. (Canada Revenue Agency trust examinations to settle the question may take several months, and lenders generally cannot afford that sort of a delay in seeking the appointment of a receiver.) If a receiver is appointed on the application of a lender pursuant to section 243 of the BIA, the resulting receivership order does not purport to create charges ranking in priority to the statutory deemed trust. If the lender subsequently discovers that the statutory deemed trust secures liabilities in excess of the value of the debtor’s assets, then the Crown is in a position to benefit from the appointment of the receiver (at the lender’s expense) and the work of the receiver, without having to pay for either. Surely the work of counsel and insolvency professionals undertaken to facilitate the orderly liquidation of a debtor’s assets with a view to maximizing returns for all stakeholders is in the best interests of all parties, including the Crown.
The Supreme Court’s decision in Canada North is encouraging to lenders, insolvency professionals and their counsel. However, rather than ending the debate over when “priming” the ITA deemed trust is permitted, it appears that this decision has in fact begun that debate anew.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.