On August 29, 2019, the Alberta Court of Appeal released its much-anticipated decision in Canada v. Canada North Group Inc., 2019 ABCA 314 (“Canada North”). In a 2-1 split, the majority held that priming charges granted in a CCAA Initial Order can have priority over the Crown’s statutory deemed trust for unremitted source deductions. CAIRP acted as an intervenor in the case, arguing against the Crown’s position that its deemed trust for unremitted source deductions under the Income Tax Act, RSC 1985, c 1 (5th Supp.) (the “ITA”), the Employment Insurance Act, SC 1996, c 23, and the Canada Pension Plan, RSC 1985, c C-8 (together, the “Fiscal Statutes”) could not be primed by the usual CCAA charge such as an administration charge securing the fees of professionals involved in such filings.
On July 5, 2017, the Court of Queen’s Bench of Alberta granted the Canada North Group protection under the CCAA (the “Initial Order”). The Initial Order provided (as is typical) for various priming charges, namely, an administration charge, an interim lender’s charge, and a director’s charge (collectively, the “Priming Charges”). Such Priming Charges provide necessary and important security for participants in the restructuring process.
On July 31, 2017, the Crown applied to vary the Initial Order on the grounds that the Court did not have jurisdiction to grant Priming Charges that had priority over the Crown’s statutory deemed trust for unremitted source deductions. The Crown submitted that the Fiscal Statutes provide the Crown with priority for such unremitted source deductions and that the CCAA does not permit the Court to grant charges which would prime those deemed trusts.
Madam Justice Topolniski of the Alberta Court of Queen’s Bench dismissed the Crown’s application, holding that the deemed trust provisions under the Fiscal Statutes give the Crown a security interest, not a proprietary interest, and that accordingly the CCAA gives the Court authority to grant the Priming Charges which take priority over the Crown’s deemed trust.
The Crown sought leave to appeal the decision to the Alberta Court of Appeal. Leave to appeal was granted on a single issue: whether the chambers judge erred in law in determining that the Priming Charges can enjoy priority over statutory deemed trusts in favour of the Crown for unremitted source deductions created by the Fiscal Statutes.
Decision of the Court of Appeal
In a 2-1 split, the majority of the Alberta Court of Appeal held that the Crown’s deemed trust for unremitted source deductions constitutes a “security interest” within the definition of the ITA and prior jurisprudence. As the CCAA provides that “[t]he court may order that the security or charge rank in priority over the claim of any secured creditor of the company”, the majority held that the court has jurisdiction to create charges which “prime” (i.e. take priority over) the Crown’s claim for unremitted source deductions. According to the majority, if the Crown’s position were accepted, it would result in absurd consequences by undermining the objectives of the CCAA, thereby resulting in fewer restructurings and reduced tax revenue. In other words, the majority held that if the Crown’s position were correct, it would be “biting off the hand that feeds it”.
In his dissent, the Honourable Mr. Justice Wakeling disagreed with the lower court and the majority of the Court of Appeal, holding that “there is only one plausible meaning” to the deemed trust provisions in the Fiscal Statutes: that they enjoy “unassailable priority”. In reaching this conclusion, Justice Wakeling limited himself to a strict statutory interpretation of the Fiscal Statutes, holding that any concern about the viability of restructurings under the CCAA result from his preferred statutory interpretation should be addressed by Parliament, not the Courts.
The decision of the majority is a welcome development for Canadian insolvency law, for lenders and professionals involved in insolvency proceedings, and is a recognition of the important role the CCAA (and all insolvency law) plays in the Canadian economy. As the majority noted, restructurings under the CCAA promote the public good by facilitating the survival of companies, the production of goods and services, the preservation of jobs, and the continued survival of the Canadian tax base.
The decision provides much-needed protection for participants in insolvency proceedings, including interim lenders and Court officers who oftentimes must rely upon Priming Charges for protection at a time when the state of an insolvent company’s account with the Crown can be very unclear. The question of the quantum of unremitted source deductions owing to the Crown by an insolvent company is one which can take weeks or months to determine following a filing. One of the implications of a contrary judgment in Canada North would have been that Court officers would be asked by the Court to accept an appointment, and interim lenders would be asked to extend credit, without certainty with respect to the quantum of the Crown’s prior charge. Hence, such participants would have been unable to assess the extent of their security or risk. Such a result would no doubt have created a chill over the prospect of future CCAA filings (a fact which was acknowledged by the Crown in an argument in the Court below).
For now, the decision of the majority in Canada North ensures an increased level of certainty in CCAA filings, provides much-needed protection for participants in such proceedings and avoids the chill which would certainly have resulted from a contrary decision.
By Randal Van de Mosselaer and Emily Paplawski
Osler, Hoskin & Harcourt LLP