Supreme Court of Canada Rules that Government Loses Priority for GST Under CCAA

Print This Post Print This Post

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Steven Golick and Sachin Kanabar.  Steven Golick is a partner in the insolvency and restructuring group of Osler Hoskin & Harcourt LLP, and Sachin Kanabar is an associate in the group.

On December 16, 2010, the Supreme Court of Canada released its decision in the case of Re Ted Leroy Trucking Ltd, which considered the issue of whether the Canadian Federal Government (the “Government”) retains its statutory priority over secured creditors for unremitted goods and services tax (“GST”) owed by a debtor company in restructuring proceedings commenced under the Companies’ Creditors Arrangement Act (“CCAA”).
In this landmark decision the majority of the court (i) ruled that Parliament did not intend the Government’s priority for GST to have effect under the CCAA; and (ii) confirmed and provided direction on the broad discretion of a court supervising CCAA proceedings.

Summary of Decisions Below

The debtor, Ted Leroy Trucking Ltd., commenced restructuring proceedings under the CCAA.  Prior to the filing, the company had collected amounts for GST but had not yet remitted them to the Government, which claimed a priority to such amounts in accordance with the provisions of federal legislation.  The debtor’s major secured creditor disputed the Government’s claim for priority, arguing that the funds in question should instead be paid to it pursuant to its security.

The issue arises due to a conflict between the express wording of the relevant statutes.  The legislation creating the Government’s statutory priority for GST, the Excise Tax Act (“ETA”), provides that any amounts for GST collected but not remitted by the debtor to the Government are deemed to be held in trust for the Government.  Under the ETA the Government’s trust claim is granted priority over secured creditors.   However, under the ETA this special priority does not apply where the debtor has filed either for liquidation or restructuring under the Bankruptcy and Insolvency Act (“BIA”).  This means the Government loses its priority to GST in restructuring or liquidation proceedings under the BIA.  By contrast, the CCAA provides that most such special priorities in favour of the Government do not apply in respect of companies that file for protection under the CCAA, with certain express exceptions, such as employee source deductions of income tax.  In other words, under the express wording of the CCAA, the Government is an unsecured creditor for GST collected but not remitted prior to the filing.

The conflicting provisions raise the question of whether Parliament intended that the Government lose its priority for GST only in BIA proceedings, or whether such priority should also be lost in a CCAA proceeding.

In the Ted Leroy Trucking case, when it became apparent that the debtor could not successfully restructure under the CCAA, it was proposed that the company be put into liquidation under the BIA, which would have had the effect of reversing the priorities for GST.  The Supreme Court of British Columbia at first instance held that it had the jurisdiction under the CCAA to stay the Government’s priority claim until the company was put into liquidation under the BIA.

A unanimous British Columbia Court of Appeal reversed the lower court’s decision.  It upheld the Government’s priority claim to GST in a CCAA proceeding.  The British Columbia Court of Appeal adopted the reasoning of the Ontario Court of Appeal in Re Ottawa Senators Hockey Club Corp., which stood for the same proposition.  This case had decided, in part, that because the amendments to the ETA were subsequent in time to the amendments to the CCAA, the provisions of the ETA should be applied.  While this was the case at the time of the Ontario Court of Appeal decision, the CCAA was subsequently amended.  While the provision in the CCAA relating to the priority of the Crown  remained the same, as a technical matter, in Sept 2009, it was re-enacted and renumbered by repeal and replacement.

Summary of the Decision of the Majority of the Supreme Court of Canada

In a majority ruling, the Supreme Court of Canada reversed the Court of Appeal’s decision.  Canada’s top court concluded that Parliament did not intend the Government to retain its priority to GST under the CCAA.  After reviewing the purpose and historical evolution of the CAA, the majority based its decision on the following reasons:

  • Given Parliament’s clear goal of harmonizing the aspects of insolvency law common to its two primary insolvency statutes, the CCAA and the BIA, and the recent “paring down” of Government priorities by Parliament in the insolvency context, absent express language to the contrary, the Government’s retention of priority for GST under the CCAA,  is not consistent with recent changes to Canadian insolvency law.
  • The CCAA relegates the Government to the status of an unsecured creditor, subject to certain specific exceptions. It does not provide any exception for GST.  In the absence of such an express exception would not be consistent with Parliament’s approach to Government priorities under the CCAA or the BIA to interpret the ETA as providing a special priority to GST under the CCAA and not the BIA.  The Government must have intended that the special priority for GST under the ETA would be lost in both the BIA and the CCAA.
  • If the Government retained priority under the CCAA and not in liquidation proceedings under the BIA, a “strange asymmetry” would result that would encourage statute shopping by secured creditors.  The ultimate effect will be that debtors will essentially be deprived of the ability to restructure under the flexible and responsive CCAA.
  • Since the Sept 2009 amendments to the CCAA were subsequent to the amendments to the ETA, Parliament’s intention should be considered to be that the Government’s priority for GST should not be effective under the CCAA.  As a result, the Ottawa Senators decision, and related line of cases, which uphold the  Government’s priority to GST under the CCAA cannot stand.

The majority of the Supreme Court of Canada also confirmed and provided guidance on the following regarding the broad discretion of a court supervising a CCAA proceeding:

  • The court may rely upon its equitable or inherent jurisdiction as a source of authority to “fill the gaps” in the CCAA.  An order that furthers the remedial purpose of the CCAA will always be within the court’s discretion.
  • In exercising its discretion, the court must always consider whether the order is appropriate and whether the debtor has been acting in good faith and with due diligence.
  • Parliament intended the CCAA to operate in tandem with other insolvency legislation, such as the BIA.

Impact of the Majority Decision

The effect of the majority decision represents a substantial shift in insolvency law with respect to GST.  The Government will no longer enjoy priority over secured creditors for GST collected and unremitted before the filing by a debtor under the CCAA.  Rather, it ranks as an unsecured creditor in respect of such amounts.

It may be inferred from the majority’s reasoning that any similar statutory trust provisions granting priority in favour of the Government will generally be inoperable under the CCAA absent a specific provision to the contrary in the CCAA.  It remains to be seen whether future cases will adopt this principle.  If so, this represents a significant change in the law with respect to the other  priority trust claims of the Government under the CCAA.

The views and opinions expressed herein are exclusively the personal views of the guest contributors only, unless otherwise attributed.  Information and opinions expressed herein do not necessarily represent the views of Weil, its attorneys, or its clients. Please see the complete Disclaimer  for additional terms and conditions of use of this blog.