Are input tax credits on damage payments for agreements disclaimed under section 32 CCAA pre-filing or post-filing claims owing to the debtor and can they be set-off by fiscal authorities against their pre-filing sales tax-related claims against the tax debtor?
On January 27, 2015 (the “Filing Date”), the Superior Court of Quebec granted an Initial Order (the “Bloom Lake Initial Order”) in favour of Cliffs Québec Iron Mining ULC (“CQIM”) and other affiliated companies (the “Bloom Lake CCAA Parties”), which operated the Bloom Lake mine located in Fermont, Quebec and related infrastructure. FTI Consulting Canada Inc. was appointed as monitor (the “Monitor”) of the Bloom Lake CCAA Parties and subsequently the parties commonly referred to as the “Wabush CCAA Parties” (collectively with the Bloom Lake CCAA Parties, the “CCAA Parties”) by way of the May 20, 2015 Initial Order (the “Wabush Initial Order”). The proceedings were initiated from the outset with the aim of selling the CCAA Parties’ assets to distribute the proceeds to their creditors.
At the time of the issuance of the Bloom Lake Initial Order, operations at the Bloom Lake mine had been at a halt for several weeks, which led CQIM to disclaim contracts (the “Disclaimed Contracts”) that were no longer needed with four suppliers (the “CQIM Creditors”) pursuant to section 32 CCAA. The CQIM Creditors subsequently filed proofs of claim for the damages they suffered as a result (the “Restructuring Claims”), which were allowed by the Monitor. Pursuant to subsection 32(7) CCAA, the Restructuring Claims were deemed to be provable claims, and could therefore subject to compromise. An amended and restated joint plan of arrangement and compromise dated May 16, 2018 (as amended from time to time, the “Plan”) was sanctioned by the Court on June 29, 2018 and implemented on July 31, 2018.
In August of 2018, the Monitor commenced the first interim distribution pursuant to the Plan (the “First Interim Distribution”), including the CQIM Creditors who received partial damage payments on account of their Restructuring Claims (the “Damage Payments”). Sections 182 of the Excise Tax Act (“ETA”) and 318 of the Québec Sales Tax Act (“QSTA”) deemed the Damage Payments to be inclusive of goods and service tax (“GST”) and Quebec sales tax (“QST”), and further deemed same to constitute taxable supplies within the meaning of the ETA and QSTA. This allowed CQIM to claim approximately $7.5 million in input tax credits (“ITCs”) and refunds (“ITRs”) (collectively, the “Damage Payment ITCs”) from the CRA and Revenu Québec in its sales tax returns for the reporting period in which the Damage Payments were made.
The Monitor allowed proofs of claim submitted by Revenu Québec (acting on its own behalf and on behalf of the CRA) against CQIM for approximately $13 million in unpaid GST and QST on taxable supplies that CQIM had received prior to the Filing Date, pursuant to subsection 296(1) ETA and section 25 of Québec’s Tax Administration Act (the “296 Claims”). Revenu Québec then asserted that it had the right to effect compensation (set-off) between the Damage Payment ITCs and the 296 Claims, as they were both pre-filing claims. The Monitor and CQIM disagreed with Revenu Québec’s characterization of the Damage Payment ITCs as a pre-filing claim, as they only arose after the Filing Date, and therefore could not be set-off against a pre-filing claim. The Monitor sought directions from the Court to determine whether Revenu Québec was entitled to set-off both debts.
The Court agreed with the Monitor and CQIM that the clear and unambiguous wording of subsection 182(1) ETA and section 318 QSTA was dispositive of the issue: CQIM’s right to claim the Damage Payment ITCs only came into existence once the partial Damage Payments were actually made by way of the First Interim Distribution, as the GST and QST was only deemed to have been paid to the CQIM Creditors at that time.
Revenu Québec also submitted that as the Restructuring Claims were deemed to be provable claims per subsection 32(7) CCAA, they were accordingly by implication pre-filing claims for the purpose of set-off or compensation, and as a result, the Damage Payment ITCs should also be characterized as pre-filing claims, as they were an “accessory” to the Restructuring Claims. The Court disagreed and found that the Restructuring Claims were indeed post-filing liabilities that simply represented the present value of services that the CQIM Creditors would have provided after the Filing Date and were merely deemed to be subject to a compromise or arrangement per subsection 32(7) CCAA. In making this finding, the Court also considered the provisions of the Claims Procedure Order which distinguished pre-filing claims and “Restructuring Claims”. Defining the latter would have been superfluous if they were included in the definition of the former.
The Court also concluded that given their post-filing nature, the Damage Payment ITCs could not be set-off against the 296 Claims, which the parties agreed were pre-filing in nature. In reaching this conclusion, the Court relied on the Québec Court of Appeal’s seminal decision in Arrangement relatif à Métaux Kitco inc., 2017 QCCA 268, which stands for the proposition that compensation (set-off) cannot operate between pre-filing and post-filing claims in CCAA proceedings. Revenu Québec argued that the rule in Kitco was limited to CCAA proceedings where the debtor company continues to operate as a going concern, and not to liquidating CCAAs. The Court agreed with the Monitor and CQIM that liquidating CCAAs are not informed by a different set of rules and echoed the Supreme Court’s reasons in 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10 at paras 42-45, by affirming that liquidating CCAAs are now commonplace.
The Court added that if Revenu Québec were to effect compensation (set-off) between the 296 Claims and the Damage Payment ITCs, it would be tantamount to granting security on an unsecured claim, which would fall afoul the pari passu principle, a cornerstone in insolvency proceedings.
Accordingly, the Court ordered Revenu Québec to issue a payment to CQIM for the Damage Payment ITCs without set-off of any kind.
Judge: Michel A. Pinsonnault, J.S.C.
Counsel: Sylvain Rigaud, Bogdan-Alexandru Dobrota and Joshua Bouzaglou of Woods for FTI as Monitor; Bernard Boucher of Blakes for CQIM and the CCAA Parties; Daniel Cantin, Jean-Claude Gaudette and Henrick Lavoie for Revenu Québec and the Canada Revenue Agency; Gerry Apostolatos of Langlois for Québec North Shore & Labrador Railway Company and Iron Ore Company of Canada; Nicolas Brochu of Fishman Flanz Meland Paquin for the Salaried/non-union employees and retirees