What is the nature of ITCs on damage payments for disclaimed agreements under the CCAA, and can they be set off against pre-filing sales tax-related claims?
Summary: Quebec Court of Appeal confirms input tax credits on damage payments for agreements disclaimed under section 32 CCAA are post-filing claims and cannot be set-off by fiscal authorities against their pre-filing sales tax-related claims. The Quebec Court of Appeal also clearly limits the availability of pre-post compensation in favour of tax authorities to exceptional circumstances.
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 and related infrastructure located in Fermont, Quebec. FTI Consulting Canada Inc. was appointed as monitor (the “Monitor”) to the Bloom Lake CCAA Parties and subsequently to 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 halted for several weeks, which led CQIM to disclaim contracts (the “Disclaimed Contracts”) that were no longer needed with four suppliers (the “CQIM Creditors”), as permitted under 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. Per subsection 32(7) CCAA, the Restructuring Claims were deemed to be provable claims, and could therefore subject to compromise. As a matter of fact, 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 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 CCAA supervising judge agreed with the Monitor and CQIM that the clear and unambiguous wording of subsection 182(1) ETA and section 318 QSTA (collectively, the “Tax Provisions”) 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. 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 decision in Arrangement relatif à Métaux Kitco inc., 2017 QCCA 268, which stands for the proposition that set-off cannot operate between pre-filing and post-filing claims in CCAA proceedings.
Before the Court of Appeal, Revenu Québec argued the CCAA supervising judge erred in failing to determine that the Damage Payment ITCs constituted a pre-filling claim that could be set-off against the 296 Claims. Furthermore, Revenu Québec maintained that even if that conclusion stands the first instance judge failed to properly exercise his discretion under s. 11 CCAA to allow for the set-off of pre and post filling claims.
The Court of Appeal agreed with the CCAA supervising judge’s conclusion that the wording of Tax Provisions settled the issue as their plain and simple wording left no doubt as to when the Damage Payment ITCs came into existence only when the Damage Payments were made and therefore constituted post-filling claims. Accordingly, the Court of Appeal found that the terms of the Tax Provisions were sufficient to dispose of the first ground of appeal. Revenu Québec also attempted to qualify the Damage Payment ITCs as pre-filing claims as a result of their close connection to the Restructuring Claims and their pre-filing nature pursuant to ss. 19 and 32(7) CCAA. Although the Restructuring Claims are post-filing claims deemed to be provable claims by virtue of s. 32(7) CCAA, the Court of Appeal found that they are not transformed into pre-filling claims.
Finally, the Court of Appeal relied on the recent Supreme Court of Canada decision in Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53 (rendered after the trial judgment) to dismiss Revenu Québec’s argument that the CCAA supervising judge should have exercised his discretion under s. 11 CCAA to allow the pre-post filling set-off. Although the Deloitte decision allows pre-post filling set-off in certain exceptional settings, the present circumstances did not warrant such. Allowing pre-post set-off would have elevated the unsecured 296 Claims to secured creditor status at the expense of the general body of creditors. Simply invoking that the collection of unpaid taxes is for the benefit of the public at large is not a sufficient reason to justify pre-post set-off at the request of tax authorities, whose claims rank, save certain limited exceptions, as unsecured claims.
Accordingly, the Court of Appeal dismissed Revenu Quebec’s appeal.
Judges: Robert M. Mainville, J.A., Sophie Lavallée, J.A. and Peter Kalichman, J.A.
Counsel: Sylvain Rigaud, Bogdan-Alexandru Dobrota and Joshua Bouzaglou of Woods for FTI as Monitor; Bernard Boucher and Youssef Kabbaj of Blakes for CQIM and the CCAA Parties; Daniel Cantin and Jean-Claude Gaudette for Revenu Québec and the Canada Revenue Agency; Gerald Apostolatos of Langlois for Québec North Shore & Labrador Railway Company and Iron Ore Company of Canada; Andrew Hatnay of Koskie Minsky as well as Tina Silverstein and Nicolas Brochu of Fishman Flanz Meland Paquin for the Salaried/non-union employees and retirees
By Matilda Lici