Can CCAA priority charges prime the CRA’s deemed trust claim?
The Debtors initiated restructuring proceedings under the BIA, but soon changed course and sought to restructure under the CCAA. In their initial CCAA application, they requested, among other things, the creation of three super-priority charges. The first charge was an administration charge of up to $1,000,000 in favour of counsel, the monitor and the chief restructuring officer for the fees they incurred. The second was a $1,000,000 financing charge in favour of the interim lender. The third was a $150,000 directors’ charge protecting the Debtors’ directors and officers against liabilities incurred after the commencement of the insolvency proceedings. The Court granted an Initial Order in favour of the Debtors on the terms requested in the initial application, aside from a $500,000 reduction in the administration charge.
The Crown sought to vary the Initial Order on the ground that the Initial Order failed to recognize the Crown’s priority interest in unremitted source deductions (the portion of remuneration that employers are required to withhold from employees and remit directly to CRA). The Crown argued that the nature of its interest is determined by s. 227(4.1) of the Income Tax Act, which creates a proprietary interest. The Alberta Court of Queen’s Bench dismissed the motion on the ground that s. 227(4.1) creates a security interest that can be subordinated to court ordered super-priority charges.
The Crown appealed to the Court of Appeal. The appellate court was divided as to whether the super-priority charges had priority over the Crown’s claim. The majority agreed with the motion judge that s. 227(4.1) of the ITA creates a security interest. However, it held that absurd consequences would follow if the deemed trust created under s. 227(4.1) could not be subordinated to super-priority charges. This would undermine the objectives of both the CCAA and the ITA because fewer restructurings could succeed and thus less tax revenue could be collected. Approximately 75 percent of restructurings require interim lenders. Without the assurance that they would be repaid in priority, these lenders would not come forward, nor would monitors or directors.
The central issue in the appeal before the Supreme Court of Canada was whether s. 227(4.1) of the ITA conferred upon the Crown an interest in the debtor’s property that precluded a court from ordering charges with priority over the Crown’s claim. Like the appellate court below it, the Supreme Court panel was split, but the majority ultimately dismissed the appeal. The majority was also divided, with (1) Justice Côté delivering an opinion on her own behalf and on behalf of Chief Justice Wagner and Justice Kasirer JJ; and (2) Justice Karakatsanis delivering a concurring opinion on her own behalf and on behalf of Justice Martin.
According to Justice Côté, in general, courts supervising a CCAA reorganization have the authority to order super-priority charges to facilitate the restructuring process. When a company seeks protection under the CCAA, s. 37(1) of the CCAA provides that most of the Crown’s deemed trusts are nullified. However, s. 37(2) exempts the deemed trusts created by s. 227(4.1) of the ITA from the nullification, and the deemed trusts continue to operate throughout the CCAA process. This preservation of the deemed trusts created by the ITA does not modify the characteristics of these trusts.
Section 227(4.1) does not create a beneficial interest that can be considered a proprietary interest. Without attaching to specific property (thus creating the usual right to the enjoyment of property or the fiduciary obligations of a trustee), the interest created by s. 227(4.1) lacks the qualities that allow a court to refer to a beneficiary as a beneficial owner. Therefore, the Crown did not have a proprietary interest in a debtor’s property that was adequate to prevent the exercise of a supervising judge’s discretion to order super-priority charges under the CCAA. As a result, there was no conflict between s. 227(4.1) of the ITA and the Initial Order made in this case. The Initial Order’s super-priority charges prevailed over the deemed trust.
Justice Côté also noted that court-ordered super-priority charges are granted to facilitate restructurings in furtherance of the interests of all stakeholders, not merely for the sole benefit of the holder of the charge. Consequently, the super-priority charges benefit the creditors as a group. Nevertheless, courts should still recognize the distinct nature of the Crown’s interest and ensure that they grant a charge with priority over the deemed trust only when necessary. In creating a super-priority charge, a supervising judge must always consider whether the order will achieve the objectives of the CCAA. It may be necessary to subordinate the Crown’s deemed trust where the supervising judge believes that, without a super-priority charge, a particular professional or lender would not act. For instance, when the Crown’s claim is small or known with a high degree of certainty, commercial parties will be able to manage their risks and will not need a super priority.
The Court dismissed the appeal with costs. Justices Karakatsanis and Martin also dismissed the appeal, but on other grounds. Justices Brown, Rowe, Abella and Moldaver each dissented, with Justice Moldaver rendering his own reasons.
Judges: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ.
Counsel: Duncan Craig LLP, Edmonton for Canada North Group Inc., Canada North Camps Inc., Campcorp Structures Ltd., DJ Catering Ltd., 816956 Alberta Ltd., 1371047 Alberta Ltd., 1919209 Alberta Ltd. and Ernst & Young Inc. in its capacity as monitor; Cassels Brock & Blackwell LLP, Calgary for the Business Development Bank of Canada; Blake, Cassels & Graydon LLP, Calgary for the intervener the Insolvency Institute of Canada; Osler, Hoskin & Harcourt, LLP, Calgary for the intervener the Canadian Association of Insolvency and Restructuring Professionals