When will property taxes be considered unsecured claims?
The Debtors are insolvent energy companies that were placed into receivership on February 13, 2017, and subsequently declared bankrupt on May 3, 2017. They owed approximately $838,339 in linear property taxes to three municipalities (the “Appellants”) through which the pipeline passes. The Municipal Government Act (the “MGA“) defines linear property to mean: electric power systems; street light systems; telecommunication systems; pipelines; railway property; and wells. The linear property involved in this application were pipelines and related equipment.
The Appellants did not advance claims as secured creditors in the receivership or bankruptcy at any time prior to the granting on June 20, 2017 of an Order for Advice and Directions and Distribution of Funds (the “Order”). After the Order was granted, the Receiver distributed all recovered funds to the Debtors’ secured creditors—Bank of Nova Scotia (“BNS“) and Alberta Treasury Branches—with the result that no funds remained to pay the Appellants’ claims.
On appeal, the Appellants argued that their claims for linear property tax arrears were secured claims pursuant to s. 348 of the MGA and the Bankruptcy and Insolvency Act (the “BIA“). BNS and the Receiver (together, the “Respondents”) argued that the appeal was moot because the funds originally held back for the linear property tax arrears had been distributed. In the alternative, they argued that s. 348(d)(i) of the MGA does not apply to linear property tax arrears and tax claims do not have priority by virtue of ss. 87 and 73(4) of the BIA. The substantive issue on appeal was whether the taxation provisions of the MGA grant priority in bankruptcy proceedings to municipalities for tax arrears related to linear property.
The Appellants submitted that the appeal was not moot because it presented a live issue: are linear property tax arrears secured claims? If so, the distributed funds can be traced to BNS and may be recovered. They also contended that even if the appeal is moot, the question of how to treat the linear property tax arrears for the purposes of the MGA and the BIA is a question of public importance and the ruling would be of precedential value.
Historically, municipal taxes were “not recoverable as a debt at common law and . . . absent a statutory power to do so, a municipality would be without authority to recover tax arrears from a taxpayer by an action in the courts”. Section 348 of the MGA grants such authority to municipalities in Alberta. The Appellants argued that “property tax” in s. 348(d)(i) includes “linear property tax”, and that the provision grants them a special lien on “land and any improvements to the land” with respect to linear property tax arrears. That special lien, they submitted, gave them priority over all creditors other than the Crown.
A provincial legislature can create a statutory lien that takes precedence over the interests of secured creditors. However, to do so “the plain and unambiguous meaning of the section must be that it deprives a properly secured creditor . . . of all or part of its security without compensation, for the purpose of paying another debt entirely unrelated to the security”.
In construing the intended reach of s. 348(d)(i), the Court found it instructive to consider the context of the MGA taxation scheme as a whole, especially other provisions of the MGA that govern the ability of municipalities to collect arrears of taxes. Division 8 of Part 10 of the MGA sets out a mechanism for municipalities to “recover tax arrears in respect of a parcel of land”, which is defined as a “parcel of land and the improvements on it”. Division 8 does not apply to linear property tax arrears, which are covered by the collection remedy set out in Division 9 of the MGA.
For the purposes of Division 9, “tax” is defined to certain types of property tax, including “property tax . . . imposed in respect of property referred to in section . . . 304(1)(i)” (i.e. linear property). Section 304(1)(i) identifies the assessed person with respect to linear property as “the operator of the linear property”. Accordingly, unlike under Division 8, the person responsible for arrears of linear property tax is the “operator”, and the remedy for arrears of linear property tax is a right of distress and seizure of the debtor’s goods.
Linear property taxes are imposed on the operator, not on the owner of the linear property, and not on the owner of the land on which the linear property is situated. “Operator” is defined to include licensees under the Pipeline Act or the Oil and Gas Conservation Act. Each of the Debtors was such a “licensee”, and therefore was an operator responsible for linear property tax arrears under the MGA.
When s. 348(d)(i) is considered in the context of the entire scheme of the MGA, including the specific provisions for remedies regarding linear property taxes set out in Division 9, and the fact that the operator is designated as the person liable for linear property taxes, it is apparent that the provision applies to land and its improvements but does not encompass linear property.
The Court agreed with the Receiver that difficulties would arise if the provision was construed otherwise: to what “land and any improvements to the land” would the lien attach? There is no justification for attaching to the parcel of land on which the linear property is situated, and none for attaching to the linear property itself unless the operator and linear property owner happen to be the same person, which is not necessarily the case under the legislative scheme.
The Court accordingly dismissed the appeal.
Counsel: Michael McCabe Q.C. and Shauna Finlay of Reynolds Mirth Richards & Farmer LLP for the Appellant Northern Sunrise County, Gregory Plester of Brownlee LLP for the Appellants Municipal District of Opportunity No. 17 and Lamont County, Preet Saini and Richard Jones of McMillan LLP for the Respondent The Bank of Nova Scotia, Derek Pontin of Dentons for the Respondent Alberta Treasury Branches and Gino Bruni and Kyle Kashuba of Torys for the Respondent Alvarez & Marsal Canada Inc.