Apportioning a post-closing tax liability

Skymark Finance Corporation v. Mahal Venture Capital Inc., 2025 ONCA 141 
Is a purchaser in a receivership responsible for outstanding municipal taxes?

Summary: In this case, the Ontario Court of Appeal considered an appeal of a decision finding that a purchaser (and not the debtor) was responsible for a post-closing municipal tax liability following the sale of real property in a receivership proceeding. The court below relied on the language of the approval and vesting order and concluded that the post-closing tax liability was a permitted encumbrance which remained with the property and transferred to the purchaser. This decision was overturned on appeal. The Court of Appeal noted that it is a fundamental principle of insolvency law that a claim may exist even though the quantum of the claim has not yet been determined. Liability for a tax reassessment exists as of the closing even though the relevant tax bills may not have been issued yet. As a result, the debtor was responsible for the tax liability.

The Debtors owned property (the “Property”) used in connection with the operation of a flour mill in Brantford, Ontario (the “City”). KSV Restructuring Inc. (“KSV”) was appointed as receiver of the assets of the Debtors, including the Property. On or about October 28, 2021, the City informed KSV that the Property was not properly assessed for tax purposes and that the City had submitted a reassessment request to the Municipal Property Assessment Corporation (“MPAC”). The City also informed KSV that omitted tax notices for prior taxation years would be issued after the MPAC reassessment.

On November 15, 2021, KSV filed an assignment in bankruptcy under the Bankruptcy and Insolvency Act on behalf of the Debtors and, shortly thereafter, the court approved a sale process for KSV to sell the Debtors’ assets. On April 11, 2022, the court granted an approval and vesting order in respect of the transaction contemplated by an asset purchase agreement with 12175622 Canada Ltd. (“121” or the “Purchaser”), pursuant to which 121 agreed to purchase substantially all of the Debtors’ assets, including the Property.

In connection with the closing, KSV obtained tax certificates from the City disclosing that approximately $167,000 was owing in respect of property taxes levied on the Property. However, those certificates did not include the omitted taxes that were anticipated to be levied following the MPAC reassessment of the Property, which had not yet been completed. On May 25, 2022, KSV paid the City the amount reflected on the tax certificates that had been received as of that date.

On November 24, 2022, following the completion of the MPAC reassessment, the City delivered a tax assessment to 121, which included three omitted tax bills totaling $1,091,423 (the “Omit Tax Claim”) in respect of the taxation years 2020, 2021 and 2022. 121 forwarded the tax bills reflecting the Omit Tax Claim to KSV and indicated that, because the tax bills included liabilities that arose prior to the Closing Date, such liabilities were the responsibility of the Debtors rather than 121.

In January 2024, MNP Ltd. (the “Purchaser’s Receiver”) was appointed by the court as receiver of the assets of 121 and a related entity. The Purchaser’s Receiver and KSV subsequently argued a motion as to who was liable for the payment of outstanding municipal taxes in the context of a sale by a receiver of assets in respect of which an approval and vesting order was granted. The motion judge found that the Purchaser was liable for the outstanding taxes because, in her view, the Omit Tax Claim did not arise until the relevant tax bills were issued in November 2022—more than six months following the Closing Date, and beyond a 45-day post-closing adjustment period contemplated by the APA. Accordingly, the taxes were assumed by the Purchaser in accordance with the terms of the APA between the parties and the AVO.

On appeal, the Purchaser’s Receiver argued that the motion judge erred, inter alia, in the following respects:

1. by holding that liability for the Omit Tax Claim only “arose” when the liability was quantified through the issuance of the relevant tax bills, and was therefore the responsibility of the Purchaser as an Assumed Liability under the APA and the AVO; and

2. by holding that the Omit Tax Claim was not “due” until the issuance of the relevant tax bills, despite s. 307 (3) of the Municipal Act, and was therefore not vested out of the purchased assets by the AVO and was enforceable against the Purchaser.

The Court of Appeal noted that it is a fundamental principle of insolvency law that a claim may be said to exist or have arisen even though the quantum of the claim has not yet been determined. Liability for a tax reassessment exists as of the closing even though the relevant tax bills may not have been issued yet and thus the quantum of the liability is unknown at the time of closing. Those taxes are properly characterized as a future claim for realty taxes that existed at the time of closing but remained to be quantified. As such, it cannot be said to be “contingent” because liability for the increased taxes to the date of closing had crystallized prior to the date of closing.

In this case, the dates upon which the liability for the Omit Tax Claim arose were authoritatively determined by s. 307(3) of the Municipal Act (i.e. on January 1, 2020, 2021 and 2022, respectively). The parties could not, through their contract, override or “contract out” of the “deeming” provision in s. 307(3). Municipal taxes are, by statute, deemed to be imposed and due on January 1 of the relevant taxation year, regardless of how the parties might choose to allocate responsibility as between themselves for ensuring that the tax is actually paid. Accordingly, the liability arose prior to the Closing Date and was not assumed by the Purchaser, in accordance with the APA.

Because the Omit Tax Claim became “due” prior to the Closing Date, it was not a Permitted Encumbrance under the APA or the AVO. As such, it was expunged and discharged as against the Property, and the motion judge erred in finding otherwise. The appeal was allowed, and the motion judge’s order was set aside.

Judges: Paciocco, Monahan and Wilson JJ.A.

Professionals involved:

• Cliff Prophet and Heather Fisher of Gowling WLG for the appellant MNP Ltd., in its capacity as Receiver of 12175622 Canada Inc. and GPM Food Inc.

• Chris Burr of Blakes for the respondents KSV Restructuring Inc., in its capacity as Receiver of Mahal Venture Capital Inc. and Golden Miles Food Corporation

• Geoff Daley for the respondent City of Brantford