Can a municipality exercise its tax sale powers in a proposal?

Terra Firma Development Corporation Limited (Re), 2026 NSSC 30
Does the BIA stay a municipality’s statutory power to allocate tax payments and conduct tax sales during a proposal?

Summary: In this case, the Supreme Court of Nova Scotia approved the BIA proposal of Terra Firma Development Corporation Limited. The Court held that while municipal property tax liens remain secured during a BIA proposal, a municipality’s tax collection remedies, including “oldest-first” payment allocation and tax sales, are stayed by operation of the federal insolvency regime. The Court rejected a municipality’s argument that the Municipal Government Act required it to apply payments to historical arrears and justified lifting the stay, finding no constitutional conflict between the statutes and no material prejudice to the municipality, particularly given that tax lien expiry periods are tolled during the proposal. The Court refused to lift the stay (except with respect to six lots identified by the trustee as having no equity), while the proposal was found to be calculated to benefit the general body of creditors and was approved.

The Supreme Court of Nova Scotia has approved a long-running proposal by Terra Firma Development Corporation Limited, rejecting an attempt by the Municipality of West Hants to lift the insolvency stay and proceed with tax sales over hundreds of acres of development land tied to a failed resort project.

The case arose from the collapse of a planned resort-style residential development anchored by a Jack Nicklaus-designed golf course. Terra Firma has been insolvent since September 2020, with more than 500 creditors and over $200 million in mostly unsecured claims. Most of the company’s remaining assets consist of undeveloped land in West Hants, which has accumulated significant arrears in real property taxes.

At issue was a proposal filed by MNP Ltd., as proposal trustee, that contemplates vesting the remaining properties in the proposal trustee, selling them in an orderly liquidation, and paying secured claims, including municipal taxes, out of sale proceeds. West Hants did not dispute the amount owed, but argued that under Nova Scotia’s Municipal Government Act it was required to apply any payments to the oldest outstanding tax years first and should be permitted to proceed immediately with tax sales.

The trustee countered that this “oldest-first” allocation rule conflicted with the federal insolvency regime. It argued that the Bankruptcy and Insolvency Act requires post-filing taxes to be kept current while pre-filing claims are dealt with through the proposal process, and that allowing the municipality to apply payments to historical arrears would undermine that structure.

Registrar Balmanoukian rejected the invitation to declare the provincial statute constitutionally inoperative, finding no constitutional conflict with the BIA, and found that the municipality’s tax collection tools are stayed by operation of the federal legislation. He held that the “oldest-first” allocation mechanism is a form of “remedy” within the meaning of the BIA’s stay of proceedings, and is therefore suspended during the proposal without engaging constitutional paramountcy.

Crucially for municipalities and other statutory lienholders, the Court held that the stay does not erode secured status over time. The six-year period under the Municipal Government Act after which tax liens expire is tolled while the stay is in place, meaning West Hants does not lose priority simply because it is prevented from enforcing during the proposal.

On the request to lift the stay, the Court found no material prejudice to West Hants. Evidence showed the municipality was financially stable, that taxes and interest continued to accrue, and that it was likely to be paid in full as lots are sold. An orderly liquidation through the proposal was found to be superior to tax sales, which are designed to recover arrears rather than maximize value for all stakeholders.

The Court declined to lift the stay except with respect to six specific parcels that the trustee identified as having no equity, where it consented to tax sales. The registrar noted some jurisdictional uncertainty about lifting a stay on an asset-by-asset basis, but invited the parties to settle appropriate wording.

With those issues resolved, approval of the proposal followed. The Court held that the proposal was calculated to benefit the general body of creditors and noted that it had received overwhelming creditor support. Costs were reserved, with the Court expressing a preliminary view that each side should bear its own given the novelty of the issues and the municipality’s statutory constraints.

Judge: Raffi A. Balmanoukian, Registrar in Bankruptcy

Professionals involved:

• E. Patrick Shea, K.C. of Gowling WLG for MNP as proposal trustee

• John Shanks and Tyler White of Stewart McKelvey for the Municipality of West Hants

• Edward A. Gores, K.C. for the Attorney General of Nova Scotia

• Mark Freeman for the Attorney General of Canada