Re 12463873 Canada Inc., 2021 ONSC 5895

September 08, 2021

Is a purchaser or a ResidualCo entitled to a tax refund of the debtor?

PwC as Monitor of 124 Canada Inc. brought a motion for declaratory relief about entitlement to HST refunds with a value of approximately $456,429.42. The issue arose in connection with a company known as Green Relief, which obtained CCAA protection in early 2020. In November 2020, the Court approved a Reverse Vesting Order and a Share Purchase Agreement between Green Relief and AOCO Ventures Inc. The effect of the SPA was to make AOCO the new sole shareholder of Green Relief.

The overall goal of the transaction was to have Green Relief’s assets remain with Green Relief while its liabilities were vested with 124 Canada Inc. (“ResidualCo”). On the closing of the transaction, Green Relief exited CCAA protection and ResidualCo became subject to CCAA protection. The CRA paid ResidualCo an HST refund of $407,736.61 on account of HST payments that arose before November 2020. Green Relief took the position that the HST refund was an asset of Green Relief which was intended to remain with Green Relief under the SPA. ResidualCo took the position that the proper interpretation of the SPA entitled it to retain the HST refund.

The Court noted that the contract must be read as a whole, and not interpreted by simply looking at a single clause in isolation. It must be read in a manner consistent with the surrounding circumstances known to the parties. Courts should consider only objective evidence of the background facts at the time of the SPA’s execution. Green Relief’s approach focused solely on one provision of the Share Purchase Agreement and ignored the surrounding circumstances in which the contract was made.

A reading of the contract as a whole and a reading of the contract in the context in which it was made were consistent with finding that ResidualCo should retain HST refunds that arose on account of transactions entered into before November 20, 2020. The SPA made Green Relief responsible for tax liabilities up until closing and transferred that liability to ResidualCo on closing. It is common practice for CRA and businesses to offset HST liabilities against HST refunds and pay or refund a net amount. The HST it has paid is credited against the HST collected. The tax liability referred to in the SPA was interpreted as the net liability when referring to HST. It was more appropriate to view the refunds and liabilities as a whole, set them off against each other, and characterize the net result of the two as either a refund or a liability.

The SPA and the Reverse Vesting Order were negotiated in a commercial context in which CRA and businesses offset HST liabilities and refunds against each other in such a way as to properly interpret the concept of an HST liability in the SPA as one that is net of any refunds. There was evidence before the parties that demonstrated CRA’s intention to do so in this case. It made little sense to divorce HST liabilities and HST refunds from each other when they appeared to have been treated by all parties as a single net concept.

ResidualCo was entitled to retain any HST refunds it received from CRA on account of transactions that occurred before November 20, 2020 and Green Relief was ordered to pay to ResidualCo the HST refund of $48,692.81 that it received on account of transactions that occurred between October 1, 2020 and November 20, 2020.

Counsel: Danny Nunes of DLA Piper for PwC as Monitor; Rebecca Kennedy of TGF for 12463873 Canada Inc.; David Ward and Manav Singhla of Miller Thomson for Green Relief Inc., 2650064 Ontario Inc. and AOCO Ventures Inc.; Maria Vujnovic and Myra Sivaloganathan for the Department of Justice

Judge: Koehnen J.