On December 8, 2021, Alberta proclaimed in force Bill 77, the Municipal Government (Restoring Tax Accountability) Amendment Act, 2021 (the Amending Act), which is intended to strengthen municipal budgets following reports by rural municipalities in 2021 of $245 million in unpaid property taxes associated with oil and gas operations, by giving municipalities a super-priority over a broader range of property.

This change also follows recent amendments to certain Alberta Energy Regulator Directives to include the consideration of municipal tax arrears. Specifically, Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licences and Approvals now permits the consideration of municipal tax arrears when assessing if a licensee poses unreasonable risk. Directive 088: Licensee Life-Cycle Management, which became effective December 1, 2021, also considers municipal tax arrears when assessing transfers involving public land dispositions. Directive 088 provides that transfer applications involving public land dispositions will be rejected where either the transferor or transferee owes taxes to a municipality.

The Amendments

The primary purpose of the amendments to the Municipal Government Act (MGA) appear to be to address the 2019 decision of the Alberta Court of Appeal in Northern Sunrise County v Virginia Hills Oil Corp, 2019 ABCA 61. This case held that linear property tax arrears constitute unsecured claims, and that subsection 348(d)(i) of the MGA, which creates a special lien "on land and any improvements to the land" for taxes due to a municipality, did not apply to linear property taxes. Linear property is defined in the MGA to include electric power systems, street lighting systems, telecommunication systems, pipelines, railway property and wells.

The Court of Appeal noted that linear property taxes are imposed on an operator, not on the owner of linear property or the owner of the land on which the linear property is situated. The Court of Appeal considered the context of the taxation scheme as a whole, noting that different remedies were provided under Division 8 of the MGA, which is headed "Recovery of Taxes Related to Land," as compared to Division 9, which was headed "Recovery of Taxes Not Related to Land." The Court of Appeal held that when subsection 348(d)(i) was read in its grammatical and ordinary sense and in harmony with the scheme of the MGA, its reference to "property tax" does not include linear property tax arrears, and that the provision, therefore, did not create a special lien "on land and any improvements to land" with respect to those arrears. As such, the Court of Appeal determined that linear property tax arrears did not constitute secured claims. See Not Just Linear Property Tax Priorities: Alberta Court of Appeal on Abuse of Process and Mootness for additional background on the Virginia Hills decision.

The Amending Act addresses the issues noted by the Court of Appeal by making it clear that as of December 8, 2021, linear tax arrears are captured under the special lien, and now constitute secured claims over all of the debtor's assessable property located within the municipality with priority over the claims of every person except the Crown. To address the concerns that the Court of Appeal raised regarding potential differences in ownership of the property and any machinery and equipment, the amendments provide for joint and several liability for linear municipal tax arears as between the assessed person and the owner of the linear property or the machinery and equipment.

In a "Restoring Tax Accountability Fact Sheet" issued by the Alberta Government, the Government notes that the changes "will give municipalities priority over other creditors to receive taxes owed, with exception of the Crown and environmental regulatory obligations". This last reference is to the 2019 decision of the Supreme Court of Canada in Orphan Well Assn v Grant Thornton, 2019 SCC 5 [Redwater]. Redwater provided that regulatory obligations to abandon and reclaim oil and gas sites take priority over obligations owed to an insolvent company's creditors. See The Supreme Court of Canada Rules in Orphan Well Case for more information.

A recent decision of the Alberta Court of Queen's Bench in the Manitok Energy Inc. receivership (2021 ABQB 227) held that builders' lien claims took priority to regulatory obligations in circumstances where the AER has not issued an abandonment order before the assets subject to those lien claims were sold, and where the proceeds were expressly held in trust for the lien claimants. Leave to appeal this decision was sought by the Receiver of Manitok and has been granted. Certain municipalities as well as the Orphan Well Association have been granted leave to intervene in that appeal. The outcome of that appeal has the potential to further shift priorities as between regulatory obligations, municipalities and secured creditors.

Going forward, there will be increased scrutiny on the payment of municipal taxes not only by the Alberta Energy Regulator, but also creditors and those parties who may now face liability for linear tax arrears. Whether these amendments will result in a significant reduction in municipal tax arrears remains to be seen and will likely be impacted by a multitude of other factors, including commodity prices and environmental obligations.