​In the recent unreported decision, Bank of Nova Scotia et al v. Virginia Hills Oil Corp. et al, File No. 1701-02184, the Alberta Court of Queen’s Bench held that not all municipal property tax claims are priority secured claims in an insolvency. As a result of this decision, the ability of a municipal government to recover unpaid municipal property taxes from an insolvent taxpayer may be compromised.

Prior to this decision, all property taxes due to municipalities enjoyed priority over the claims of every person except the Crown, as those taxes are a special lien. In response to an application by the court-appointed receiver to confirm priority and status of municipal claims, the Court held that the municipal taxes taking priority pursuant to Section ​348 of the Municipal Government Act, (Alberta) do not include linear property taxes. […]


Virginia Hills Oil Corp. (VHO) and its wholly-owned subsidiary Dolomite Energy Inc. (Dolomite) were small public oil companies whose core assets were located in north central Alberta. A receiver-manager (the Receiver) was appointed over of VHO and Dolomite on February 13, 2017, and the Receiver sold all of VHO and Dolomite’s assets pursuant to a Court order granted on March 21, 2017. On May 3, 2017, the Receiver obtained a Bankruptcy Order under the Bankruptcy and Insolvency Act (Canada) (the BIA) declaring VHO and Dolomite bankrupt.

Subsequently, in June 2017, the Receiver applied to the Court for advice and determination of the nature and priority of the outstanding linear tax component of the municipal taxes owed by VHO and Dolomite. The Receiver’s position was that, while non-linear property taxes have priority in an insolvency, linear property taxes are an unsecured claim which therefore do not enjoy priority.

Additionally, the Receiver sought the Court’s advice and determination regarding whether the outstanding surface lease rental payments owed to the surface leaseholders were unsecured claims. This portion of the Receiver’s Application did not proceed and has been adjourned to a later date.

Receiver’s Position

The Receiver differentiated between two types of municipal taxes: linear and non-linear.

Pursuant to Section 248(k) of the Municipal Government Act (Alberta) (the MGA), linear property includes oil and gas wells, pipelines to transport petroleum products, and electric power systems among other things. Municipal taxes for linear property are levied in the MGA on a specific “assessed person” and are based on an “assessed value” of the property being taxed. In contrast, non-linear property is not defined in the MGA, but would include all other property that is not included in the definition of linear property.

Under Section 348(c) of the MGA, taxes due to a municipality take priority over the claims of e​very person except the Crown. On its face, this appears to include all property taxes (and has in previous insolvency matters). However, the Receiver emphasized subsection 348(d)(i), wherein taxes due to a municipality are a special lien on land if the tax is a property tax or a special tax, amongst others.

Property is defined in Section 284(r) of the MGA as a parcel of land or an improvement. Hence, the receiver-manager argued that the special lien extends to tax arrears for parcels of land but not to linear taxes in arrears, as those taxes do not relate to land. The Receiver emphasized that there is a distinction between taxes related to land (i.e. non-linear property) and those not related to land (i.e. linear property). This is notwithstanding that the definition of “property” includes an improvement.

The Receiver further argued that, in the event that a special lien exists, Section 87 of the BIA requires that any security provided for in provincial legislation (in this case, any special lien under the MGA) for securing a claim of the federal or provincial Crown is only valid if the security is registered before bankruptcy. In this case, it was not. Therefore, the affected municipalities could not claim a special lien under Section 348 of the MGA, according to the Receiver.

The Order

While it is not clear from the decision which of the Receiver’s arguments ultimately prevailed, Justice Yamauchi ordered and declared that the pre-receivership linear tax claims of the Municipalities were indeed unsecured claims and not entitled to special lien status. Justice Yamauchi also held that these linear tax claims were not “Permitted Encumbrances” under the Sale Approval and Vesting Order, and that the Municipalities have no further claims against the Purchaser, the transaction properties, or the funds held by the Receiver from the sale of the property.


This Order departs from the conventional understanding that in an insolvency, municipal property taxes in arrears have priority. Linear taxes in arrears will now be considered unsecured claims, for which the municipalities will no longer enjoy priority, and the end result is likely to be lower prospects of recovery of tax arrears in an insolvency. One might accordingly expect municipalities to become much more insistent that property taxes are kept current.

This matter may yet result in further developments in the law once the issue of payment of the outstanding pre-receivership surface lease payments is brought back before the Court for determination.​