In Canada v. Canada North Group Inc., 2019 ABCA 314, the Court of Appeal of Alberta (the “ABCA”) upheld the decision of the Court of Queen’s Bench of Alberta (the “Lower Court”), which held that the Companies’ Creditors Arrangement Act (the “CCAA”) permits courts to subordinate statutory deemed trusts in favour of the Crown to court-ordered insolvency priming charges.

Priming charges (or “super-priority charges”) are created by court order pursuant to discretion granted under sections 11.2, 11.51 and 11.52 of the CCAA to facilitate a debtor’s access to interim financing for the purpose of completing a restructuring or arrangement process. They rank ahead of claims held by secured creditors who would otherwise rank in priority, and may even supersede prior-granted priming charges if the court so orders.

In July 2017, the Lower Court issued an initial order granting Canada North Group Inc. and certain related companies (collectively, the “Debtors”) protection under the CCAA and approving priming charges totalling $1,650,000 (comprised of an administration charge, an interim lending charge and a directors’ charge and together, the “Charges”). At the time of the initial order, certain of the Debtors had failed to remit almost $700,000 in source deductions (i.e. employees’ income tax, CPP contributions and EI premiums) to the Crown. After its motion in the Lower Court to vary the Charges by carving out a priority for the amounts owing to it, the Crown appealed the decision of the chambers judge.

The central issue on appeal was whether priming charges pursuant to an initial order under the CCAA can outrank statutory deemed trusts arising under the Income Tax Act, the Canada Pension Plan and the Employment Insurance Act (collectively, the “Fiscal Statutes”).

The Crown argued that priming charges – and indeed all creditor claims, including charges arising from any federal statute – are subordinate in rank to deemed trusts arising under the Fiscal Statutes because the deemed trust provisions create a proprietary interest that removes assets from a debtor’s estate, and that to hold otherwise would defeat the stated purpose of the Fiscal Statutes. Essentially, the Crown’s position was that “the deemed trust supersedes all.”

The majority of the ABCA rejected the Crown’s argument, finding that the Crown failed to reconcile the objective of tax collection with Parliament’s commitment to facilitate CCAA restructurings. The ABCA relied on statutory interpretation and the “harmonious interpretation” principle to examine the broader legislative framework and ultimately find no statutory conflict: when the Fiscal Statutes and the CCAA are read harmoniously, the objectives of both can be achieved. In the instant case, the priming charges allowed the Debtors to continue to operate their business, thereby raising sufficient funds to satisfy both the priming charges and the Crown’s claim.

The decision emphasized that CCAA restructurings are crucial enough to support a narrow exception to the deemed trust. If the Crown’s position were to prevail, it would have a chilling effect on commercial restructuring, which would in turn result in reduced tax revenue. In the words of the majority: “[t]he Crown’s position ignores that CCAA restructurings facilitate the survival of companies, the production of goods and services, and ultimately jobs, all of which serve as fuel for the fiscal base.”

The ABCA declined to follow an earlier decision of the Nova Scotia Supreme Court, which held that the Income Tax Act source deduction deemed trust had priority over a financing charge in a Bankruptcy and Insolvency Act proposal proceeding.

The ABCA’s reasoning will ring true to businesspeople and insolvency professionals. Nevertheless, the ABCA was not unanimous. A lengthy dissent found that the language of the Fiscal Statutes created a “blanket paramountcy” not found in the CCAA, and that the Crown therefore cannot be a mere “secured creditor” under a plain reading of that term. The dissent acknowledged that there may be a socioeconomic imperative to facilitating restructurings, but demurred on whether it was the judiciary’s role to consider such matters. Reading concerns into statutes, the dissent said, is more properly the province of Parliament. A further appeal should be expected.