Canada v. Canada North Group Inc., 2021 SCC 30– Bankruptcy and insolvency — Priority — Source deductions

On appeal from a judgment of the Alberta Court of Appeal (2019 ABCA 314) affirming a decision of Topolniski, J. (2017 ABQB 550).

Canada North Group and six related corporations initiated restructuring proceedings under the Companies' Creditors Arrangement Act (“CCAA”). In their initial CCAA application, they requested a package of relief including the creation of three priming charges (or court ordered super priority charges): an administration charge in favour of counsel, a monitor and a chief restructuring officer for the fees they incurred, a financing charge in favour of an interim lender, and a directors' charge protecting their directors and officers against liabilities incurred after the commencement of the proceedings. The application included an affidavit from one of their directors attesting to a debt to Her Majesty The Queen for unremitted employee source deductions and GST. The CCAA judge made an order (“Initial Order”) that the priming charges were to “rank in priority to all other security interests, . . . charges and encumbrances, claims of secured creditors, statutory or otherwise”, and that they were not to be “otherwise . . . limited or impaired in any way by . . . the provisions of any federal or provincial statutes” (“Priming Charges”). The Crown subsequently filed a motion for variance, arguing that the Priming Charges could not take priority over the deemed trust created by s. 227(4.1) of the Income Tax Act (“ITA”) for unremitted source deductions. The motion to vary was dismissed, and the Crown's appeal to the Court of Appeal was also dismissed.

Held (5-4): The appeal should be dismissed.

Per Wagner C.J. and Côté and Kasirer JJ.: The Priming Charges prevail over the deemed trust. Section 227(4.1) does not create a proprietary interest in the debtor's property. Further, a court‑ordered super‑priority charge under the CCAA is not a security interest within the meaning of s. 224(1.3) of the ITA. As a result, there is no conflict between s. 227(4.1) of the ITA and the Initial Order made in this case, or between the ITA and s. 11 of the CCAA.

In general, courts supervising a CCAA reorganization have the authority to order super‑priority charges to facilitate the restructuring process. The most important feature of the CCAA is the broad discretionary power it vests in the supervising court: s. 11 of the CCAA confers jurisdiction on the supervising court to “make any order that it considers appropriate in the circumstances”. This jurisdiction is constrained only by restrictions set out in the CCAA itself and the requirement that the order made be appropriate in the circumstances — its general language is not restricted by the availability of more specific orders in ss. 11.2, 11.4, 11.51 and 11.52. As restructuring under the CCAA often requires the assistance of many professionals, giving super priority to priming charges in favour of those professionals is required to derive the most value for the stakeholders. For a monitor and financiers to put themselves at risk to restructure and develop assets, only to later discover that a deemed trust supersedes all claims, would defy fairness and common sense.

Her Majesty does not have a proprietary interest in a debtor's property that is adequate to prevent the exercise of a supervising judge's discretion to order super-priority charges under s. 11 of the CCAA or any of the sections that follow it. Section 227(4.1) does not create a beneficial interest that can be considered a proprietary interest, and it does not give the Crown the same property interest a common law trust would. Without attaching to specific property, creating the usual right to the enjoyment of property or the fiduciary obligations of a trustee, the interest created by s. 227(4.1) lacks the qualities that allow a court to refer to a beneficiary as a beneficial owner.

Furthermore, under Quebec civil law, it is clear that s. 227(4.1) does not establish a legal trust as it does not meet the three requirements set out in arts. 1260 and 1261 of the Civil Code of Québec. Although s. 227(4.1) provides that the assets are deemed to be held “separate and apart from the property of the person” and “to form no part of the estate or property of the person”, the main element of a civilian trust is absent in the deemed trust established by s. 227(4.1): no specific property is transferred to a trust patrimony, and there is no autonomous patrimony to which specific property is transferred.

Section 227(4.1) states that the Receiver General shall be paid the proceeds of a debtor's property “in priority to all such security interests”, as defined in s. 224(1.3), but court‑ordered super‑priority charges under s. 11 of the CCAA or any of the sections that follow it are not security interests within the meaning of s. 224(1.3). Section 224(1.3) defines “security interest” as meaning “any interest in, or for civil law any right in, property that secures payment or performance of an obligation” and including “an interest, or for civil law a right, created by or arising out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for”. The grammatical structure of this provision evidences Parliament's intent that the list have limiting effect, such that only the instruments enumerated and instruments that are similar in nature fall within the definition. Court‑ordered super‑priority charges are utterly different from any of the interests listed in s. 227(4.1) because they were not made for the sole benefit of the holder of the charge, nor were they made by consensual agreement or by operation of law. Instead, they were ordered by the CCAA judge to facilitate the restructuring in furtherance of the interests of all stakeholders. This interpretation is consistent with the presumption against tautology, which suggests that Parliament intended interpretive weight to be placed on the examples, and with the ejusdem generis principle, which limits the generality of the final words on the basis of the narrow enumeration that precedes them.

Preserving the deemed trusts under s. 37(2) of the CCAA does not modify the characteristics of these trusts. They continue to operate as they would have if the insolvent company had not sought CCAA protection. Similarly, granting Her Majesty the right to insist that a compromise or arrangement not be sanctioned by a court unless it provides for payment in full under s. 6(3) does not modify the deemed trust created by s. 227(4.1) in any way. In any event, s. 6(3) comes into operation only at the end of the CCAA process when parties seek court approval of their arrangement or compromise.

Finally, whether Her Majesty is a “secured creditor” under the CCAA or not, the supervising court's power in s. 11 provides a very broad jurisdiction that is not restricted by the availability of more specific orders. Although ss. 11.2, 11.51 and 11.52 of the CCAA may attach only to the property of the debtor's company, there is no such restriction in s. 11. That said, courts should still recognize the distinct nature of Her Majesty's interest and ensure that they grant a charge with priority over the deemed trust only when necessary.

Per Karakatsanis and Martin JJ.: There is no conflict between the ITA and CCAA provisions at issue in this appeal. The broad discretionary power under s. 11 of the CCAA permits a court to rank priming charges ahead of the Crown's deemed trust for unremitted source deductions.

Section 227(4.1) of the ITA provides that a deemed trust attaches to property of the employer to the extent of unremitted source deductions “notwithstanding any security interest in such property” or “any other enactment of Canada”. Although this provision clearly specifies that the Crown's right operates notwithstanding other security interests, the content of that right for the purposes of insolvency cannot be inferred solely from the text of the ITA. Section 227(4.1) states that the amount of the unremitted source deductions is “beneficially owned” by the Crown, but there is no settled doctrinal meaning of the term “beneficial ownership”, and s. 227(4.1) modifies even those features of beneficial ownership that are widely associated with it under the common law.

As a creature of statute, a statutory deemed trust does not have to fulfill the ordinary requirements of trust law. In the case of the deemed trust in s. 227(4.1), there is no identifiable trust property and therefore no certainty of subject matter. Moreover, without specific property being transferred to the trust patrimony, s. 227(4.1) does not satisfy the requirements of an autonomous patrimony contemplated by the Civil Code of Québec in arts. 1260, 1261 and 1278. As a result, s. 227(4.1) traces the value of the unremitted source deductions, capping the Crown's right at that value, and the specific property that constitutes the debtor's estate remains unchanged, with the debtor continuing to have control over it.

The Bankruptcy and Insolvency Act (“BIA”) and the CCAA each give the deemed trust meaning for their own purposes. The purpose of a BIA liquidation is to give the debtor a fresh start and pay out creditors to the extent possible. To realize these goals, the BIA is strictly rules‑based and has a comprehensive scheme for the liquidation process. In the BIA, the deemed trust for unremitted source deductions appears in s. 67(3). Section 67(1)(a) excludes property held in trust by the bankrupt from property of the bankrupt that is divisible among creditors. Section 67(2) provides an exception for deemed trusts that are not true trusts. Section 67(3) provides a further exception by stating that s. 67(2) does not apply in respect of the Crown's deemed trust for unremitted source deductions under the ITA and other statutes. The result of this scheme is that the debtor's estate — to the extent of the unremitted source deductions — is not “property of a bankrupt divisible among his creditors”, as required by s. 67(1) of the BIA. Section 67 therefore gives content to the Crown's right of beneficial ownership under s. 227(4.1) of the ITA: the amount of the unremitted source deductions is taken out of the pool of money that is distributed to creditors in a BIA liquidation.

In contrast, the purpose of the CCAA is remedial; it provides a means for companies to avoid the devastating social and economic consequences of commercial bankruptcies. Due to its remedial nature, the CCAA is famously skeletal in nature and there is no rigid formula for the division of assets. When a debtor's restructuring is on the table, the goal pivots, and interim financing is introduced to facilitate restructuring. Entitlements and priorities shift to accommodate the presence of the interim lender — a new and necessary player who is absent from the liquidation scheme under the BIA.

The Crown's right to unremitted source deductions in a CCAA restructuring is protected by both ss. 37(2) and 6(3) of the CCAA. Section 37(2) provides that the Crown continues to beneficially own the debtor's property equal in value to the unremitted source deductions; the unremitted source deductions “shall . . . be regarded as being held in trust for Her Majesty”. Although this signals that, unlike deemed trusts captured by s. 37(1), the Crown's deemed trust continues and confers a stronger right, s. 37(2) does not explain what to do with that right for the purposes of a CCAA proceeding. It does not, for example, provide that trust property should be put aside, as it would be in the BIA context. Section 6(3) gives specific effect to the Crown's right by requiring that a plan of compromise provide for payment in full of the Crown's deemed trust claims within six months of the plan's approval. As such, the Crown can demand to be paid in full in priority to all “security interests”, including priming charges. The remedial goal of the CCAA is at the forefront of providing flexibility in preserving the Crown's right to unremitted source deductions in s. 37(2), and in giving a concrete effect to that right in s. 6(3) of the CCAA. The fact that the Crown's right under s. 227(4.1) of the ITA is treated differently between the two statutes is consistent with the different schemes and purposes of the BIA and CCAA.

Sections 11.2, 11.51 and 11.52 of the CCAA, which allow the court to order priming charges over a company's property, do not give the court the authority to rank priming charges ahead of the Crown's deemed trust for unremitted source deductions. Instead, that authority comes from s. 11 of the CCAA. Section 11 allows the court to make any order that it considers appropriate in the circumstances, subject to the requirements of good faith and due diligence on the part of the applicant. It can be used to rank priming charges ahead of the Crown's deemed trust for unremitted source deductions for two reasons. First, ranking a priming charge ahead of the Crown's deemed trust does not conflict with the ITA provision. So long as the Crown is paid in full under a plan of compromise, the Crown's right under s. 227(4.1) remains intact “notwithstanding any security interest” in the amount of the unremitted source deductions. Second, depending on the circumstances, such an order may further the remedial objectives of the CCAA. Interim financing is often crucial to the restructuring process. If there is evidence that interim lending cannot be obtained without ranking the interim loan ahead of the Crown's deemed trust, such an order could further the CCAA's remedial goals. In general, the court should have flexibility to order super-priority charges in favour of parties whose function is to facilitate the proposal of a plan of compromise that, in any event, will be required to pay the Crown in full.

Per Abella, Brown and Rowe JJ. (dissenting): The appeal should be allowed. The text, context, and purpose of s. 227(4.1) of the ITA support the conclusion that s. 227(4.1) and the related deemed trust provisions under the the ITA, the CPP, and the EIA (collectively, the “Fiscal Statutes”) bear only one plausible interpretation: the Crown's deemed trust enjoys priority over all other claims, including priming charges granted under the CCAA. Parliament's intention when it amended and expanded s. 227(4) and 227(4.1) of the ITA was clear and unmistakable: it granted this unassailable priority by employing the unequivocal language of “notwithstanding any . . . enactment of Canada”. This is a blanket paramountcy clause; it prevails over all other statutes. No similar “notwithstanding” provision appears in the CCAA. Indeed, it is quite the opposite: unlike most deemed trusts which are nullified in CCAA proceedings by the operation of s. 37(1) of the CCAA, s. 37(2) preserves the deemed trusts of the Fiscal Statutes.

The Fiscal Statutes give absolute priority to the deemed trusts for source deductions over all security interests notwithstanding the CCAA, and the priming charges provisions in ss. 11.2(1), 11.51(1) and 11.52(1) of the CCAA fall under the definition of “security interest”, because they are “interests in the debtor's property securing payment or performance of an obligation”, i.e. the payment of the monitor, the interim lender, and directors. As the definition of “security interest” in the ITA includes “encumbrances of any kind, whatever, however or whenever arising, created, deemed to arise or otherwise provided for”, there is no reason that the definition would preclude the inclusion of an interest that is designed to operate to the benefit of all creditors. This is sufficient to decide the appeal.

This finding does not leave the deemed trust provisions in the Fiscal Statutes in conflict with the CCAA. Section 11 of the CCAA contains a grant of broad supervisory discretion and the power to “make any order that it considers appropriate in the circumstances”, but that grant of authority is not unlimited. Parliament avoided any conflict between the CCAA and the ITA by imposing three restrictions that are significant here. First, although s. 37(1) of the CCAA provides that “property of the debtor company shall not be regarded as being held in trust for Her Majesty unless it would be so regarded in the absence of that statutory provision”, s. 37(2) provides for the continued operation of the deemed trusts under the Fiscal Statutes in a CCAA proceeding. In addition, while the deemed trusts are not “true trusts” and the commingling of assets renders the money subject to the deemed trusts untraceable, tracing has no application to s. 227(4.1). Second, the unremitted source deductions are deemed not to form part of the property of the debtor's company. If there is a default in remittances, the Crown is deemed to obtain beneficial ownership in the tax debtor's property in the amount of the unremitted source deductions that it can collect “notwithstanding” any other enactment or security interest. However, priming charges can attach only to the debtor's property, so the Crown's interest under the deemed trust is not subject to the Priming Charges. Third, under the definition of “secured creditor” in s. 2 of the CCAA, the Crown is not a “secured creditor” in respect of its deemed trust claims under the Fiscal Statutes. That definition must be read as “secured creditor means . . . a holder of any bond of the debtor company secured by . . . a trust in respect of, all or any property of the debtor company”, which makes it manifestly clear that the Crown is not a “secured creditor” in respect of its deemed trust claims under the Fiscal Statutes.

Giving effect to Parliament's clear intent to grant absolute priority to the deemed trust does not render s. 6(3) or s. 11.09 of the CCAA meaningless. To the contrary, s. 6(3) and s. 11.09 respect the ultimate priority of the deemed trusts by allowing for the ultimate priority of the Crown claim to persist, while not frustrating the remedial purpose of the CCAA. Section 6(3) of the CCAA, which protects the Crown's claims under the deemed trusts as well as claims not subject to the deemed trusts under the Fiscal Statutes, operates only where there is an arrangement or compromise put to the court. In contrast, the deemed trusts arise immediately and operate continuously from the time the amount was deducted or withheld from employee's remuneration, and apply to only unremitted source deductions. Without s. 6(3), the Crown would be guaranteed entitlement only to unremitted source deductions when the court sanctions a compromise or arrangement, and not to its other claims under s. 224(1.2) of the ITA, because most of the Crown's claims rank as unsecured under s. 38 of the CCAA. However, s. 6(3) does not explain the survival of the deemed trust or the rights conferred on the Crown under the deemed trust. Their survival is explained by s. 37(2), which continues the operation of s. 227(4.1), or by s. 227(4.1), which provides that the proceeds of the trust property “shall be paid to the Receiver General in priority to all such security interests”. Finally, s. 6(3) protects different interests than those captured by the deemed trusts, and the right not to have to compromise under s. 6(3) is a right independent of the Crown's right under deemed trusts.

Section 11.09 of the CCAA, which permits the court to stay the Crown's enforcement of its claims under the deemed trust claims, can apply to the Crown's deemed trust claims, but it does not remove the priority granted by the deemed trusts.

Further, no concerns regarding certainty of subject matter or autonomous patrimony arise here. The deemed trust is not a “true” trust and it does not confer an ownership interest or the rights of a beneficiary to the Crown as they are understood at common law or within the meaning of the Civil Code of Québec. The requirements of “true” trusts of civil and common law are irrelevant to ascertaining the operation of a statutorily deemed trust as the deemed trust is a legal fiction with sui generis characteristics that are described in s. 227(4) and (4.1) of the ITA.

Finally, concluding that the deemed trusts under the Fiscal Statutes have priority over the priming charges would not lead to absurd consequences. The conclusion that interim financing would simply end was not supported by the record, and there are usually enough funds available to satisfy both the Crown claim and the court-ordered priming charges. Equally unfounded is the claim that confirming the priority of the deemed trusts would inject an unacceptable level of uncertainty into the insolvency process. Interim lenders can rely on the company's financial statements to evaluate the risk of providing financing.

Per Moldaver J. (dissenting): There is substantial agreement with the analysis and conclusions of Brown and Rowe JJ. However, there are two points to be addressed. First, the question of the nature of the Crown's interest should be left to another day. This is because, properly interpreted, the relevant provisions of the CCAA and ITA work in harmony to direct that the Crown's interest under s. 227(4.1) of the ITA — in whatever form it takes — must be given priority over court‑ordered priming charges. This conclusion is sufficient to dispose of the appeal.

Second, while there is agreement that s. 37(2) of the CCAA can be interpreted as an internal restriction on s. 11, if this interpretation is mistaken, s. 11 is nonetheless restricted by s. 227(4.1), as Parliament has expressly indicated the supremacy of s. 227(4.1) over the provisions of the CCAA. The Crown's deemed trust claim must thus take priority over all court‑ordered priming charges, whether they arise under the specific priming charge provisions, or under the court's discretionary authority. A necessary consequence of the absolute supremacy of the Crown's deemed trust claim is that the Crown's interest under s. 227(4.1) cannot be given effect by s. 6(3) of the CCAA. Unlike s. 227(4.1), which is focused on ensuring the priority of the Crown's claim, s. 6(3) merely establishes a six‑month timeframe for payment to the Crown in the event that the debtor company succeeds in staying viable as a going concern. Accordingly, if s. 6(3) gave effect to the Crown's interest, the Crown could be ranked last, so long as it is paid within six months of any arrangement. Such an outcome would be plainly inconsistent with the absolute priority of the Crown's claim. Further, as s. 6(3) does not apply where a liquidation occurs under the CCAA, the Crown would be deprived of its priority over security interests in such circumstances.

It cannot be doubted that Parliament considered the potential consequences of its legislative actions, including any consequences for CCAA proceedings. If circumstances do arise in which the priority of the Crown's claim threatens the viability of a particular restructuring, it clearly lies with the Crown to be flexible so as to avoid any consequences that would undermine the remedial purposes of the CCAA.

Reasons for judgment: Côté J. (Wagner C.J. and Kasirer J. concurring)

Concurring Reasons: Karakatsanis J. (Martin J. concurring)

Joint Dissenting Reasons: Brown and Rowe JJ. (Abella J. concurring)

Dissenting Reasons: Moldaver J.

Neutral Citation: 2021 SCC 30

Docket Number: 38871