On July 28, 2021, the Supreme Court of Canada (the "SCC") released its decision in Canada v Canada North Group Inc. (2021 SCC 30) confirming that court-ordered super-priority charges ("Priming Charges") granted pursuant to the Companies' Creditors Arrangement Act (the "CCAA") rank in priority to the statutory deemed trusts arising in favour of the Crown for unremitted source deductions pursuant to the Income Tax Act (Canada) (the "ITA"), the Canada Pension Plan Act (Canada) and the Employment Insurance Act (Canada) (collectively, the "Fiscal Statutes").
Facts & background
On July 5, 2017, the Alberta Court of Queen's Bench granted an initial order (the "CCAA Initial Order") granting the debtor applicants (collectively referred to as the "Canada North Group") protection under the CCAA.
The CCAA Initial Order provided for certain super-priority Priming Charges including an administration charge, an interim lender's charge, and a directors' charge.
The terms of the CCAA Initial Order provided that the Priming Charges would have priority over the claims of all other secured creditors and that the Priming Charges would not otherwise be limited or impaired in any way by the provisions of any federal or provincial statutes. At the time of the granting of the CCAA Initial Order, two of the debtor corporations making up the Canada North Group had failed to remit to the Crown payments for source deductions as required by the Fiscal Statutes.
Following the granting of the CCAA Initial Order, on July 31, 2017, the Crown applied to the court to vary the CCAA Initial Order on the grounds, among other things, that the provisions of the CCAA Initial Order granting the Priming Charges failed to recognize the Crown's legislative proprietary interest in unremitted source deductions pursuant to the Fiscal Statutes. The Crown argued that its claims for unremitted source deductions had priority over the claims of all other creditors, notwithstanding any other federal statute.
The Chambers Judge dismissed the Crown's application, rejecting the argument that the deemed trust provisions in the ITA create a proprietary, rather than secured, interest. The Chambers Judge held that the definition of "security interest" under the provisions of the ITA included reference to both deemed and actual trusts. She then held that, on the basis of a harmonious interpretation of the CCAA and the Fiscal Statutes, the Crown's statutorily deemed trusts could be subordinated by court-ordered Priming Charges.
The Crown appealed to the Alberta Court of Appeal (the "ABCA").
A majority of the ABCA agreed with the decision of the Chambers Judge. The ABCA confirmed that the Crown's deemed trust for unremitted source deductions pursuant to the ITA fit squarely in the definition of "secured interest" under the ITA and CCAA. The ABCA further confirmed that such deemed trust could be subordinated to the court-ordered Priming Charges granted pursuant to the CCAA, noting that to find otherwise would undermine the objectives of both the Fiscal Statutes and CCAA, as fewer restructurings pursuant to the CCAA would succeed, and in turn, less tax revenue would ultimately be collected.
Once again, the Crown applied for, and was granted leave to appeal to the SCC.
The decision of the Supreme Court of Canada
A 5-4 majority of the SCC affirmed the decision of the lower courts (in two separate sets of reasons), dismissing the Crown's appeal.
Justice Côté (Chief Justice Wagner and Justice Kasirer concurring) authored the lead decision, noting the following in confirming the decisions of the lower courts:
- The most important feature of the CCAA is the broad discretionary power vested in a CCAA supervising judge pursuant to s.11 of the CCAA. The jurisdiction conferred pursuant to s. 11 of the CCAA may only be constrained by restrictions set out under the CCAA and the general requirement that the order being made be appropriate in the circumstances. The availability of more specific orders as provided under the CCAA does not restrict the general language of s.11. As a result, s.11 of the CCAA grants a CCAA supervising judge with the authority to order super-priority Priming Charges in order to facilitate the restructuring process, and is the basis of the court's authority for granting Priming Charges in priority to the Crown's interest pursuant to any statutory deemed trust.
- The deemed trusts created in favour of the Crown pursuant to s.227(4.1) of the ITA does not create a beneficial interest in specific property of a debtor such that it can be considered a proprietary interest. In turn, the Crown does not have a proprietary interest in a debtor's property that is adequate to prevent the exercise of a CCAA supervising judge's discretion to order Priming Charge pursuant to s.11 of the CCAA;
- Priming Charges ordered by a CCAA supervising judge pursuant to s.11 of the CCAA are not security interests under s.227(4.1) of the ITA, and in turn, are not automatically subordinated to the Crown's deemed trust for unremitted source deductions. Priming Charges are distinguishable from the interests enumerated under the definition of "security interest" under s.224(1.3) of the ITA . Priming Charges are not made for the sole benefit of the holder of the charge or by consensual agreement or by operation of law, but are ordered by a CCAA supervising judge to facilitate restructuring in furtherance of the interests of all stakeholders, and benefit the creditors of the debtor company as a group.
- As noted above, the authority of a CCAA supervising judge to grant Priming Charges with priority over the Crown's deemed trust is grounded in s.11 of the CCAA. This authority is discretionary. In exercising the broad jurisdiction granted to a CCAA supervising judge pursuant to s.11, courts should recognize the distinct nature of the Crown's interest, and ensure that Priming Charges with priority over the Crown's deemed trust are granted only when necessary. In considering whether the granting of Priming Charges in priority to the Crown's deemed trust are necessary, courts must consider whether the order will achieve the objectives of the CCAA.
Justice Karakatsanis (Justice Martin concurring), in separate reasons, agreed that the appeal should be dismissed, and that the broad discretionary power under s.11 of the CCAA permits a CCAA supervising court to raking Priming Charges ahead of the Crown's deemed trusts for unremitted source deductions. The concurring reasons note that:
- The ranking of Priming Charges ahead of the Crown's statutory deemed trust does not conflict with the provisions of the ITA provided (and in accordance with s.6(3) of the CCAA) the Crown is paid in full under a plan of compromise.
- That, in certain circumstances, an order granting Priming Charges in priority to the Crown's statutory deemed trust may be necessary to further the remedial objectives of the CCAA by, for example, providing a mechanism for obtaining interim financing that is often crucial to the restructuring process.
- When considering whether to exercise its discretion pursuant to s.11 of the CCAA to rank a Priming Charge ahead of the Crown's deemed trust for source deductions, the court should take a focused look at the specific facts of each case to determine whether such an order is necessary and appropriate.
The decision of the SCC confirms that Priming Charges granted in favour of parties such as interim lenders, directors and officers of a debtor company and the monitor and its counsel, may rank in priority to the Crown's statutory deemed trust pursuant to the Fiscal Statutes over claims for unremitted source deductions.
Importantly, however, the court has made it clear that in exercising its discretion pursuant to s.11 of the CCAA, a CCAA supervising court must be cognizant of the distinct nature of the Crown's interest, and ensure that the granting of Priming Charges in priority to the Crown's deemed trust for unremitted source deductions is done only where necessary.