The priorities of some pension claims on bankruptcy and receivership changed as a result of amendments effective July 8, 2008 to the Bankruptcy and Insolvency Act R.S.C. (Canada) (the “BIA”).  

Priority Before the Amendments

Prior to the recent amendments, a claim in bankruptcy or most receiverships regarding pension plan contributions ranked with claims of other unsecured creditors unless a true trust could be demonstrated. Under the Pension Benefits Act (Ontario), a deemed trust and lien are created to secure certain required, but unremitted, contributions. However, the provincial deemed trust and lien are not applied in proceedings governed by the BIA, for constitutional law reasons.  

New Superpriority for Some Pension Plan Contributions

As a result of the amendments, a superpriority is given to claims in respect of:  

(a) unremitted employee contributions deducted from pay,  

(b) required, but unpaid, employer contributions under a defined contribution provision, and  

(c) required, but unpaid, normal cost contributions (as calculated under federal pension regulations), which does not include special payments.  

These claims are secured against all assets of the bankrupt or insolvent debtor, ranking ahead of secured creditors. The only claims or security that rank ahead of these pension claims are:  

(i) certain rights of unpaid suppliers and farmers, fishermen and acquaculturists,  

(ii) the new security for limited wage claims, which may include claims of the federal government regarding payments it makes under the new Wage Earner Protection Program, and  

(iii) certain deemed trusts regarding income tax, the Canada Pension Plan and Employment Insurance.  

Other claims regarding pension contributions, including special payments and wind up contributions in most cases, continue to rank with unsecured creditors. Hence some contributions that are protected by the provincial deemed trust and lien are not protected by the superpriority security in proceedings governed by the BIA.

A trustee in bankruptcy or receiver selling assets of a debtor is personally liable for pension contributions secured by this superpriority claim.  

To the extent that this superpriority claim reduces proceeds available to a secured creditor, the secured creditor has a claim that ranks ahead of unsecured creditors generally, but after other secured creditors, costs of administration and certain wage claims.  

Other Amendments to Bankruptcy and Restructuring Legislation

These changes regarding pension contributions were made in conjunction with changes to the priority of certain wage claims on bankruptcy or receivership and the implementation of the Wage Earner Protection Program that allows employees to recover limited wage claims from the federal government.  

Other amendments relating to pension plans have been made to the BIA and the Companies’ Creditors Arrangements Act (Canada) (the “CCAA”), most of which are not yet in effect. Among those unproclaimed changes is a requirement that proposals under the BIA or the CCAA provide for payment of the pension contributions secured by the new superpriority security, unless agreement otherwise is reached among the relevant parties and approved by the pension regulator.