Supreme Court of Canada rules: deemed trusts for source deductions do not have priority over court-ordered charges in CCAA proceedings

As insolvency practitioners know well, there is a decades-long ongoing contest in insolvency proceedings consisting of repeated iterations of the same fundamental skirmish: the priority to be afforded Crown claims; particularly, claims in respect of sales taxes and source deductions. In the latest round, the Supreme Court of Canada (SCC) has held in the proceedings of Canada v. Canada North Group Inc. that Crown deemed trust claims for source deductions do not have priority over court-ordered priority charges granted in the course of insolvency proceedings under the Companies’ Creditors Arrangement Act (Canada) (CCAA). 

What you need to know

• Canada North Group and six related companies commenced CCAA proceedings and obtained as part of the Initial CCAA Order three customary “superpriority” court-ordered charges on the debtors’ property: namely, an administration charge, a D&O charge and a DIP / interim financing charge.
• The Court ordered that these charges: (i) ranked in priority to all other security interests, charges and encumbrances, whether statutory or otherwise; and (ii) were not to be limited or impaired in any way by the provisions of any federal or provincial statutes.
• The Crown brought a motion seeking to vary the Initial CCAA Order and priority afforded these charges, arguing that the deemed trust for unremitted source deductions under the Income Tax Act (ITA) could not be primed in this way. The Crown was unsuccessful at first instance and again on appeal to the Alberta Court of Appeal, appealing further to the SCC.
• Although the appeal was dismissed by the SCC, the Court was split 5-4, with 4 different sets of reasons written by the Court (2 in support, 2 in dissent). Despite repeatedly insisting that the law was clear (in fact, the words “clear” or “clearly” appear 64 times in the decision and headnote!), it is readily apparent that the law isn’t particularly clear and that there were sharply divided views on the question of whether these Crown deemed trust claims should be given priority.
• Key findings made by the SCC majority include:
  • Neither the deemed trust provisions of the ITA nor the protections afforded deemed trusts under the CCAA operate to create a legal or beneficial interest that amounts to a proprietary interest in favour of the Crown in a debtor’s property that cannot be further encumbered: that is, these provisions do not give the Crown an interest in the property in question the effect of which is to remove that property from the reach of a court-ordered charge that is otherwise granted on the debtor’s property.
  • Under the ITA, deemed trusts have priority over “security interests” as defined therein—however, a court-ordered “superpriority” charge is not caught by the ITA definition of a “security interest”.
  • The courts supervising CCAA proceedings have broad authority to grant such orders as they consider appropriate in the circumstances, and this includes granting charges and affording them “superpriority” status.
  • The fact that: (i) deemed trusts for source deductions are preserved and treated differently under the Bankruptcy and Insolvency Act (BIA); or (ii) the CCAA preserves deemed trust claims and that a CCAA Plan must provide for payment in full of the amounts in question unless the Crown consents otherwise, does not mean that the court cannot grant charges in CCAA proceedings ranking in priority to deemed trust claims. In part, this is explained by the objects and remedial purpose of the CCAA (which can be contrasted with the liquidation scheme under the BIA).
  • Notwithstanding the foregoing, the courts should recognize the distinct nature of the Crown’s interest in source deductions and grant a priority charge ahead of deemed trusts for source deductions only when necessary
• Key findings made by the SCC dissent include:
  • A proper construction of the ITA (including its paramountcy language) and the CCAA supported a conclusion that: (i) Crown deemed trusts for source deductions ought to have priority over any court-ordered charges under the CCAA; and (ii) court-ordered charges do constitute “security interests” as defined in the ITA, and therefore are subject to source deduction deemed trusts.
  • The CCAA gives courts broad supervisory discretion and the power to make any order they consider appropriate in the circumstances—but that grant of authority is not unlimited. And in the case of the priority to be afforded deemed trusts, both the ITA and the CCAA have limited the court’s authority.
  • The ITA and CCAA operate to give the Crown an interest in the property subject to the deemed trust so that it cannot otherwise be affected by any charge granted by the courts on a debtor’s property. Three of the four dissenting judges held that such interest of the Crown was a beneficial (i.e., proprietary) interest, while the fourth dissenting judge would leave that determination to another day (i.e., irrespective of the nature of the interest, it is sufficient to put the property out of reach of a court-ordered priority charge on a debtor’s property).

Conclusion

We’ve all seen this fight play out too many times to expect this to be the final word on the priority afforded Crown deemed trust claims. And the diametrically opposed conclusions reached by the SCC—in each case insisting that the law was unmistakably clear—underscores that this area remains ripe for legislative reform to either or all of the ITA, CCAA and BIA. But for the time being, the beneficiaries of court-ordered charges granted in insolvency proceedings can rest easy knowing that their claims will not be usurped by Crown claims for source deductions. However, given the warning by the SCC that courts should grant priming charges ahead of such Crown deemed trust claims “only when necessary”, parties seeking and relying on such charges should be careful to provide a proper evidentiary record to permit the court to make a finding of necessity.