Can CCAA priority charges prime the CRA's deemed trust claim?Canada v. Canada North Group Inc., 2019 ABCA 314 (CanLII)
1. On July 5, 2017, the court issued an order granting the Debtors protection under the Companies’ Creditors Arrangement Act (the “Initial Order”). The Initial Order provided for a total of $1,650,000 in Priming Charges in the following priority:
a. Administration Charge of $950,000 in favour of the court-appointed Monitor;
b. Interim Lender’s Charge of $3,500,000 in favour of the interim financier; and
c. Directors’ Charge of $150,000.
2. The Initial Order provided that the Priming Charges have priority over the claims of secured creditors. It also provided that the Priming Charges “shall not otherwise be limited or impaired in any way by…(d) the provisions of any federal or provincial statutes”.
3. On July 31, 2017, the Crown applied to vary the Priming Charges in the Initial Order on the grounds that the Initial Order failed to recognize the Crown’s legislative proprietary interest in unremitted source deductions. At the time of the Initial Order, two of the Debtor corporations had failed to remit to the Crown a total of $685,542.93 in source deductions. The Crown argued that s. 227(4.1) of the Income Tax Act, s. 23(4) of the Canada Pension Plan and s. 86(2.1) of the Employment Insurance Act (the “Fiscal Statutes”) provide that the Crown’s claims for unremitted source deductions have priority over the claims of all other creditors of a debtor, notwithstanding any other federal statute, including the CCAA.
4. The chambers judge dismissed the Crown’s application. She held that the Crown’s statutorily deemed trusts could be subordinated by court-ordered Priming Charges. While it appeared that Parliament had drafted provisions that purport to grant super-priority to court-ordered Priming Charges under the CCAA (the “Priming Provisions”) while at the same time granting super-priority to the Crown’s deemed trusts under the Fiscal Statutes, she held that this apparent conflict could be avoided by interpreting the statutes harmoniously. The chambers judge concluded that the Crown’s statutory deemed trusts have priority over all security interests, except those ordered under the Priming Provisions of the CCAA.
5. The main issue on appeal was whether the Crown’s deemed trusts under the Fiscal Statutes can be subordinated to the Priming Charges by a court order under the CCAA? The Crown argued that the language of the Fiscal Statutes is clear: Parliament intended that the Crown’s interest in unremitted source deductions cannot be subordinated to any other secured interest, including court-ordered Priming Charges.
6. The Appellate Court disagreed for a number of reasons. First, while a conflict may appear to exist at the level of the “black letter” wording of the Priming Provisions of the CCAA and the Fiscal Statutes, the presumption of statutory coherence requires that the provisions be read to work together to achieve the intended goal. The Crown’s argument failed to reconcile the objective of tax collection with Parliament’s commitment to facilitate CCAA restructurings. 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. Insolvency could be so widely felt as to impact stakeholders other than creditors and employees.
7. The Crown’s position would result in fewer restructurings, which would necessarily result in reduced tax revenue. Undermining the remedial objective of the CCAA for the sake of tax collection disregards the obvious benefit for the government of successful corporate restructurings. In this case, the Priming Charges allowed the Debtor to continue to operate its business and raise sufficient funds to satisfy both the Priming Charges and the Crown’s claim. When the statutes are read harmoniously, the objectives of both the Fiscal Statutes and the CCAA can be achieved.
8. Secondly, a harmonious interpretation avoids absurd consequences. If the Crown’s position prevailed, interim financing of CCAA restructurings would simply end. Interim financing is necessary to achieve the purposes of the CCAA, with approximately 75% of restructurings requiring the aid of interim lenders. The chambers judge also rightly recognized the important role played by the court-appointed monitors who cannot resign without leave of the court, and the directors of the debtor company who steer the sinking ship. Moreover, since the value of unremitted source deductions is often unknown at the outset of CCAA proceedings, the Crown’s position would inject an unacceptable level of uncertainty into the insolvency process.
9. Third, s. 6(3) of the CCAA prohibits the court from sanctioning a compromise or arrangement unless the plan of compromise or arrangement provides for payment in full to the Crown, within six months of the sanction of the plan, of all amounts that could be subject to a demand under the Fiscal Statutes. If the Crown’s statutory deemed trusts had absolute priority, s. 6(3) would be unnecessary because the Crown would always be paid first. The legislature avoids tautology: every provision serves a purpose.
10. Fourth, this interpretation is supported by the court’s authority to displace the Crown’s claim in order to facilitate a restructuring. Section 11.09(1) of the CCAA grants courts the power to stay the Crown’s garnishment right under s. 224(1.2) of the ITA, just as the court can stay the enforcement mechanisms of other secured creditors. This power is illustrative of Parliament’s intent to authorize courts to exercise control over the Crown’s interests while monitoring restructuring proceedings. An implication of the Crown’s position is that a court ordered stay would not apply to the Crown’s claim.
11. The CCAA applies in special circumstances while the Fiscal Statutes are of general application. At the level of the provisions, the Priming Provisions in the CCAA are narrow, precise, limited to only those charges necessary for restructuring, and subject to ongoing judicial oversight. The court is typically balancing multiple interests as it moves the CCAA process forward. In contrast, the ITA deals generally with income tax collection, giving the Minister a mechanism to recover employee tax deductions that employers fail to remit to the Minister.
12. The intended effect of s. 227(1.4) of the ITA is not diminished by giving effect to the CCAA. The Crown’s interest remains specially protected as against all other secured creditors save those charges that are necessary to implement restructurings. This interpretation recognizes that the CCAA carves out a discretion for the court to achieve the intended legislated purpose of the CCAA.13. The Appellate Court dismissed the appeal. It upheld the chambers judge’s ruling that the Priming Provisions of the CCAA give the court the ability to grant priority to charges necessary for restructuring ahead of the Crown’s security interest arising out of the statutory deemed trusts under the Fiscal Statutes.