Pre-filing sales taxes benefit from no priority under the CCAA
In the matter of the Companies’ Creditors Arrangement Act of North American retailer Groupe Dynamite, Justice Kalichman, then of the Superior Court of Québec, rendered a judgment on the treatment of pre-filing sales taxes required to be remitted by the debtors. The Court exercised its discretion to amend the Initial Order to provide that only sales taxes accrued or collected after the filing date shall be immediately paid to the tax authorities.
Background: Groupe Dynamite’s restructuring
Groupe Dynamite, a Montreal-based fashion retailer operating over 300 stores across North America, has obtained an Initial Order on September 8, 2020 under the CCAA to restructure its operations and present a compromise or arrangement to its creditors. The Initial Order contained a provision from the Ontario lnitial Order Model requiring Groupe Dynamite to pay all applicable sales taxes (1) accrued or collected after the date of the Initial Order; or (2) accrued or collected prior the date of the Initial Order but not required to be remitted until after the date of the Initial Order (the “Straddle Period Sale Taxes”).
Approximately at the same time, in August 2020, the British Columbia Legislature enacted the Economic Stabilization (COVID-19) Act, SBC 2020 c 19 (the “Stabilization Act”) in an attempt to mitigate the difficult economic context caused by the COVID-19 pandemic. The Stabilization Act extended to September 30, 2020 the date on which the sales taxes collected between March 2020 and September 2020 were to be remitted, namely after the date of the Initial Order.
Groupe Dynamite asked the Court to amend the Initial Order in order to limit the immediate payment of sales taxes to those collected after the date of the filing, and thereby relieve the debtors of their obligation to remit the Straddle Period Sale Taxes. The Ministry of Attorney General of British Columbia (the “BC Tax Authority”), which demanded immediate payment of the Straddle Period Sales Taxes, contested the amendment sought.
The discretion to amend the Initial Order
The Court amended the Initial Order as requested by Groupe Dynamite. It concluded that this amendment was an appropriate use of its discretion pursuant to Section 11 of the CCAA, even if there had been no significant change in circumstances since the issuance of the Initial Order. Justice Kalichman held that a change of circumstances is not an essential criterion for seeking an amendment to the Initial Order, but only a factor to be considered.
With reference to White Birch, Aveos and Target, the Court recognized that it should not exercise its discretion to modify an Initial Order to the detriment of a good faith third party who relied on the wording of the Initial Order to take decisions or make commitments. The Court however concluded that the BC Tax Authority did not rely on the Initial Order to take any specific action and will not suffer from the suggested amendment, since the BC Tax Authority was in the same position it would have been had the proposed wording been included from the outset.
By enacting the Stabilization Act, the BC Tax Authority extended the remittance date for sales taxes. This generous measure placed the BC Tax Authority at a relative disadvantage compared to the other tax authorities. While this result is unfortunate, it is inevitable in the context of CCAA proceedings where the impact on the creditors varies depending on the status of their relationship with the debtors.
The amendment furthers the objectives of the CCAA
As prescribed by sections 37 and 38 of the CCAA, sales taxes accrued or collected prior to the Initial Order benefit from no priority or deemed trust under the CCAA, and accordingly rank as unsecured claims. The Court therefore held that the immediate payment of the Straddle Period Sale Taxes would provide the BC Tax Authority with an undue advantage over other unsecured creditors.
As well, the Court decided that the BC Tax Authority did not fit into the narrow exception permitting payments to creditors on account of pre-filing to ensure the ongoing business operations of the debtor. The tax authorities, including the BC Tax Authority, do not provide any valuable consideration to debtors after the date of the Initial Order justifying immediate payment of Straddle Period Sales Taxes.
The Court concluded that the amendment sought furthers the objectives of the CCAA for two reasons. First, it ensures a more equitable distribution of the debtors’ assets. Second, the amendment enhances Groupe Dynamite’s ability to craft a viable plan of arrangement with the funds that would otherwise be used to pay Straddle Period Sales Taxes.
In the context of Groupe Dynamite's CCAA proceedings, Justice Kalichman used his discretion and granted Groupe Dynamite’s proposed amendment to the Initial Order in order to limit the immediate payment of sales taxes to those collected after the date of the Initial Order. CCAA debtors may seek an amendment to an Initial Order where the amendment furthers the purposes of the CCAA, even in the absence of a change of circumstances.
Groupe Dynamite Inc (18 May 2021), Que SC, Montréal 500-11-058763-208 (Judgment (Application to amend an initial order with respect to the payment of sales tax))