The Alberta Court of Appeal recently upheld an unreported decision of the Court of Queen’s Bench that unpaid taxes on linear property (which were pipelines and associated facilities in the case at bar) formed only unsecured claims against the debtors. The Queen’s Bench decision was the subject of a previous post on this blog.

The substantive legal issue on appeal of interest to insolvency practitioners was whether section 348(d)(i) of the Municipal Government Act (“MGA”) created a special lien for linear property tax arrears.   The Court began by noting, at paragraph 38 of the the decision, that provincial statutes can impose liens that take precedence over secured creditors, but that doing so requires that “the plain and unambiguous meaning of the section must be that it deprives a properly secured creditor….of all or part of its security without compensation, for the purpose of paying another debt entirely unrelated to the security”, citing para 10 of the 1989 ABCA case of Lloyds Bank Canada v International Warranty Company Limited). From there, the analysis followed a standard statutory interpretation. The Court noted that there are two remedy sections in the MGA, found in Divisions 8 and 9, respectively, of Part 10 of the Act. Division 8 remedies apply to taxes related to land, which the Court found did not include linear property. The Division 9 remedies do apply to linear property, but because linear property is not land, the Court was not willing to allow a lien on land (i.e., arising under section 348(d)(i)) to be applied to linear property tax arrears. The Court took a comprehensive view of the entire MGA, and found that to do otherwise would create problematic ambiguity.

The tension between municipal taxes and secured creditors is not novel (see, for example, the recent case of Re Regent Resources Ltd and our earlier blog post ). The Court of Appeal noted here that it is within the purview of the legislature to give municipalities priority in bankruptcy over secured creditors, though to date Alberta lawmakers have not done so. Importantly, the Court declined to consider some of the broader Bankruptcy and Insolvency Act priority implications of municipal tax enforcement under the MGA, the most notable of which is whether all pre-filing municipal tax claims may rank unsecured in bankruptcy through operation of sections 86 and 87 of the statute.  Although this case does clarify some important points in Alberta law, we do not expect the broader priority debate to subside any time soon.