Supreme Court of Canada confirms priority status of restructuring charges over CRA deemed trusts
The Supreme Court of Canada (“SCC”) has released its decision in Canada North, conclusively resolving the priority dispute between deemed trusts created under the federal “fiscal statutes” (being the Income Tax Act (the “ITA”), the Canada Pension Plan Act, and the Employment Insurance Act) and priming charges arising under Canadian restructuring and insolvency legislation (being the Companies’ Creditors Arrangement Act (the “CCAA”) and the Bankruptcy and Insolvency Act (the “BIA”)).
We have previously discussed this issue here, here, and here. In sum, there were conflicting decisions from Nova Scotia (Rosedale) and Alberta (Canada North) regarding whether court-ordered super-priority charges may rank senior to the Crown’s deemed trust claims under the fiscal statutes. Deemed trust claims arise where an employer fails to remit source deductions (consisting of income tax, CPP contributions, and EI premiums) to the Crown: a deemed trust attaches to the property of the employer to the extent of the unremitted source deductions.
In a split decision with four sets of reasons, including two concurring opinions and two dissents, the SCC upheld the decision of the Alberta Court of Appeal in Canada North: superior courts may subordinate the Crown’s deemed trust to a court-ordered charge, in the appropriate circumstances.
Canada North has provided much-needed clarity regarding a contentious point of law. The decision is encouraging to distressed companies, lenders, directors, insolvency professionals and any others that may rely on charges granted under federal insolvency legislation. In addition, this decision has provided helpful guidance regarding when it is appropriate to grant a priming charge super-priority over the Crown’s deemed trust.
SCC Confirms That Super-Priority Charges May Prime the Deemed Trust
While the two sets of majority reasons were substantially in agreement, each focused on different aspects of the dispute.
Justice Côté (Wagner C.J. and Kasier J. concurring) began with the principle that the CCAA regime is remedial and recognizes that debtor companies retain more value as going concerns than in liquidation scenarios. Section 11 of the CCAA vests in the supervising court broad jurisdiction to make “any order that it considers appropriate in the circumstances” and is restricted only by the provisions of the CCAA itself (but, crucially, not by the availability of more specific orders under other provisions of the CCAA).
In Justice Côté’s view, there are numerous reasons why the proper interpretation of the applicable sections of the CCAA and BIA afford a court with the authority to prime the Crown’s deemed trust claim. Those reasons include that:
- Restructuring under the CCAA requires the assistance of many professionals, and granting priming charges in favor of those professionals is required to derive the most value for the debtor company’s stakeholders. To give a deemed trust priority over the charges would “defy fairness and common sense.”;
- Section 227(4.1) of the ITA does not create a beneficial interest that can be considered a true proprietary interest, because no specific property is transferred or identified;
- Similarly, court-ordered super-priority charges are not “security interests” as defined in section 224(1.3) of the ITA and do not fall within the priority regime set out in section 227(4.1) of the ITA. While the ITA definition of “security interest” is expansive, super-priority charges are fundamentally different from other security interests in that they are “integrally connected to insolvency proceedings that operate for the benefit of the creditors as a group.”; and,
- The specific charging provisions in the CCAA refer to granting priority over “secured creditors”. However, it is not necessary to determine whether by virtue of the deemed trust the Crown is a “secured creditor”. Instead of the specific charging provisions, the initial order should be grounded in the broad jurisdiction under section 11 of the CCAA, and a supervising court may subordinate the deemed trust to a priority charge.
Justice Karakatsanis (Martin J. concurring) agreed with Justice Côté that the authority to rank priming charges ahead of the Crown’s deemed trust is derived from section 11 of the CCAA, rather than the specific charging provisions set out in the statute.
However, Justice Karakatsanis also concluded that there is no settled doctrinal meaning of the term “beneficial ownership” referred to in section 227(4.1) of the ITA. As a result, section 227(4.1) does not create a true trust, which cannot be subordinated to a priming charge. In Justice Karakatsanis’ view, the specific nature of the “beneficial ownership” of deemed trust property must be determined in the context in which it is asserted.
In a CCAA proceeding, the rights associated with the deemed trust are limited to the express requirement that the Crown must be paid in full within six months of any plan of arrangement or compromise, pursuant to section 6(3) of the CCAA. Provided that requirement is met, the broad jurisdiction conferred by section 11 of the CCAA permits a supervising court to rank priming charges ahead of a deemed trust, regardless of whether the deemed trust is a “security interest”.
When Should A Supervising Court Grant Charges In Priority to the Deemed Trust?
Both majority reasons agreed that court-ordered super-priority charges should only be granted when necessary to further the policy objectives of the CCAA. The Honourable Justices identified several factors to be considered in determining whether it is necessary to subordinate the deemed trust:
- Where the supervising judge believes that without a super-priority charge, a particular professional or lender would not act, or where the interim lender has indicated in good faith that it will not lend to the debtor without ranking ahead of the Crown’s deemed trust, subordination to the priming charge may be necessary;
- In liquidating CCAA proceedings, which aim to maximize returns for creditors, or where the amount of the unremitted source deductions is a small fraction of the proposed interim financing, there will be less justification for subordination;
- Whether, and for how long, the Crown allowed source deductions to go unremitted without taking action; and,
- Whether there is a strong prospect of a successful going concern restructuring, or the CCAA is likely to be used to sell the debtor’s assets.
In conclusion, and notwithstanding two lengthy dissents that would have allowed the Crown’s appeal, Canada North stands for the principle that court-ordered super-priority charges may prevail over the deemed trust, provided that circumstances exist which make granting a priming charge appropriate. The decision has also provided clarity regarding the factors indicating that such a charge is appropriate, which in essence involves consideration of whether the super-priority charge will enhance the prospects of a successful restructuring under the CCAA.
 Ibid. at para. 20, citing Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, at para. 18.
 Ibid. at paras. 20, 28, 30.
 Ibid. at para. 55.
 Ibid. at para. 62.
 Sections 11.2, 11.51, and 11.52.
 Ibid. at para. 70.
 Ibid. at paras. 70-71.
 Ibid. at para. 181.
 Ibid. at para. 111. As a general principle of law, the creation of a trust requires the “three certainties”: certainty of intention (i.e. to create a trust), certainty of object (i.e. identifiable beneficiaries), and certainty of subject matter (i.e. the trust property must be identifiable).
 Ibid. at paras. 111, 181.
 Ibid. at paras. 158, 173.
 Ibid. at paras. 173-174, 176, 181.
 Ibid. at para. 73.
 Ibid. at para. 179.
 Ibid. at para. 73.
 Ibid. at paras. 73, 179.
 Ibid. at para. 179.
deemed trust CRA priority Supreme Court of Canada Income Tax Act Canada Pension Plan Employment Insurance Act CCAA Bankruptcy and Insolvency Act