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Court-Ordered CCAA Super-Priority Charge Can Outrank CRA: 5 Key Take-Aways

Published:

August 5, 2021

Author(s):

• Hilary Gilroy

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On July 28, 2021, the Supreme Court of Canada issued a decision protecting the status of the Companies’ Creditors Arrangement Act (CCAA) as a powerful and flexible tool in Canadian restructuring law. In Canada v. Canada North Group Inc., the Court confirmed that court-ordered “super-priority” or “priming” charges, often granted to insolvency professionals and interim lenders in CCAA restructuring, can rank ahead of the federal Crown’s super-priority to deemed trust amounts for unremitted source deductions.

The CCAA’s driving force is to provide companies with an avenue to avoid bankruptcy and maximize value for all stakeholders. It allows companies with a minimum $5M in debt to restructure their affairs through a “plan of arrangement”, essentially a compromise with their creditors. As part of this process, the company applies to the court for the appointment of a monitor: an insolvency professional that oversees the plan of arrangement. The Court’s decision in Canada North gives parties involved in a CCAA restructuring (including the monitor, lenders, directors, and professional service providers) confidence that if granted a court-ordered super-priority charge, this charge will outrank claims by any other stakeholders  – including the Canada Revenue Agency (CRA). This mitigates the risk that a party will invest resources to restructure a company, only to find there are insufficient funds to be paid. While this is always a possibility based on the nature of corporate restructuring, the risk would be considerably higher if CRA’s deemed trust ranked ahead of these restructuring charges.

The Background. Canada North Group and six related companies began restructuring proceedings under the Bankruptcy and Insolvency Act before changing streams to restructure under the CCAA. The companies applied for a court order outlining how the CCAA restructuring would work. The court’s order included three classes of super-priority charges: an administrative charge for counsel, the monitor and a chief restructuring officer; a financing charge for the interim lender; and a directors’ charge protecting the companies’ directors and officers. The order stated these charges were to “rank in priority to all other security interests, . . . charges and encumbrances, claims of secured creditors, statutory or otherwise”, and that they were not to be “otherwise . . . limited or impaired in any way by . . . the provisions of any federal or provincial statutes”. The CRA took issue with the order and applied to the court to vary it, arguing the super-priority charges to facilitate restructuring could not take priority over its deemed trust for source deductions under section 227(4.1) of the Canadian Income Tax Act (ITA).

The Decision. Both the Trial Judge and the Alberta Court of Appeal decided the CRA’s deemed trust creates a security interest. Therefore, it can be subordinated to court-ordered super-priority charges such as the restructuring charges. As a result, the restructuring charges had to be paid first. In a split decision, a majority of the Supreme Court of Canada agreed that the super-priority charges the court ordered to facilitate restructuring ranked ahead of the CRA’s deemed trust. The Supreme Court declined, however, to decide whether the CRA is a secured creditor with respect to its deemed trust because it wasn’t necessary to do so in this case.

5 Key Take-Aways. Here are five key takeaways from the Supreme Court’s decision in Canada North:

• The CCAA allows supervising courts to order restructuring expenses with priority above all other claims – including CRA’s deemed The Court reiterated that the most important feature of the CCAA is the broad discretionary power it vests in the supervising court to make any order it considers appropriate in the circumstances. Within this discretionary power, the court is free to grant a super-priority that outranks the CRA’s deemed trust.

• The Crown doesn’t have a proprietary interest in deemed trust property. The Court also reiterated its decisions in previous cases that the deemed trust does not attach to any specific property. The Court found the Crown is not a beneficial owner of deemed trust property, and the deemed trust created by section 227(4.1) of the ITA is different in nature from a “common law” trust. In addition to its lack of attachment to specific property, the deemed trust does not create the usual right to the enjoyment of the property or carry the fiduciary obligations of a trustee.

• A court-ordered super-priority charge under the CCAA is not a security interest within the definition of section 224(1.3) of the Income Tax Act. As a result, there’s no conflict between the ITA and the CCAA: the ITA deemed trust outranks security interests, but the CCAA super-priority is not a security interest.

• While section 37(2) of the CCAA does preserve the deemed trusts throughout the CCAA process, it does not modify or elevate their status. Rather, the deemed trusts continue to operate as if the insolvent company had not sought CCAA protection. The only purpose of this provision is to exclude the deemed trust property from the operation of section 37(1) of the CCAA, which would otherwise reduce CRA’s deemed trust to a claim of an ordinary creditor.
• Even still, supervising courts should only grant a super-priority for restructuring charges over CRA’s deemed trust where it would further the objectives of the CCAA. When making an order, the judge must consider whether it would facilitate restructuring because the professional or lender would refuse to act if not granted the super-priority, although the Court acknowledged this would usually be the case. The Court warned that in CCAA proceedings where liquidation is the aim, maximizing return for creditors is the main goal, and subordination of the deemed trust could be less justified.

Please contact your McInnes Cooper lawyer or any member of our Bankruptcy & Insolvency Team @ McInnes Cooper to discuss this topic or any other legal issue.

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