A Divided Court Dismisses CRA Appeal and upholds CCAA Super-Priority Charges

August 30, 2019 | Stephanie Wanke, Kenneth R. Rosenstein, Kyla E. M. Mahar

Yesterday, the Alberta insolvency community breathed a collective sigh of relief as the Alberta Court of Appeal issued its long-awaited decision in Canada v. Canada North Group Inc.[1]

The majority decision confirms the power of the Court to grant charges (“Super-Priority Charges”) pursuant to the Companies’ Creditors Arrangement Act (the “CCAA”) in favour of interim lenders, restructuring professionals and directors with such charges having priority to the company’s assets ahead of the deemed trust claims (“Deemed Trust Claims”) of the Crown arising from the Income Tax Act, the Canada Pension Plan and the Employment Insurance Act (collectively, the “Fiscal Statutes”).  

Without Super-Priority Charges, companies that might successfully restructure would doubtlessly be driven to liquidate.  Successful restructuring generally requires interim financing to allow a company with cash flow issues to continue operations with a view to maximizing value for all stakeholders.  Interim lenders, as well as insolvency professionals, who rely on Super-Priority Charges to secure payment would be unlikely to advance credit in a restructuring if indeterminate Deemed Trust Claims had priority ahead of the Super-Priority Charges.

Madam Justice Rowbotham, writing for the majority (the “Majority Decision”), notes the harm: “[a]ll parties acknowledge the chilling effect on commercial restructuring that will result if the Crown’s position prevails”[2].

The central issue in Canada North is a question of legislative interpretation: does the specific provision in the CCAA that authorizes the Court to grant specific Super-Priority Charges which “rank in priority over the claim of any secured creditor of the company”[3] include the ability of the Court to grant the charge in priority over the Crown’s Deemed Trust Claims?

If it does, is the CCAA provision rendered inoperative as a result of the language in the Fiscal Statutes, which each grant a deemed trust in favour of the Crown over a company’s assets equal to the amount of unremitted payroll deductions (for income tax, CPP and EI, respectively), in priority to the interests of secured creditors, notwithstanding any other legislation (except sections 81.1 and 81.2 of the Bankruptcy and Insolvency Act)?[4]

The Majority Decision first confirms that the Crown is a secured creditor with respect to the Deemed Trust Claims[5], which brings the Crown into the class of creditors that can be primed with Super-Priority Charges pursuant to the CCAA.  The Majority Decision rejected the Crown’s argument that the Deemed Trust Claims constituted property claims that were outside the priming scope of the CCAA.

The Majority Decision then considers if the ‘notwithstanding’ language of the Fiscal Statutes conflicts with the CCAA.  Noting that legislative cohesion among statutes is presumed as the starting point of statutory interpretation, the Majority Decision articulates a harmonious interpretation of the CCAA and the Fiscal Statutes, which allows Super-Priority Charges to trump Deemed Trust Claims.

The harmonious interpretation set out in the Majority Opinion gives weight to the important remedial purpose of the CCAA as well as the important objectives of the Fiscal Statutes.[6] Additionally, the Majority notes this harmonious interpretation avoids the absurd consequence of a hamstrung restructuring regime[7], balances other provisions of the CCAA dealing with Crown claims[8], and recognizes that the specific limited charging provision in the CCAA should prevail over the general provisions in the Fiscal Statutes if there were a conflict.[9]

In a strongly worded and detailed dissent, Mr. Justice Wakeling maintains that the language of the Fiscal Statutes is clear and the Deemed Trust Claims have priority ahead of any Super-Priority Charge granted under the CCAA.  His reasoning classifies holders of Super-Priority Charges as secured creditors and finds that the express notwithstanding language in the Fiscal Statutes gives ultimate priority to the Crown over any secured party, including Super-Priority Charges.  Mr. Justice Wakeling characterizes the Majority Decision as an improper effort to rewrite legislation under the “guise of statutory interpretation”.[10]

Canada North provides immediate appellate level certainty on this important issue.  However, given the robust dissent, a lower court conflicting decision out of Nova Scotia[11] and the importance of this issue to both the Crown and to restructuring generally, this decision is likely not the last word.

[1] 2019 ABCA 314 [Canada North]

[2] Canada North, ibid., at para 7

[3] CCAA, ss. 11.2(1) and (2), 11.51(1) and (2) and 11.52(1) and (2)

[4] Income Tax Act, ss. 227(4) and (4.1), Canada Pension Pan, ss. 23(3) and 23(4) and Employment Insurance Act, ss. 86(2) and 86(2.1)

[5] Canada North, supra note 2, at paras 30-43

[6] Ibid. at paras 44 – 48

[7] Ibid. at paras 49 – 52

[8] Ibid. at paras 53 – 54

[9] Ibid. at paras 55 – 58

[10] Ibid. at para 83

[11] Rosedale Farms Limited, Hassett Holdings Inc., Resurgam Resources (Re), 2017 NSSC 160


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