Supreme Court Judgments

Decision Information

Decision Content

SUPREME COURT OF CANADA

Citation: Canada v. Canada North Group Inc., 2021 SCC 30

 

Appeal Heard: December 1, 2020

Judgment Rendered: July 28, 2021

Docket: 38871

 

Between:

Her Majesty The Queen in Right of Canada

Appellant

 

and

 

Canada North Group Inc., Canada North Camps Inc., Campcorp Structures Ltd., DJ Catering Ltd., 816956 Alberta Ltd., 1371047 Alberta Ltd., 1919209 Alberta Ltd., Ernst & Young Inc. in its capacity as monitor and Business Development Bank of Canada

Respondents

 

- and -

 

Insolvency Institute of Canada and Canadian Association of

Insolvency and Restructuring Professionals

Interveners

 

 

Coram: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ.

 

Reasons:

(paras. 1 to 74)

Côté J. (Wagner C.J. and Kasirer J. concurring)

Concurring Reasons:

(paras. 75 to 182)

Karakatsanis J. (Martin J. concurring)

Joint Dissenting Reasons:

(paras. 183 to 253)

Brown and Rowe JJ. (Abella J. concurring)

Dissenting Reasons:

(paras. 254 to 265)

Moldaver J.

 

Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports.

 

 


 


canada v. canada north group inc.

Her Majesty The Queen in Right of Canada                                               Appellant

v.

Canada North Group Inc.,

Canada North Camps Inc.,

Campcorp Structures Ltd.,

DJ Catering Ltd.,

816956 Alberta Ltd.,

1371047 Alberta Ltd.,

1919209 Alberta Ltd.,

Ernst & Young Inc. in its capacity as monitor and

Business Development Bank of Canada                                                  Respondents

and

Insolvency Institute of Canada and

Canadian Association of Insolvency and Restructuring Professionals   Interveners

Indexed as: Canada v. Canada North Group Inc.

2021 SCC 30

File No.: 38871.

2020: December 1; 2021: July 28.

Present: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ.

on appeal from the court of appeal of alberta

                    Bankruptcy and insolvency — Priority — Source deductions — Priming charges — Employee source deductions not remitted to Crown by companies in receivership — Judge supervising restructuring proceedings under Companies’ Creditors Arrangement Act  ordering priming charges over debtor companies’ assets in favour of interim lender, monitor and directors — Order giving priority to priming charges over claims of secured creditors and providing that they are not to be limited or impaired in any way by provisions of any federal or provincial statute — Property of debtor companies subject to deemed trust in favour of Crown for unremitted source deductions under Income Tax Act  — Whether court has authority to rank priming charges ahead of Crown’s deemed trust for unremitted source deductions — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 227(4.1) Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36, ss. 11 , 11.2 , 11.51 , 11.52 .

                    Canada North Group and six related corporations initiated restructuring proceedings under the Companies’ Creditors Arrangement Act  (“CCAA ”). In their initial CCAA  application, they requested a package of relief including the creation of three priming charges (or court‑ordered super‑priority charges): an administration charge in favour of counsel, a monitor and a chief restructuring officer for the fees they incurred, a financing charge in favour of an interim lender, and a directors’ charge protecting their directors and officers against liabilities incurred after the commencement of the proceedings. The application included an affidavit from one of their directors attesting to a debt to Her Majesty The Queen for unremitted employee source deductions and GST. The CCAA judge made an order (“Initial Order”) that the priming 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” (“Priming Charges”). The Crown subsequently filed a motion for variance, arguing that the Priming Charges could not take priority over the deemed trust created by s. 227(4.1)  of the Income Tax Act  (“ITA ”) for unremitted source deductions. The motion to vary was dismissed, and the Crown’s appeal to the Court of Appeal was also dismissed.

                    Held (Abella, Moldaver, Brown and Rowe JJ. dissenting): The appeal should be dismissed.

                    Per Wagner C.J. and Côté and Kasirer JJ.: The Priming Charges prevail over the deemed trust. Section 227(4.1)  does not create a proprietary interest in the debtor’s property. Further, a court‑ordered super‑priority charge under the CCAA  is not a security interest within the meaning of s. 224(1.3)  of the ITA . As a result, there is no conflict between s. 227(4.1)  of the ITA  and the Initial Order made in this case, or between the ITA  and s. 11  of the CCAA .

                    In general, courts supervising a CCAA  reorganization have the authority to order super‑priority charges to facilitate the restructuring process. The most important feature of the CCAA  is the broad discretionary power it vests in the supervising court: s. 11  of the CCAA  confers jurisdiction on the supervising court to “make any order that it considers appropriate in the circumstances”. This jurisdiction is constrained only by restrictions set out in the CCAA  itself and the requirement that the order made be appropriate in the circumstances — its general language is not restricted by the availability of more specific orders in ss. 11.2 , 11.4 , 11.51  and 11.52 . As restructuring under the CCAA  often requires the assistance of many professionals, giving super priority to priming charges in favour of those professionals is required to derive the most value for the stakeholders. For a monitor and financiers to put themselves at risk to restructure and develop assets, only to later discover that a deemed trust supersedes all claims, would defy fairness and common sense.

                    Her Majesty does not have a proprietary interest in a debtor’s property that is adequate to prevent the exercise of a supervising judge’s discretion to order super-priority charges under s. 11  of the CCAA  or any of the sections that follow it. Section 227(4.1)  does not create a beneficial interest that can be considered a proprietary interest, and it does not give the Crown the same property interest a common law trust would. Without attaching to specific property, creating the usual right to the enjoyment of property or the fiduciary obligations of a trustee, the interest created by s. 227(4.1)  lacks the qualities that allow a court to refer to a beneficiary as a beneficial owner.

                    Furthermore, under Quebec civil law, it is clear that s. 227(4.1) does not establish a legal trust as it does not meet the three requirements set out in arts. 1260 and 1261 of the Civil Code of Québec. Although s. 227(4.1) provides that the assets are deemed to be held “separate and apart from the property of the person” and “to form no part of the estate or property of the person”, the main element of a civilian trust is absent in the deemed trust established by s. 227(4.1): no specific property is transferred to a trust patrimony, and there is no autonomous patrimony to which specific property is transferred.

                    Section 227(4.1) states that the Receiver General shall be paid the proceeds of a debtor’s property “in priority to all such security interests”, as defined in s. 224(1.3) , but court‑ordered super‑priority charges under s. 11  of the CCAA  or any of the sections that follow it are not security interests within the meaning of s. 224(1.3) . Section 224(1.3)  defines “security interest” as meaning “any interest in, or for civil law any right in, property that secures payment or performance of an obligation” and including “an interest, or for civil law a right, created by or arising out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for”. The grammatical structure of this provision evidences Parliament’s intent that the list have limiting effect, such that only the instruments enumerated and instruments that are similar in nature fall within the definition. Court‑ordered super‑priority charges are utterly different from any of the interests listed in s. 227(4.1)  because they were not made for the sole benefit of the holder of the charge, nor were they made by consensual agreement or by operation of law. Instead, they were ordered by the CCAA  judge to facilitate the restructuring in furtherance of the interests of all stakeholders. This interpretation is consistent with the presumption against tautology, which suggests that Parliament intended interpretive weight to be placed on the examples, and with the ejusdem generis principle, which limits the generality of the final words on the basis of the narrow enumeration that precedes them.

                    Preserving the deemed trusts under s. 37(2)  of the CCAA  does not modify the characteristics of these trusts. They continue to operate as they would have if the insolvent company had not sought CCAA  protection. Similarly, granting Her Majesty the right to insist that a compromise or arrangement not be sanctioned by a court unless it provides for payment in full under s. 6(3)  does not modify the deemed trust created by s. 227(4.1)  in any way. In any event, s. 6(3)  comes into operation only at the end of the CCAA  process when parties seek court approval of their arrangement or compromise.

                    Finally, whether Her Majesty is a “secured creditor” under the CCAA  or not, the supervising court’s power in s. 11  provides a very broad jurisdiction that is not restricted by the availability of more specific orders. Although ss. 11.2, 11.51 and 11.52 of the CCAA  may attach only to the property of the debtor’s company, there is no such restriction in s. 11 . That said, courts should still recognize the distinct nature of Her Majesty’s interest and ensure that they grant a charge with priority over the deemed trust only when necessary.

                    Per Karakatsanis and Martin JJ.: There is no conflict between the ITA  and CCAA  provisions at issue in this appeal. The broad discretionary power under s. 11  of the CCAA  permits a court to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions.

                    Section 227(4.1)  of the ITA  provides that a deemed trust attaches to property of the employer to the extent of unremitted source deductions “notwithstanding any security interest in such property” or “any other enactment of Canada”. Although this provision clearly specifies that the Crown’s right operates notwithstanding other security interests, the content of that right for the purposes of insolvency cannot be inferred solely from the text of the ITA . Section 227(4.1)  states that the amount of the unremitted source deductions is “beneficially owned” by the Crown, but there is no settled doctrinal meaning of the term “beneficial ownership”, and s. 227(4.1)  modifies even those features of beneficial ownership that are widely associated with it under the common law.

                    As a creature of statute, a statutory deemed trust does not have to fulfill the ordinary requirements of trust law. In the case of the deemed trust in s. 227(4.1) , there is no identifiable trust property and therefore no certainty of subject matter. Moreover, without specific property being transferred to the trust patrimony, s. 227(4.1)  does not satisfy the requirements of an autonomous patrimony contemplated by the Civil Code of Québec in arts. 1260, 1261 and 1278. As a result, s. 227(4.1)  traces the value of the unremitted source deductions, capping the Crown’s right at that value, and the specific property that constitutes the debtor’s estate remains unchanged, with the debtor continuing to have control over it.

                    The Bankruptcy and Insolvency Act  (“BIA ”) and the CCAA  each give the deemed trust meaning for their own purposes. The purpose of a BIA  liquidation is to give the debtor a fresh start and pay out creditors to the extent possible. To realize these goals, the BIA  is strictly rules‑based and has a comprehensive scheme for the liquidation process. In the BIA , the deemed trust for unremitted source deductions appears in s. 67(3) . Section 67(1) (a) excludes property held in trust by the bankrupt from property of the bankrupt that is divisible among creditors. Section 67(2)  provides an exception for deemed trusts that are not true trusts. Section 67(3)  provides a further exception by stating that s. 67(2)  does not apply in respect of the Crown’s deemed trust for unremitted source deductions under the ITA  and other statutes. The result of this scheme is that the debtor’s estate — to the extent of the unremitted source deductions — is not “property of a bankrupt divisible among his creditors”, as required by s. 67(1)  of the BIA . Section 67  therefore gives content to the Crown’s right of beneficial ownership under s. 227(4.1)  of the ITA : the amount of the unremitted source deductions is taken out of the pool of money that is distributed to creditors in a BIA  liquidation.

                    In contrast, the purpose of the CCAA  is remedial; it provides a means for companies to avoid the devastating social and economic consequences of commercial bankruptcies. Due to its remedial nature, the CCAA  is famously skeletal in nature and there is no rigid formula for the division of assets. When a debtor’s restructuring is on the table, the goal pivots, and interim financing is introduced to facilitate restructuring. Entitlements and priorities shift to accommodate the presence of the interim lender — a new and necessary player who is absent from the liquidation scheme under the BIA .

                    The Crown’s right to unremitted source deductions in a CCAA  restructuring is protected by both ss. 37(2)  and 6(3)  of the CCAA . Section 37(2)  provides that the Crown continues to beneficially own the debtor’s property equal in value to the unremitted source deductions; the unremitted source deductions “shall . . . be regarded as being held in trust for Her Majesty”. Although this signals that, unlike deemed trusts captured by s. 37(1) , the Crown’s deemed trust continues and confers a stronger right, s. 37(2)  does not explain what to do with that right for the purposes of a CCAA  proceeding. It does not, for example, provide that trust property should be put aside, as it would be in the BIA  context. Section 6(3)  gives specific effect to the Crown’s right by requiring that a plan of compromise provide for payment in full of the Crown’s deemed trust claims within six months of the plan’s approval. As such, the Crown can demand to be paid in full in priority to all “security interests”, including priming charges. The remedial goal of the CCAA  is at the forefront of providing flexibility in preserving the Crown’s right to unremitted source deductions in s. 37(2) , and in giving a concrete effect to that right in s. 6(3)  of the CCAA . The fact that the Crown’s right under s. 227(4.1)  of the ITA  is treated differently between the two statutes is consistent with the different schemes and purposes of the BIA  and CCAA .

                    Sections 11.2 , 11.51  and 11.52  of the CCAA , which allow the court to order priming charges over a company’s property, do not give the court the authority to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions. Instead, that authority comes from s. 11  of the CCAA . Section 11  allows the court to make any order that it considers appropriate in the circumstances, subject to the requirements of good faith and due diligence on the part of the applicant. It can be used to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions for two reasons. First, ranking a priming charge ahead of the Crown’s deemed trust does not conflict with the ITA  provision. So long as the Crown is paid in full under a plan of compromise, the Crown’s right under s. 227(4.1)  remains intact “notwithstanding any security interest” in the amount of the unremitted source deductions. Second, depending on the circumstances, such an order may further the remedial objectives of the CCAA . Interim financing is often crucial to the restructuring process. If there is evidence that interim lending cannot be obtained without ranking the interim loan ahead of the Crown’s deemed trust, such an order could further the CCAA ’s remedial goals. In general, the court should have flexibility to order super-priority charges in favour of parties whose function is to facilitate the proposal of a plan of compromise that, in any event, will be required to pay the Crown in full.

                    Per Abella, Brown and Rowe JJ. (dissenting): The appeal should be allowed. The text, context, and purpose of s. 227(4.1)  of the ITA  support the conclusion that s. 227(4.1)  and the related deemed trust provisions under the the ITA , the CPP, and the EIA (collectively, the “Fiscal Statutes”) bear only one plausible interpretation: the Crown’s deemed trust enjoys priority over all other claims, including priming charges granted under the CCAA . Parliament’s intention when it amended and expanded s. 227(4)  and 227(4.1)  of the ITA  was clear and unmistakable: it granted this unassailable priority by employing the unequivocal language of “notwithstanding any . . . enactment of Canada”. This is a blanket paramountcy clause; it prevails over all other statutes. No similar “notwithstanding” provision appears in the CCAA . Indeed, it is quite the opposite: unlike most deemed trusts which are nullified in CCAA  proceedings by the operation of s. 37(1)  of the CCAA, s. 37(2)  preserves the deemed trusts of the Fiscal Statutes.

                    The Fiscal Statutes give absolute priority to the deemed trusts for source deductions over all security interests notwithstanding the CCAA , and the priming charges provisions in ss. 11.2(1) , 11.51(1)  and 11.52(1)  of the CCAA  fall under the definition of “security interest”, because they are “interests in the debtor’s property securing payment or performance of an obligation”, i.e. the payment of the monitor, the interim lender, and directors. As the definition of “security interest” in the ITA  includes “encumbrances of any kind, whatever, however or whenever arising, created, deemed to arise or otherwise provided for”, there is no reason that the definition would preclude the inclusion of an interest that is designed to operate to the benefit of all creditors. This is sufficient to decide the appeal.

                    This finding does not leave the deemed trust provisions in the Fiscal Statutes in conflict with the CCAA . Section 11  of the CCAA  contains a grant of broad supervisory discretion and the power to “make any order that it considers appropriate in the circumstances”, but that grant of authority is not unlimited. Parliament avoided any conflict between the CCAA  and the ITA  by imposing three restrictions that are significant here. First, although s. 37(1)  of the CCAA  provides that “property of the debtor company shall not be regarded as being held in trust for Her Majesty unless it would be so regarded in the absence of that statutory provision”, s. 37(2)  provides for the continued operation of the deemed trusts under the Fiscal Statutes in a CCAA  proceeding. In addition, while the deemed trusts are not “true trusts” and the commingling of assets renders the money subject to the deemed trusts untraceable, tracing has no application to s. 227(4.1) . Second, the unremitted source deductions are deemed not to form part of the property of the debtor’s company. If there is a default in remittances, the Crown is deemed to obtain beneficial ownership in the tax debtor’s property in the amount of the unremitted source deductions that it can collect “notwithstanding” any other enactment or security interest. However, priming charges can attach only to the debtor’s property, so the Crown’s interest under the deemed trust is not subject to the Priming Charges. Third, under the definition of “secured creditor” in s. 2  of the CCAA , the Crown is not a “secured creditor” in respect of its deemed trust claims under the Fiscal Statutes. That definition must be read as “secured creditor means . . . a holder of any bond of the debtor company secured by . . . a trust in respect of, all or any property of the debtor company”, which makes it manifestly clear that the Crown is not a “secured creditor” in respect of its deemed trust claims under the Fiscal Statutes.

                    Giving effect to Parliament’s clear intent to grant absolute priority to the deemed trust does not render s. 6(3)  or s. 11.09  of the CCAA  meaningless. To the contrary, s. 6(3)  and s. 11.09  respect the ultimate priority of the deemed trusts by allowing for the ultimate priority of the Crown claim to persist, while not frustrating the remedial purpose of the CCAA . Section 6(3)  of the CCAA , which protects the Crown’s claims under the deemed trusts as well as claims not subject to the deemed trusts under the Fiscal Statutes, operates only where there is an arrangement or compromise put to the court. In contrast, the deemed trusts arise immediately and operate continuously from the time the amount was deducted or withheld from employee’s remuneration, and apply to only unremitted source deductions. Without s. 6(3), the Crown would be guaranteed entitlement only to unremitted source deductions when the court sanctions a compromise or arrangement, and not to its other claims under s. 224(1.2)  of the ITA , because most of the Crown’s claims rank as unsecured under s. 38  of the CCAA . However, s. 6(3) does not explain the survival of the deemed trust or the rights conferred on the Crown under the deemed trust. Their survival is explained by s. 37(2) , which continues the operation of s. 227(4.1) , or by s. 227(4.1) , which provides that the proceeds of the trust property “shall be paid to the Receiver General in priority to all such security interests”. Finally, s. 6(3) protects different interests than those captured by the deemed trusts, and the right not to have to compromise under s. 6(3)  is a right independent of the Crown’s right under deemed trusts.

                    Section 11.09  of the CCAA , which permits the court to stay the Crown’s enforcement of its claims under the deemed trust claims, can apply to the Crown’s deemed trust claims, but it does not remove the priority granted by the deemed trusts.

                    Further, no concerns regarding certainty of subject matter or autonomous patrimony arise here. The deemed trust is not a “true” trust and it does not confer an ownership interest or the rights of a beneficiary to the Crown as they are understood at common law or within the meaning of the Civil Code of Québec. The requirements of “true” trusts of civil and common law are irrelevant to ascertaining the operation of a statutorily deemed trust as the deemed trust is a legal fiction with sui generis characteristics that are described in s. 227(4)  and (4.1)  of the ITA .

                    Finally, concluding that the deemed trusts under the Fiscal Statutes have priority over the priming charges would not lead to absurd consequences. The conclusion that interim financing would simply end was not supported by the record, and there are usually enough funds available to satisfy both the Crown claim and the court-ordered priming charges. Equally unfounded is the claim that confirming the priority of the deemed trusts would inject an unacceptable level of uncertainty into the insolvency process. Interim lenders can rely on the company’s financial statements to evaluate the risk of providing financing.

                    Per Moldaver J. (dissenting): There is substantial agreement with the analysis and conclusions of Brown and Rowe JJ. However, there are two points to be addressed. First, the question of the nature of the Crown’s interest should be left to another day. This is because, properly interpreted, the relevant provisions of the CCAA  and ITA  work in harmony to direct that the Crown’s interest under s. 227(4.1)  of the ITA  — in whatever form it takes — must be given priority over court‑ordered priming charges. This conclusion is sufficient to dispose of the appeal.

                    Second, while there is agreement that s. 37(2)  of the CCAA  can be interpreted as an internal restriction on s. 11 , if this interpretation is mistaken, s. 11  is nonetheless restricted by s. 227(4.1), as Parliament has expressly indicated the supremacy of s. 227(4.1) over the provisions of the CCAA . The Crown’s deemed trust claim must thus take priority over all court‑ordered priming charges, whether they arise under the specific priming charge provisions, or under the court’s discretionary authority. A necessary consequence of the absolute supremacy of the Crown’s deemed trust claim is that the Crown’s interest under s. 227(4.1)  cannot be given effect by s. 6(3)  of the CCAA . Unlike s. 227(4.1), which is focused on ensuring the priority of the Crown’s claim, s. 6(3)  merely establishes a six‑month timeframe for payment to the Crown in the event that the debtor company succeeds in staying viable as a going concern. Accordingly, if s. 6(3)  gave effect to the Crown’s interest, the Crown could be ranked last, so long as it is paid within six months of any arrangement. Such an outcome would be plainly inconsistent with the absolute priority of the Crown’s claim. Further, as s. 6(3)  does not apply where a liquidation occurs under the CCAA , the Crown would be deprived of its priority over security interests in such circumstances.

                    It cannot be doubted that Parliament considered the potential consequences of its legislative actions, including any consequences for CCAA  proceedings. If circumstances do arise in which the priority of the Crown’s claim threatens the viability of a particular restructuring, it clearly lies with the Crown to be flexible so as to avoid any consequences that would undermine the remedial purposes of the CCAA .

Cases Cited

By Côté J.

                    Distinguished: Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; considered: First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720; Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, [2013] 1 S.C.R. 271; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94; referred to: Temple City Housing Inc., Re, 2007 ABQB 786, 42 C.B.R. (5th) 274; Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; 9354‑9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10; Pacific National Lease Holding Corp., Re (1992), 72 B.C.L.R. (2d) 368; Grant Forest Products Inc., Re (2009), 57 C.B.R. (5th) 128; Timminco Ltd., Re, 2012 ONSC 506, 85 C.B.R. (5th) 169; In the Matter of a Plan of Compromise or Arrangement of Green Growth Brands Inc., 2020 ONSC 3565, 84 C.B.R. (6th) 146; Ernst & Young Inc. v. Essar Global Fund Ltd., 2017 ONCA 1014, 139 O.R. (3d) 1; First Leaside Wealth Management Inc. (Re), 2012 ONSC 1299; Triton Électronique inc. (Arrangement relatif à), 2009 QCCS 1202; Chef Ready Foods Ltd. v. Hongkong Bank of Can. (1990), 51 B.C.L.R. (2d) 84; Canada (Attorney General) v. Caisse populaire d’Amos, 2004 FCA 92, 324 N.R. 31; Bank of Nova Scotia v. Thibault, 2004 SCC 29, [2004] 1 S.C.R. 758; Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8, [2018] 1 S.C.R. 224; Pecore v. Pecore, 2007 SCC 17, [2007] 1 S.C.R. 795; Csak v. Aumon (1990), 69 D.L.R. (4th) 567; Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182; National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 S.C.R. 1029; McDiarmid Lumber Ltd. v. God’s Lake First Nation, 2006 SCC 58, [2006] 2 S.C.R. 846; Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715.

By Karakatsanis J.

                    Considered: First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720; Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; Quebec (Revenue) v. Caisse populaire Desjardins de Montmagny, 2009 SCC 49, [2009] 3 S.C.R. 286; referred to: Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, [2013] 1 S.C.R. 271; Saulnier v. Royal Bank of Canada, 2008 SCC 58, [2008] 3 S.C.R. 166; Wotherspoon v. Canadian Pacific Ltd., [1987] 1 S.C.R. 952; Town of Lunenburg v. Municipality of Lunenburg, [1932] 1 D.L.R. 386; R. v. D.L.W., 2016 SCC 22, [2016] 1 S.C.R. 402; Canada (Attorney General) v. Caisse populaire d’Amos, 2004 FCA 92, 324 N.R. 31; Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9, 144 O.R. (3d) 225; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; Friends of Toronto Public Cemeteries Inc. v. Public Guardian and Trustee, 2020 ONCA 282, 59 E.T.R. (4th) 174; Bank of Nova Scotia v. Thibault, 2004 SCC 29, [2004] 1 S.C.R. 758; Rawluk v. Rawluk, [1990] 1 S.C.R. 70; Foskett v. McKeown, [2001] 1 A.C. 102; 9354‑9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10; Elan Corp. v. Comiskey (1990), 1 O.R. (3d) 289; Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, 92 O.R. (3d) 513; Stelco Inc. (Re) (2005), 75 O.R. (3d) 5; U.S. Steel Canada Inc., Re, 2016 ONCA 662, 402 D.L.R. (4th) 450; Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453; Canada (Superintendent of Bankruptcy) v. 407 ETR Concession Company Ltd., 2013 ONCA 769, 118 O.R. (3d) 161; Royal Oak Mines Inc., Re (1999), 7 C.B.R. (4th) 293; Royal Oak Mines Inc., Re (1999), 6 C.B.R. (4th) 314; Urbancorp Cumberland 2 GP Inc. (Re), 2020 ONCA 197, 444 D.L.R. (4th) 273; Temple City Housing Inc., Re, 2007 ABQB 786, 42 C.B.R. (5th) 274.

By Brown and Rowe JJ. (dissenting)

                    Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720; Canada (Attorney General) v. Caisse populaire d’Amos, 2004 FCA 92, 324 N.R. 31; Bank of Nova Scotia v. Thibault, 2004 SCC 29, [2004] 1 S.C.R. 758; R. v. Verette, [1978] 2 S.C.R. 838; Toronto‑Dominion Bank v. Canada, 2020 FCA 80, [2020] 3 F.C.R. 201; Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379; Merk v. International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers, Local 771, 2005 SCC 70, [2005] 3 S.C.R. 425; Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94; DaimlerChrysler Financial Services (Debis) Canada Inc. v. Mega Pets Ltd., 2002 BCCA 242, 1 B.C.L.R. (4th) 237; Minister of National Revenue v. Schwab Construction Ltd., 2002 SKCA 6, 213 Sask. R. 278; Temple City Housing Inc., Re, 2007 ABQB 786, 42 C.B.R. (5th) 274; 9354‑9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10; Stelco Inc. (Re) (2005), 75 O.R. (3d) 5; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; Bristol‑Myers Squibb Co. v. Canada (Attorney General), 2005 SCC 26, [2005] 1 S.C.R. 533; Baxter Student Housing Ltd. v. College Housing Co-operative Ltd., [1976] 2 S.C.R. 475; R. v. Caron, 2011 SCC 5, [2011] 1 S.C.R. 78; Lévis (City) v. Fraternité des policiers de Lévis Inc., 2007 SCC 14, [2007] 1 S.C.R. 591; Elan Corp. v. Comiskey (1990), 1 O.R. (3d) 289; R. v. McIntosh, [1995] 1 S.C.R. 686.

By Moldaver J. (dissenting)

                    9354‑9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10; Stelco Inc. (Re) (2005), 75 O.R. (3d) 5.

Statutes and Regulations Cited

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3, ss. 43(1) , 50.4(1) , 67 , 81.1 , 81.2 , 86(3) .

Canada Pension Plan, R.S.C. 1985, c. C‑8, s. 23(3) , (4) .

Civil Code of Québec, arts. 1260, 1261, 1278, 1306, 1313.

Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36, ss. 2(1)  “secured creditor”, 3(1), 6(3), 10(2)(c), 11, 11.09, 11.2, 11.4, 11.51, 11.52, 36, 37 to 39.

Employment Insurance Act, S.C. 1996, c. 23, ss. 23(4) , 86(2) , (2.1) .

Excise Tax Act, R.S.C. 1985, c. E‑15, s. 222(3) .

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 18(5)  “security interest”, 116, 153(1), Part XII.5, Part XIII, 222, 223(1) to (3), (5), (6), 224(1), (1.2), (1.3) “secured creditor”, “security interest”, 227(4), (4.1), (4.2), (9), (9.2), (9.3), (9.4), (10.1), (10.2).

Income Tax Regulations, C.R.C., c. 945, s. 2201.

Income War Tax Act, R.S.C. 1927, c. 97 [previously S.C. 1917, c. 28], s. 92(6), (7) [ad. 1942‑43, c. 28, s. 31].

Interpretation Act, R.S.C. 1985, c. I‑21, ss. 8.1 , 8.2 .

Regulatory Impact Analysis Statement, SOR/99‑322, Canada Gazette, Part II, vol. 133, No. 17, August 18, 1999, pp. 2041‑42.

Winding‑up and Restructuring Act, R.S.C. 1985, c. W‑11, s. 6(1) .

Authors Cited

Black’s Law Dictionary, 11th ed., by Bryan A. Garner. St. Paul, Minn.: Thomson Reuters, 2019, “beneficial owner”.

Brender, Mark D. “Beneficial Ownership in Canadian Income Tax Law: Required Reform and Impact on Harmonization of Quebec Civil Law and Federal Legislation” (2003), 51 Can. Tax J. 311.

Brown, Catherine. “Beneficial Ownership and the Income Tax Act ” (2003), 51 Can. Tax J. 401.

Canada. Canada Revenue Agency. Tax collections policies (online: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic98-1/tax-collections-policies.html; archived version: https://www.scc-csc.ca/cso-dce/2021SCC-CSC30_1_eng.pdf).

Canada. Department of Finance. Unremitted Source Deductions and Unpaid GST. Ottawa, April 7, 1997.

Cuming, Ronald C. C., Catherine Walsh, and Roderick J. Wood. Personal Property Security Law, 2nd ed. Toronto: Irwin Law, 2012.

Duggan, Anthony, and Jacob Ziegel. “Justice Iacobucci and the Canadian Law of Deemed Trusts and Chattel Security” (2007), 57 U.T.L.J. 227.

Gillese, Eileen E. The Law of Trusts, 3rd ed. Toronto: Irwin Law, 2014.

Grenon, Aline. “Common Law and Statutory Trusts: In Search of Missing Links” (1995), 15 Est. & Tr. J. 109.

Halsbury’s Laws of Canada — Bankruptcy and Insolvency, 2017 Reissue, contributed by Michael J. Hanlon. Toronto: LexisNexis, 2017.

Hanlon, Michael J., Vicki Tickle, and Emily Csiszar. “Conflicting Case Law, Competing Statutes, and the Confounding Priority Battle of the Interim Financing Charge and the Crown’s Deemed Trust for Source Deductions”, in Janis P. Sarra et al., eds., Annual Review of Insolvency Law 2018. Toronto: Thomson Reuters, 2019, 897.

Houlden, L. W., G. B. Morawetz, and Janis Sarra. Bankruptcy and Insolvency Law of Canada, vol. 4, 4th ed. rev. Toronto: Thomson Reuters, 2019 (loose‑leaf updated 2021, release 3).

Lamer, Francis L. Priority of Crown Claims in Insolvency. Toronto: Thomson Reuters, 2021 (loose‑leaf updated 2021, release 2).

Lamoureux, Martin. The Harmonization of Tax Legislation Dissociation: A Mechanism of Exception Part III (online: https://www.justice.gc.ca/eng/rp-pr/csj-sjc/harmonization/lamou/harm3.html; archived version: https://www.scc-csc.ca/cso-dce/2021SCC-CSC30_2_eng.pdf).

Le Robert (online: https://dictionnaire.lerobert.com/definition/particulier), “en particulier”.

McFarlane, Ben, and Robert Stevens. “The nature of equitable property” (2010), 4 J. Eq. 1.

Penner, J. E. “The (True) Nature of a Beneficiary’s Equitable Proprietary Interest under a Trust” (2014), 27 Can. J.L. & Jur. 473.

Prévost, Alain. “Que reste‑t‑il de la fiducie réputée en matière de régimes de retraite?” (2016), 75 R. du B. 23.

Salembier, Paul. Legal and Legislative Drafting, 2nd ed. Toronto: LexisNexis, 2018.

Sarra, Janis P. Rescue! The Companies’ Creditors Arrangement Act , 2nd ed. Toronto: Carswell, 2013.

Sarra, Janis P., Geoffrey B. Morawetz, and L. W. Houlden. The 2020-2021 Annotated Bankruptcy And Insolvency Act. Toronto: Thomson Reuters, 2020.

Simard, Roger P. “Priorités et droits spéciaux de la couronne”, dans JurisClasseur Québec — Collection droit civil — Sûretés, vol. 1, par Pierre‑Claude Lafond, dir. Montréal: LexisNexis, 2011, fascicule 4 (feuilles mobiles mises à jour novembre 2020, envoi no 17).

Smith, Lionel D. The Law of Tracing. Oxford: Clarendon Press, 1997.

Smith, Lionel D. “Trust and Patrimony” (2008), 38 R.G.D. 379.

Sullivan, Ruth. Sullivan on the Construction of Statutes, 6th ed. Markham, Ont.: LexisNexis, 2014.

Waters, D. W. M. “The Nature of the Trust Beneficiary’s Interest” (1967), 45 Can. Bar Rev. 219.

Waters’ Law of Trusts in Canada, 4th ed., by Donovan W. M. Waters, Mark R. Gillen, and Lionel D. Smith. Toronto: Carswell, 2012.

Wood, Roderick J. “Irresistible Force Meets Immovable Object: Canada v. Canada North Group Inc.” (2020), 63 Can. Bus. L.J. 85.

Wood, Roderick J. “The Floating Charge in Canada” (1989), 27 Alta. L. Rev. 191.

Wood, Roderick J., and Rick T. G. Reeson. “The Continuing Saga of the Statutory Deemed Trust: Royal Bank v. Tuxedo Transportation Ltd.” (2000), 15 B.F.L.R. 515.

Ziegel, Jacob S. “Crown Priorities, Deemed Trusts and Floating Charges: First Vancouver Finance v. Minister of National Revenue” (2004), 45 C.B.R. (4th) 244.

                    APPEAL from a judgment of the Alberta Court of Appeal (Rowbotham, Wakeling and Schutz JJ.A.), 2019 ABCA 314, 93 Alta. L.R. (6th) 29, 437 D.L.R. (4th) 122, 72 C.B.R. (6th) 161, 95 B.L.R. (5th) 222, [2019] 12 W.W.R. 635, 11 P.P.S.A.C. (4th) 157, 2019 D.T.C. 5111, [2019] A.J. No. 1154 (QL), 2019 CarswellAlta 1815 (WL Can.), affirming a decision of Topolniski J., 2017 ABQB 550, 60 Alta. L.R. (6th) 103, 52 C.B.R. (6th) 308, [2018] 2 W.W.R. 731, [2017] A.J. No. 930 (QL), 2017 CarswellAlta 1631 (WL Can.). Appeal dismissed, Abella, Moldaver, Brown and Rowe JJ. dissenting.

                    Michael Taylor and Louis L’Heureux, for the appellant.

                    Darren R. Bieganek, Q.C., and Brad Angove, for the respondents Canada North Group Inc., Canada North Camps Inc., Campcorp Structures Ltd., DJ Catering Ltd., 816956 Alberta Ltd., 1371047 Alberta Ltd., 1919209 Alberta Ltd. and Ernst & Young Inc. in its capacity as monitor.

                    Jeffrey Oliver and Mary I. A. Buttery, Q.C., for the respondent the Business Development Bank of Canada.

                    Kelly J. Bourassa, for the intervener the Insolvency Institute of Canada.

                    Randal Van de Mosselaer, for the intervener the Canadian Association of Insolvency and Restructuring Professionals.

 

The reasons of Wagner C.J. and Côté and Kasirer. JJ. were delivered by

 

                    Côté J. —

I.               Overview

[1]                             The Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36  (“CCAA ”), has a long and storied history. From its origins in the Great Depression to its revival and reinvention during the 1970s and 1980s, the CCAA  has played an important role in Canada’s economy. Today, the CCAA  provides an opportunity for insolvent companies with more than $5,000,000 in liabilities to restructure their affairs through a plan of arrangement. The goal of the CCAA  process is to avoid bankruptcy and maximize value for all stakeholders.

[2]                             In order to facilitate the restructuring process, courts supervising CCAA  restructurings may authorize an insolvent company to incur certain critical costs associated with this process. Supervising courts may also secure payment of these costs by ordering a super-priority charge against the insolvent company’s assets. Today, our Court is called upon to determine whether a supervising court may order super-priority charges over assets that are subject to a claim of Her Majesty protected by a deemed trust created by s. 227(4.1)  of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”).

[3]                             The Crown raises two arguments as to why a supervising court should be unable to subordinate Her Majesty’s interest to super-priority charges. First, the Crown says that s. 227(4.1)  creates a proprietary interest in a debtor’s assets and a court cannot attach a super-priority charge to assets subject to Her Majesty’s interest. Second, the Crown says that even if s. 227(4.1)  does not create a proprietary interest, it creates a security interest that has statutory priority over all other security interests, including super-priority charges.

[4]                             Both of these arguments must fail. As this Court has previously held, the CCAA  generally empowers supervising judges to order super-priority charges that have priority over all other claims, including claims protected by deemed trusts. In all cases where a supervising court is faced with a deemed trust, the court must assess the nature of the interest established by the empowering enactment, and not simply rely on the title of deemed trust. In this case, when the relevant provisions of the ITA  are examined in their entirety, it is clear that the ITA  does not establish a proprietary interest because Her Majesty’s claim does not attach to any specific asset. Further, there is no conflict between the CCAA  order and the ITA , as the deemed trust created by the ITA  has priority only over a defined set of security interests. A super-priority charge ordered under s. 11  of the CCAA  does not fall within that definition. For the reasons that follow, I would therefore dismiss the appeal.

II.            Background

[5]                             Canada North Group and six related corporations (“Debtors”) initiated restructuring proceedings under s. 50.4(1)  of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3  (“BIA ”), but soon changed course and sought to restructure under the CCAA . In their initial CCAA  application, they requested a package of relief standard to CCAA  proceedings, including a thirty-day stay on all proceedings against them, the appointment of a monitor and the creation of three super-priority charges. The first charge they requested was an administration charge of up to $1,000,000 in favour of counsel, a monitor and a chief restructuring officer for the fees they incurred. The second was a $1,000,000 financing charge in favour of an interim lender. The third was a $150,000 directors’ charge protecting their directors and officers against liabilities incurred after the commencement of the proceedings. The Debtors included in their initial motion an affidavit from one of their directors attesting to a $1,140,000 debt to Her Majesty The Queen for source deductions and Goods and Services Tax (“GST”).

[6]                             Justice Nielsen of the Court of Queen’s Bench heard the motion together with a cross-motion by the Debtors’ primary lender, Canadian Western Bank, seeking the appointment of a receiver. Justice Nielsen granted an initial order in favour of the Debtors on the terms requested in the initial application, aside from a $500,000 reduction in the administration charge (Alta. Q.B., No. 1703‑12327, July 5, 2017 (“Initial Order”)). The terms of that order included the following with regard to priority:

Each of the Directors’ Charge, Administration Charge and the Interim Lender’s Charge (all as constituted and defined herein) shall constitute a charge on the Property and subject always to section 34(11)  of the CCAA  such Charges shall rank in priority to all other security interests, trusts, liens, charges and encumbrances, claims of secured creditors, statutory or otherwise (collectively, “Encumbrances”) in favour of any Person. [Emphasis deleted; para. 44.]

Justice Nielsen further ordered that these charges “shall not otherwise be limited or impaired in any way by . . . (d) the provisions of any federal or provincial statutes” (para. 46).

[7]                             Three weeks after the Initial Order was granted, the Debtors sought supplementary orders extending the stay of proceedings and increasing the interim financing to $2,500,000. Canadian Western Bank again filed a motion to appoint a receiver. At the hearing of the three motions, counsel for Her Majesty appeared in order to advise that Her Majesty would be filing a motion to vary the Initial Order on the ground that the order failed to recognize Her priority interest in unremitted source deductions (the portion of remuneration that employers are required to withhold from employees and remit directly to the Canada Revenue Agency (“CRA”)).

[8]                             The Crown filed the motion soon after. Its argument for variance was grounded in the nature of Her Majesty’s interest in the Debtors’ property. It argued that the nature of Her Majesty’s interest is determined by s. 227(4.1)  of the ITA  and that that provision creates a proprietary interest:

(4) Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3) ) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.

 

(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4)  to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for a security interest (as defined in subsection 224(1.3) ) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

 

(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

 

(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest

 

and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

III.         Judgments Below

A.           Court of Queen’s Bench, 2017 ABQB 550, 60 Alta. L.R. (6th) 103

[9]                             Justice Topolniski heard Her Majesty’s motion to vary the Initial Order. Despite the delay between the Initial Order and the motion to vary, Topolniski J. found that she had jurisdiction to hear the motion based on the discretion and flexibility conferred by the CCAA . However, she dismissed the motion on the ground that s. 227(4.1)  of the ITA  creates a security interest that can be subordinated to court‑ordered super-priority charges.

[10]                         Justice Topolniski relied upon Temple City Housing Inc., Re, 2007 ABQB 786, 42 C.B.R. (5th) 274, and First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720, to conclude that the deemed trust created by s. 227(4.1)  of the ITA  is not a proprietary interest. Rather, the ITA  creates something similar to a floating charge over all the debtor’s assets, which permits the debtor to alienate property subject to the deemed trust. These characteristics are inconsistent with a proprietary interest, and thus s. 227(4.1)  does not create such an interest.

[11]                         Justice Topolniski also considered whether s. 227(4.1)  creates a security interest that requires Her Majesty’s interest to take priority over court-ordered charges. She acknowledged that the CCAA  preserves the operation of the deemed trust, but she found that it also authorizes the reorganization of priorities by court order. Because each of the charges included in the Initial Order was critical to the restructuring process, they were necessarily required by the CCAA  regime.

B.            Leave to Appeal, 2017 ABCA 363, 54 C.B.R. (6th) 5

[12]                         Following the dismissal of the Crown’s motion, the Debtors determined that there were sufficient assets in the estate to satisfy both Her Majesty and the beneficiaries of the three court-ordered super-priority charges in full. However, the Crown sought and obtained leave to appeal in order to seek appellate guidance on the nature of Her Majesty’s priority.

C.            Court of Appeal of Alberta, 2019 ABCA 314, 93 Alta. L.R. (6th) 29

[13]                         The Court of Appeal dismissed the appeal. It was divided as to whether the super-priority charges had priority over Her Majesty’s claim. Justice Rowbotham wrote for the majority and agreed with the motion judge that s. 227(4.1) of the ITA creates a security interest, in accordance with this Court’s earlier finding in First Vancouver that the deemed trust is like a “floating charge over all of the assets of the tax debtor in the amount of the default” (First Vancouver, at para. 40). She found further support for this in the fact that the deemed trust also falls squarely within the ITA’s definition of “security interest” in s. 224(1.3).

[14]                         After determining that Her Majesty’s interest in the Debtors’ property was a security interest, Rowbotham J.A. turned to the question of whether the deemed trust could be subordinated to the court-ordered super-priority charges. She found that “while a conflict may appear to exist at the level of the ‘black letter’ wording” of the ITA  and the CCAA , “the presumption of statutory coherence require[d] that the provisions be read to work together” (para. 45). A deemed trust that could not be subordinated to super-priority charges would undermine both Acts’ objectives because fewer restructurings could succeed and thus less tax revenue could be collected. If the Crown’s position prevailed, then absurd consequences could follow. Approximately 75 percent of restructurings require interim lenders. Without the assurance that they would be repaid in priority, these lenders would not come forward, nor would monitors or directors. The reality is that all of these services are provided in reliance on super priorities. Without these priorities, CCAA  restructurings may be severely curtailed or at least delayed until Her Majesty’s exact claim could be ascertained, by which point the company might have totally collapsed.

[15]                         Justice Wakeling dissented. In his view, none of the arguments raised by the majority could overcome the text of the ITA . On his reading, the text of s. 227(4.1)  is clear: Her Majesty is the beneficial owner of the amounts deemed to be held separate and apart from the debtor’s property, and these amounts must be paid to Her Majesty notwithstanding any type of security interest, including super-priority charges. In his view, nothing in the CCAA  overrides this proprietary interest. Section 11  of the CCAA  cannot permit discretion to be exercised without regard for s. 227(4.1)  of the ITA , nor can ss. 11.2 , 11.51  and 11.52  of the CCAA  be used, as they only allow a court to make orders regarding “all or part of the company’s property” (s. 11.2(1) ). In conclusion, since no part of the CCAA  authorizes a court to override s. 227(4.1) , a court must give effect to the clear text of s. 227(4.1)  and cannot subordinate Her Majesty’s claims to super-priority charges.

IV.         Issue

[16]                         The central issue in this appeal is whether the CCAA  authorizes courts to grant super-priority charges with priority over a deemed trust created by s. 227(4.1)  of the ITA . In order to answer this question, I proceed in three stages. First, I assess the nature of the CCAA  regime and the power of supervising courts to order such charges. Given that supervising courts generally have the authority to order super-priority charges with priority over all other claims, I then turn to s. 227(4.1)  of the ITA  to determine whether it gives Her Majesty an interest that cannot be subordinated to super-priority charges. Here I assess the Crown’s two arguments as to why s. 227(4.1)  provides for an exception to the general rule, namely that Her Majesty has a proprietary or ownership interest in the insolvent company’s assets and that, even if Her Majesty does not have such an interest, s. 227(4.1)  provides Her with a security interest that has absolute priority over all claims. I conclude by assessing how courts should exercise their authority to order super-priority charges where Her Majesty has a claim against an insolvent company protected by a s. 227(4.1)  deemed trust.

V.           Analysis

[17]                         In order to determine whether the CCAA  empowers a court to order super-priority charges over assets subject to a deemed trust created by s. 227(4.1)  of the ITA , we must understand both the CCAA  regime and the nature of the interest created by s. 227(4.1) .

A.           CCAA Regime

[18]                         The CCAA is part of Canada’s system of insolvency law, which also includes the BIA  and the Winding-up and Restructuring Act, R.S.C. 1985, c. W‑11, s. 6(1) , for banks and other specified institutions. Although both the CCAA  and the BIA  create reorganization regimes, what distinguishes the CCAA  regime is that it is restricted to companies with liabilities of more than $5,000,000 and “offers a more flexible mechanism with greater judicial discretion, making it more responsive to complex reorganizations” (Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, at para. 14).

[19]                         The CCAA works by creating breathing room for an insolvent debtor to negotiate a way out of insolvency. Upon an initial application, the supervising judge makes an order that ordinarily preserves the status quo by freezing claims against the debtor while allowing it to remain in possession of its assets in order to continue carrying on business. During this time, it is hoped that the debtor will negotiate a plan of arrangement with creditors and other stakeholders. The goal is to enable the parties to reach a compromise that allows the debtor to reorganize and emerge from the CCAA  process as a going concern (Century Services, at para. 18).

[20]                         The view underlying the entire CCAA  regime is thus that debtor companies retain more value as going concerns than in liquidation scenarios (Century Services, at para. 18). The survival of a going-concern business is ordinarily the result with the greatest net benefit. It often enables creditors to maximize returns while simultaneously benefiting shareholders, employees, and other firms that do business with the debtor company (para. 60). Thus, this Court recently held that the CCAA  embraces “the simultaneous objectives of maximizing creditor recovery, preservation of going-concern value where possible, preservation of jobs and communities affected by the firm’s financial distress . . . and enhancement of the credit system generally” (9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, at para. 42, quoting J. P. Sarra, Rescue! The Companies’ Creditors Arrangement Act  (2nd ed. 2013), at p. 14).

[21]                         The most important feature of the CCAA  — and the feature that enables it to be adapted so readily to each reorganization — is the broad discretionary power it vests in the supervising court (Callidus Capital, at paras. 47-48). Section 11  of the CCAA  confers jurisdiction on the supervising court to “make any order that it considers appropriate in the circumstances”. This power is vast. As the Chief Justice and Moldaver J. recently observed in their joint reasons, “On the plain wording of the provision, the jurisdiction granted by s. 11  is constrained only by restrictions set out in the CCAA  itself, and the requirement that the order made be ‘appropriate in the circumstances’” (Callidus Capital, at para. 67). Keeping in mind the centrality of judicial discretion in the CCAA  regime, our jurisprudence has developed baseline requirements of appropriateness, good faith and due diligence in order to exercise this power. The supervising judge must be satisfied that the order is appropriate and that the applicant has acted in good faith and with due diligence (Century Services, at para. 69). The judge must also be satisfied as to appropriateness, which is assessed by considering whether the order would advance the policy and remedial objectives of the CCAA  (para. 70). For instance, given that the purpose of the CCAA  is to facilitate the survival of going concerns, when crafting an initial order, “[a] court must first of all provide the conditions under which the debtor can attempt to reorganize” (para. 60).

[22]                         On review of a supervising judge’s order, an appellate court should be cognizant that supervising judges have been given this broad discretion in order to fulfill their difficult role of continuously balancing conflicting and changing interests. Appellate courts should also recognize that orders are generally temporary or interim in nature and that the restructuring process is constantly evolving. These considerations require not only that supervising judges be endowed with a broad discretion, but that appellate courts exercise particular caution before interfering with orders made in accordance with that discretion (Pacific National Lease Holding Corp., Re (1992), 72 B.C.L.R. (2d) 368 (C.A.), at paras. 30-31).

[23]                         In addition to s. 11 , there are more specific powers in some of the provisions following that section. They include the power to order a super-priority security or charge on all or part of a company’s assets in favour of interim financiers (s. 11.2 ), critical suppliers (s. 11.4), the monitor and financial, legal or other experts (s. 11.52 ), or indemnification of directors or officers (s. 11.51 ). Each of these provisions empowers the court to “order that the security or charge rank in priority over the claim of any secured creditor of the company” (ss. 11.2(2), 11.4(4), 11.51(2) and 11.52(2)).

[24]                         As this Court held in Century Services, at para. 70, the general language of s. 11  is not restricted by the availability of these more specific orders. In fact, courts regularly grant super-priority charges in favour of persons not specifically referred to in the aforementioned provisions, including through orders that have priority over orders made under the specific provisions. These include, for example, key employee retention plan charges (Grant Forest Products Inc., Re (2009), 57 C.B.R. (5th) 128 (Ont. S.C.J.); Timminco Ltd., Re, 2012 ONSC 506, 85 C.B.R. (5th) 169), and bid protection charges (In the Matter of a Plan of Compromise or Arrangement of Green Growth Brands Inc., 2020 ONSC 3565, 84 C.B.R. (6th) 146).

[25]                         In Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, [2013] 1 S.C.R. 271, at para. 60, quoting the amended initial order in that case, this Court confirmed that a court-ordered financing charge with priority over “all other security interests, trusts, liens, charges and encumbrances, statutory or otherwise”, had priority over a deemed trust established by the Personal Property Security Act, R.S.O. 1990, c. P.10 (“PPSA”), to protect employee pensions. Justice Deschamps wrote for a unanimous Court on this point. She found that the existence of a deemed trust did not preclude orders granting first priority to financiers: “This will be the case only if the provincial priorities provided for in s. 30(7) of the PPSA ensure that the claim of the Salaried Plan’s members has priority over the [debtor-in-possession (“DIP”)] charge” (para. 48).

[26]                         Justice Deschamps first assessed the supervising judge’s order to determine whether it had truly been necessary to give the financing charge priority over the deemed trust. Even though the supervising judge had not specifically considered the deemed trust in the order authorizing a super-priority charge, he had found that there was no alternative but to make the order. Financing secured by a super priority was necessary if the company was to remain a going concern (para. 59). Justice Deschamps rejected the suggestion “that the DIP lenders would have accepted that their claim ranked below claims resulting from the deemed trust”, because “[t]he harsh reality is that lending is governed by the commercial imperatives of the lenders, not by the interests of the plan members or the policy considerations that lead provincial governments to legislate in favour of pension fund beneficiaries” (para. 59).

[27]                         After determining that the order was necessary, she turned to the statute creating the deemed trust’s priority. Section 30(7) of the PPSA provided that the deemed trust would have priority over all security interests. In her view, this created a conflict between the court-ordered super priority and the statutory priority of the claim protected by the deemed trust. The super priority therefore prevailed by virtue of federal paramountcy (para. 60).

[28]                         There are also practical considerations that explain why supervising judges must have the discretion to order other charges with priority over deemed trusts. Restructuring under the CCAA  often requires the assistance of many professionals. As Wagner C.J. and Moldaver J. recently recognized for a unanimous Court, the role the monitor plays in a CCAA  proceeding is critical: “The monitor is an independent and impartial expert, acting as ‘the eyes and the ears of the court’ throughout the proceedings . . . . The core of the monitor’s role includes providing an advisory opinion to the court as to the fairness of any proposed plan of arrangement and on orders sought by parties, including the sale of assets and requests for interim financing” (Callidus Capital, at para. 52, quoting Ernst & Young Inc. v. Essar Global Fund Ltd., 2017 ONCA 1014, 139 O.R. (3d) 1, at para. 109). In the words of Morawetz J. (as he then was), “[i]t is not reasonable to expect that professionals will take the risk of not being paid for their services, and that directors and officers will remain if placed in a compromised position” (Timminco, at para. 66).

[29]                         This Court has similarly found that financing is critical as “case after case has shown that ‘the priming of the DIP facility is a key aspect of the debtor’s ability to attempt a workout’” (Indalex, at para. 59, quoting J. P. Sarra, Rescue! The Companies’ Creditors Arrangement Act  (2007), at p. 97). As lower courts have affirmed, “Professional services are provided, and DIP funding is advanced, in reliance on super-priorities contained in initial orders. To ensure the integrity, predictability and fairness of the CCAA  process, certainty must accompany the granting of such super-priority charges” (First Leaside Wealth Management Inc. (Re), 2012 ONSC 1299, at para. 51 (CanLII)).

[30]                         Super-priority charges in favour of the monitor, financiers and other professionals are required to derive the most value for the stakeholders. They are beneficial to all creditors, including those whose claims are protected by a deemed trust. The fact that they require super priority is just a part of “[t]he harsh reality . . . that lending is governed by the commercial imperatives of the lenders” (Indalex, at para. 59). It does not make commercial sense to act when there is a high level of risk involved. For a monitor and financiers to put themselves at risk to restructure and develop assets, only to later discover that a deemed trust supersedes all claims, smacks of unfairness. As McLachlin J. (as she then was) said, granting a deemed trust absolute priority where it does not amount to a trust under general principles of law would “defy fairness and common sense” (British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24, at p. 33).

[31]                         It is therefore clear that, in general, courts supervising a CCAA  reorganization have the authority to order super-priority charges to facilitate the restructuring process. Similarly, courts have ensured that the CCAA  is given a liberal construction to fulfill its broad purpose and to prevent this purpose from being neutralized by other statutes: [translation] “As the courts have ruled time and again, the purpose of the CCAA  and orders made under it cannot be affected or neutralized by another [Act], whether of public order or not” (Triton Électronique inc. (Arrangement relatif à), 2009 QCCS 1202, at para. 35 (CanLII)). “This case is not so much about the rights of employees as creditors, but the right of the court under the [CCAA ] to serve not the special interests of the directors and officers of the company but the broader constituency referred to in Chef Ready Foods Ltd. [v. Hongkong Bank of Can. (1990), 51 B.C.L.R. (2d) 84 (C.A.)] . . . Such a decision may inevitably conflict with provincial legislation, but the broad purposes of the [CCAA ] must be served” (Pacific National Lease Holding, at para. 28). Courts have been particularly cautious when interpreting security interests so as to ensure that the CCAA ’s important purpose can be fulfilled. For instance, in Chef Ready Foods, Gibbs J.A. observed that if a bank’s rights under the Bank Act, S.C. 1991, c. 46 , were to be interpreted as being immune from the provisions of the CCAA , then the benefits of CCAA  proceedings would be “largely illusory” (p. 92). “There will be two classes of debtor companies: those for whom there are prospects for recovery under the [CCAA ]; and those for whom the [CCAA ] may be irrelevant dependent upon the whim of the [creditor]” (p. 92). It is important to keep in mind that CCAA  proceedings operate for the benefit of the creditors as a group and not for the benefit of a single creditor. Without clear and direct instruction from Parliament, we cannot countenance the possibility that it intended to create a security interest that would limit or eliminate the prospect of reorganization and recovery under the CCAA  for some companies. To do so would turn the CCAA  into a dead letter. With this in mind, I turn to the specific provision at issue in this appeal.

B.            Nature of the Interest Created by Section 227(4.1)  of the ITA 

[32]                         The Crown argues that, despite the authority a supervising court may have to order super-priority charges, Her Majesty’s claim to unremitted source deductions is protected by a deemed trust, and that ordering charges with priority over the deemed trust is contrary to s. 227(4.1)  of the ITA . To determine whether this is true, we must begin by understanding how the deemed trust comes about.

[33]                         Section 153(1)  of the ITA  requires employers to withhold income tax from employees’ gross pay and forward the amounts withheld to the CRA. When an employer withholds income tax from its employees in accordance with the ITA , it assumes its employees’ liability for those amounts (s. 227(9.4) ). As a result, Her Majesty cannot have recourse to the employees if the employer fails to remit the withheld amounts. Instead, Her Majesty’s interest is protected by a deemed trust. Section 227(4)  of the ITA  provides that amounts withheld are deemed to be held separate and apart from the employer’s assets and in trust for Her Majesty. If an employer fails to remit the amounts withheld in the manner provided by the ITA, s. 227(4.1)  extends the trust to all of the employer’s assets. In this case, the Debtors failed to remit the amounts withheld to the CRA, bringing s. 227(4.1)  into operation.

[34]                         When a company seeks protection under the CCAA, s. 37(1)  of the CCAA  provides that most of Her Majesty’s deemed trusts are nullified (unless the property in question would be regarded as held in trust in the absence of the statutory provision creating the deemed trust). However, s. 37(2) of the CCAA  exempts the deemed trusts created by s. 227(4)  and (4.1)  of the ITA  from the nullification provided for in s. 37(1) . These deemed trusts continue to operate throughout the CCAA  process (Century Services, at para. 45). In my view, this preservation by the CCAA  of the deemed trusts created by the ITA  does not modify the characteristics of these trusts. They continue to operate as they would have if the insolvent company had not sought CCAA  protection. Therefore, the Crown’s arguments must be assessed by reviewing the nature of the interest created by s. 227(4.1)  of the ITA .

[35]                         Before doing so, and while it is not strictly speaking required of me given the reasons I set out below, I pause here to clarify the role of s. 6(3)  of the CCAA , which provides as follows:

(3) Unless Her Majesty agrees otherwise, the court may sanction a compromise or arrangement only if the compromise or arrangement provides for the payment in full to Her Majesty in right of Canada or a province, within six months after court sanction of the compromise or arrangement, of all amounts that were outstanding at the time of the application for an order under section 11  or 11.02  and that are of a kind that could be subject to a demand under

 

(a) subsection 224(1.2)  of the Income Tax Act  . . . .

[36]                         Section 6(3)  merely grants Her Majesty the right to insist that a compromise or arrangement not be sanctioned by a court unless it provides for payment in full to Her Majesty of certain claims within six months after court sanction. Section 6(3)  does not say that it modifies the deemed trust created by s. 227(4.1)  of the ITA  in any way, and it comes into operation only at the end of the CCAA  process when parties seek court approval of their arrangement or compromise. Section 6(3)  also applies to numerous claims that are not protected by the deemed trust, including penalties, interest, withholdings on non-resident dispositions and certain retirement contributions (see ss. 224(1.2)  and 227(10.1)  of the ITA , the latter of which refers to amounts payable under ss. 116 , 227(9) , (9.2) , (9.3) , (9.4)  and (10.2) , Part XII.5 and Part XIII). Equating the deemed trust with the right under s. 6(3)  renders s. 37(2)  of the CCAA  and the deemed trust meaningless. I therefore proceed, as this Court did in Indalex, by assessing the interest created by s. 227(4.1)  of the ITA  without regard to the CCAA  (Indalex, at para. 48).

[37]                         Section 227(4.1)  provides:

(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4)  to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for a security interest (as defined in subsection 224(1.3) ) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

 

(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

 

(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest

 

and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

(1)          Does Section 227(4.1) of the ITA Create a Proprietary or Ownership Interest in the Debtor’s Assets?

[38]                         This appeal — like previous appeals to this Court — does not require the Court to exhaustively define the nature and content of the interest created by s. 227(4.1)  of the ITA  (Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, and First Vancouver). All that is necessary is to determine whether s. 227(4.1)  confers upon Her Majesty an interest in the debtor’s property that precludes a court from ordering charges with priority over Her Majesty’s claim. The Crown argues that s. 227(4.1)  does so by giving Her Majesty a proprietary interest in the debtor’s assets, which “causes those assets to become the property of the Crown” (A.F., at para. 46). The Crown rests this argument on the wording of the section. First, it says that property equal in value to the amount deemed to be held in trust by a person is deemed to be held “separate and apart from the property of the person”. Second, it says that the property deemed to be held in trust is deemed “to form no part of the estate or property of the person”. Third, it says that the property deemed to be held in trust “is property beneficially owned by Her Majesty notwithstanding any security interest in such property”. The Crown submits that, as a result of Her Majesty’s proprietary interest, amounts subject to the deemed trust cannot be considered assets of the debtor in CCAA  proceedings.

[39]                         In order to determine whether s. 227(4.1)  confers a proprietary or ownership interest upon Her Majesty, we must look at the nature of the rights afforded to Her Majesty by the deemed trust and compare them to the rights ordinarily afforded to an owner. To begin with, it is clear that the statute does not purport to transfer legal title to any property to Her Majesty. Instead, the Crown’s argument places considerable weight on the common law meaning of the words “beneficially owned by Her Majesty” and “in trust”. Trusts and beneficial ownership are equitable concepts that are part of the common law. As in all cases of statutory interpretation, the meaning of these words is a question of parliamentary intent. In the interpretation of a federal statute that uses concepts of property and civil rights, reference must be had to ss. 8.1  and 8.2  of the Interpretation Act, R.S.C. 1985, c. I‑21 . These sections provide:

 Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province’s rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied.

 

8.2 Unless otherwise provided by law, when an enactment contains both civil law and common law terminology, or terminology that has a different meaning in the civil law and the common law, the civil law terminology or meaning is to be adopted in the Province of Quebec and the common law terminology or meaning is to be adopted in the other provinces.

[40]                         In other words, where Parliament uses a private law expression and is silent as to its meaning, courts must refer to the applicable provincial private law. This is known as the principle of complementarity. However, as both these sections also make clear, Parliament is free to derogate from provincial private law and create a uniform rule across all provinces (see R. Sullivan, Sullivan on the Construction of Statutes (6th ed. 2014), at pp. 158-59).

[41]                         In this case, Parliament has expressly chosen to dissociate itself from provincial private law. Section 227(4.1)  says that it operates “[n]otwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law”. In Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94, the majority found that, through these words, Parliament has created a standalone scheme of uniform application across all provinces (paras. 11‑13). The nature of the deemed trust created by s. 227(4.1)  must thus be understood on its own terms.

[42]                         With that said, it is also clear that Parliament has chosen to use terms with established legal meanings in constructing the deemed trust. While the meaning of these terms is not to be based on their precise meaning under Alberta common law, it is difficult to attempt to understand s. 227(4.1)  without any reference to how these concepts generally operate. Despite the protestations of my colleagues Justices Brown and Rowe, I do not see how we could begin to understand the meaning of the words “deemed trust”, “held in trust” or “beneficially owned” without reference to the civil law or common law. The law of trusts in both civil law and common law thus provides critical context for understanding Parliament’s intent. From a civil law perspective, some courts have found it awkward to apply the idea of beneficial ownership under s. 227(4.1)  in Quebec “on the ground that it is a concept that is obviously derived from the common law” (Canada (Attorney General) v. Caisse populaire d’Amos, 2004 FCA 92, 324 N.R. 31, at para. 48). I agree with the following observation by Noël J.A. (as he then was):

It is not the task of the judiciary to determine whether it is appropriate for Parliament to use common law concepts in Quebec (or to use civil law concepts elsewhere in Canada) for the purpose of giving effect to federal legislation. The task of the courts is limited to discovering Parliament’s intention and giving effect to it. [para. 49]

[43]                         Under Quebec civil law, it is clear that s. 227(4.1)  does not establish a trust within the meaning of the Civil Code of Québec (“C.C.Q.”). Articles 1260 and 1261 C.C.Q. provide the following:

1260. A trust results from an act whereby a person, the settlor, transfers property from his patrimony to another patrimony constituted by him which he appropriates to a particular purpose and which a trustee undertakes, by his acceptance, to hold and administer. 

 

1261. The trust patrimony, consisting of the property transferred in trust, constitutes a patrimony by appropriation, autonomous and distinct from that of the settlor, trustee or beneficiary and in which none of them has any real right.

As this Court held in Bank of Nova Scotia v. Thibault, 2004 SCC 29, [2004] 1 S.C.R. 758, at para. 31, “Three requirements must therefore be met in order for a trust to be constituted [under Quebec civil law]: property must be transferred from an individual’s patrimony to another patrimony by appropriation; the property must be appropriated to a particular purpose; and the trustee must accept the property.”

[44]                         Under s. 227(4.1) of the ITA , however, no specific property is transferred to a trust patrimony. Indeterminacy remains as to which assets are subject to the deemed trust, ergo, as to which assets left the settlor’s patrimony and entered the trust’s patrimony. Although s. 227(4.1) provides that the assets are deemed to be held “separate and apart from the property of the person” and “to form no part of the estate or property of the person”, this is not sufficient to constitute an autonomous patrimony such as the one contemplated by the civilian trust regime. It flows from the autonomous nature of the trust patrimony that assets held in trust must be property in which none of the settlor, trustee or beneficiary has any property right. But this runs afoul of the interest created by s. 227(4.1), because nothing in that provision deprives the person whose assets are subject to a deemed trust of property rights in these assets. Therefore, the main element of a civilian trust is absent in the deemed trust established by s. 227(4.1): there is no autonomous patrimony to which specific property is transferred.

[45]                         Furthermore, under s. 227(4.1), the person whose assets are subject to the deemed trust would act as trustee. Again, this is inconsistent with the definition of a trustee in civil law. The person whose assets are subject to a deemed trust pursuant to s. 227(4.1) does not “undertak[e], by his acceptance, to hold and administer” a trust patrimony (art. 1260 C.C.Q.). But most importantly, the fact that assets subject to the deemed trust are indeterminate makes the trustee’s role effectively impossible to play. The C.C.Q. provides that the trustee “has the control and the exclusive administration of the trust patrimony” and “acts as the administrator of the property of others charged with full administration” (art. 1278). Thus, the trustee under s. 227(4.1)  would be required to administer its own property — or at least an indefinite part of it — in the interest of Her Majesty (art. 1306 C.C.Q.). The trustee would be subject to obligations impossible to fulfill, such as the obligation not to mingle the administered property with its own (art. 1313 C.C.Q.). Obviously, one cannot act as an administrator of the property of others with respect to one’s own property. It is therefore clear that the interest created by s. 227(4.1)  has little, if anything, in common with the trust in civil law.

[46]                         In the common law, a trust arises when legal ownership and beneficial ownership of a particular property are separated (see Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8, [2018] 1 S.C.R. 224, at para. 18). “Because a trust divides legal and beneficial title to property between a trustee and a beneficiary, respectively, the ‘hallmark’ characteristic of a trust is the fiduciary relationship existing between the trustee and the beneficiary, by which the trustee is to hold the trust property solely for the beneficiary’s enjoyment” (para. 17 (footnote omitted)). As Rothstein J. wrote, because of this fiduciary relationship, “[t]he beneficial owner of property has been described as ‘the real owner of property even though it is in someone else’s name’” (Pecore v. Pecore, 2007 SCC 17, [2007] 1 S.C.R. 795, at para. 4, quoting Csak v. Aumon (1990), 69 D.L.R. (4th) 567 (Ont. H.C.J.), at p. 570).

[47]                         While the precise rights given to a beneficial owner may vary according to the terms of the trust and the principles of equity, I agree with the Crown that, where this type of interest exists, it will generally be inappropriate for the supervising judge to order a super-priority charge over the property subject to the interest, although the broad power conferred on the court by s. 11  of the CCAA  would enable it to do so. Property held in trust cannot be said to belong to the trustee because “in equity, it belongs to another person” (Henfrey, at p. 31). However, a close examination of the nature of the interest created by s. 227(4.1)  of the ITA  reveals that it does not create this type of interest because “[t]he employer is not actually required to hold the money separate and apart, the usual fiduciary obligations of a trustee are absent, and the trust exists without a res. The law of tracing is similarly corrupted” (R. J. Wood and R. T. G. Reeson, “The Continuing Saga of the Statutory Deemed Trust: Royal Bank v. Tuxedo Transportation Ltd.” (2000), 15 B.F.L.R. 515, at p. 532). In other words, the key attributes that allow the common law to refer to beneficial ownership as being a proprietary interest are missing.

[48]                         According to the common law understanding of a trust, the legal owner or trustee owes a fiduciary duty to the equitable owner or beneficiary. The fiduciary relationship impresses the office of trustee with three fundamental duties: the trustee must act honestly and with reasonable skill and prudence, the trustee cannot delegate the office, and the trustee cannot personally profit from its dealings with the trust property or its beneficiaries (see Valard, at para. 17). This severely restricts what the trustee may do with trust property and creates a relationship significantly different from the one between a debtor and a creditor. For instance, while a debtor may attempt to reduce its debt or reach a compromise, a trustee cannot, since it must always act in the best interest of the beneficiary and cannot consider its own interests. Similarly, while a debtor is liable to a creditor until the debt is repaid, a trustee is not liable to a beneficial owner where property is lost, unless it was lost through a breach of the standard of care owed (see E. E. Gillese, The Law of Trusts (3rd ed. 2014), at p. 14). In the case of the deemed trust, however, Parliament did not create such a fiduciary relationship. Parliament expressly contemplated a potential compromise between Her Majesty and the debtor in s. 6(3)  of the CCAA . In addition, the terms of the ITA  do not require that the debtor actually keep the property subject to the deemed trust separate and use it solely for the benefit of Her Majesty. In fact, Her Majesty does not enjoy the benefit of Her interest in the property while the property is held by the debtor. Instead, Parliament contemplated that the debtor would continue to use and dispose of the property subject to the trust for its own business purposes (see First Vancouver, at paras. 42-46).

[49]                         Another core attribute of beneficial ownership is certainty as to the property that is subject to the trust (see Gillese, at p. 39). Many deemed trusts fail to provide for certainty of subject matter. For instance, in Henfrey, the Court considered the deemed trust created by the British Columbia Social Service Tax Act, R.S.B.C. 1979, c. 388. Like s. 227(4.1) of the ITA , the Social Service Tax Act provided that tax collected but not remitted was deemed to be held in trust for Her Majesty. It further provided that unremitted amounts were deemed to be held separate and apart from and form no part of the assets or estate of the tax collector. While McLachlin J. found that the property was identifiable at the time the tax was collected, she noted that “[t]he difficulty in this, as in most cases, is that trust property soon ceases to be identifiable. The tax money is mingled” (p. 34). Therefore, she concluded that there was no trust under general principles of equity. The legislature’s attempt to resolve this problem by deeming the amounts to be separate from and form no part of the tax debtor’s property was merely a tacit acknowledgment that “the reality is that after conversion the statutory trust bears little resemblance to a true trust. There is no property which can be regarded as being impressed with a trust” (p. 34).

[50]                         In First Vancouver, this Court examined the nature of the interest created by s. 227(4.1)  of the ITA . Writing for the Court, Iacobucci J. held that this provision creates a charge which “is in principle similar to a floating charge over all the assets of the tax debtor in the amount of the default” (para. 40). He concluded that Parliament specifically intended to create a charge with fluidity, a charge that could readily float over all of the debtor’s assets rather than attach to a particular one (para. 33). Parliament’s intention was to capture any property that comes into the possession of the tax debtor whilst simultaneously allowing any asset to be alienated and the proceeds of disposition to be captured (para. 5).

[51]                         This lack of certainty as to the subject matter of the trust is even starker in the present case than in Henfrey or in Sparrow Electric, where there was certainty as to the assets until they were mingled. Section 227(4.1)  purports to bring all assets owned by the debtor within its reach. Despite the wording of the section, this interest — one of the same nature as a “floating charge” — has no particular property to which it attaches. Without certainty of subject matter, equity cannot know which property the debtor has a fiduciary obligation to maintain in the beneficiary’s interest and thus “[t]he notion of a trust without a res simply cannot be made sensible or coherent” (Wood and Reeson, at pp. 532‑33 (footnote omitted); see also Sparrow Electric, at para. 31).

[52]                         Parliament’s decision to avoid certainty of subject matter was an intentional modification to the deemed trust following this Court’s decision in Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182. In Dauphin Plains, the Court refused to enforce Her Majesty’s claim because the Crown had failed to establish that the moneys purported to be deducted actually existed or were kept in such a way as to be traceable (p. 1197). Traceability is another key aspect of a beneficial interest, since it allows the beneficial owner to enjoy the benefits of ownership, such as income from the property. It also ensures that the beneficial owner is responsible for the costs of ownership. By choosing not to attach Her Majesty’s claim to any particular asset, Parliament has protected Her Majesty from the risks associated with asset ownership, including damage, depreciation and loss. I agree with Gonthier J., who, speaking of the predecessor to s. 227(4.1)  (albeit in dissent), said that “this subsection is antithetical to tracing in the traditional sense, to the extent that it requires no link at all between the subject matter of the trust and the fund or asset which the subject matter is being traced into” (Sparrow Electric, at para. 37). Had Parliament wanted to confer a beneficial ownership interest upon Her Majesty, it would have had to impose these associated risks as well.

[53]                         For the same reason as in Henfrey, the statement that property is deemed to be removed from the debtor’s estate is equally ineffective at preventing a judge from ordering super priorities over the debtor’s property. Because the deemed trust does not attach to specific property and the debtor remains free to alienate any of its assets, no property is actually removed from the debtor’s estate.

[54]                         This interpretation is supported by the existence of s. 227(4.2)  of the ITA , which specifically anticipates other interests taking priority over the deemed trust (something that would be impossible if there were an ownership interest). It states that “[f]or the purposes of subsections 227(4)  and 227(4.1) , a security interest does not include a prescribed security interest”. In the Income Tax Regulations, C.R.C., c. 945, s. 2201(1), the Governor in Council has defined “prescribed security interest” as a registered mortgage “that encumbers land or a building, where the mortgage is registered . . . before the time the amount is deemed to be held in trust by the person”. Therefore, in certain situations, mortgage holders take priority over Her Majesty.

[55]                         I reiterate that, without specific property to attach to, there can be no trust. The fact that s. 227(4.1)  specifically anticipates that the character of assets will change over time and automatically releases any assets that the debtor chooses to alienate from the deemed trust means that Parliament had in mind something different from beneficial ownership in the common law sense of the word. I tend to agree with Noël J.A.’s assessment of s. 227(4.1) : “The deemed trust mechanism, whether applied in Quebec or elsewhere, effectively creates in favour of the Crown a security interest . . .” (Caisse populaire d’Amos, at para. 46).

[56]                         Other scholars agree that s. 227(4.1)  “merely secures payment or performance of an obligation” (R. J. Wood, “Irresistible Force Meets Immovable Object: Canada v. Canada North Group Inc.” (2020), 63 Can. Bus. L.J. 85, at p. 95; see also A. Duggan and J. Ziegel, “Justice Iacobucci and the Canadian Law of Deemed Trusts and Chattel Security” (2007), 57 U.T.L.J. 227, at pp. 245-46). Wood and Reeson reach the particularly damning conclusion that “[t]he concept of a trust is used in the legislation, but in virtually every respect the characteristics of a trust are lacking” and thus “the use of inappropriate legal concepts” has led to the creation of a “statutory provision [that] is deeply flawed” (pp. 531-32). They “suspec[t] that the intention of the drafters was that Revenue Canada should obtain a charge on all the assets of the debtor”, and they state that “the statutory deemed trust is nothing more than a legislative mechanism that is intended to create a non-consensual security interest in the assets of the employer” (p. 533).

[57]                         Nonetheless, for our purposes it is not necessary to conclusively determine whether the interest created by s. 227(4.1)  should be characterized as a security interest. What is clear is that s. 227(4.1)  does not create a beneficial interest that can be considered a proprietary interest. Like the deemed trust at issue in Henfrey, it “does not give [the Crown] the same property interest a common law trust would” (p. 35). Without attaching to specific property, creating the usual right to the enjoyment of property or the fiduciary obligations of a trustee, the interest created by s. 227(4.1)  lacks the qualities that allow a court to refer to a beneficiary as a beneficial owner. Therefore, I do not accept the Crown’s argument that Her Majesty has a proprietary interest in a debtor’s property that is adequate to prevent the exercise of a supervising judge’s discretion to order super-priority charges under s. 11  of the CCAA  or any of the sections that follow it.

(2)          Does Section 227(4.1) of the ITA Create a Super Priority That Conflicts With a Court-Ordered Super-Priority Charge?

[58]                         The Crown also refers to the part of s. 227(4.1)  which states that the Receiver General shall be paid the proceeds of a debtor’s property “in priority to all such security interests”, as defined in s. 224(1.3) . In the Crown’s view, court-ordered super-priority charges under s. 11  of the CCAA  or any of the sections that follow it are security interests within the meaning of s. 224(1.3)  and therefore Her Majesty’s interest has priority over them.

[59]                         My colleagues Justices Brown and Rowe point to the legislative history of s. 227(4.1)  as evidence that Parliament intended Her Majesty’s deemed trust to have “absolute priority” over all other security interests (para. 201). In particular, they rely upon Justice Iacobucci’s comment in Sparrow Electric that “it is open to Parliament to step in and assign absolute priority to the deemed trust” by using the words “shall be paid to the Receiver General in priority to any such security interest” (reasons of Brown and Rowe JJ., at para. 202, citing Sparrow Electric, at para. 112). They further rely upon the press release accompanying the amendments, which stated that the deemed trust was to have absolute priority.

[60]                         With respect, I disagree with this reasoning. Sparrow Electric dealt with a type of interest very different from the one before us now. In Sparrow Electric, this Court held that a fixed and specific charge over the tax debtor’s inventory had priority over Her Majesty’s deemed trust created by the ITA . Thus the purpose of the amendments was to “clarify that the deemed trusts for unremitted source deductions and GST apply whether or not other security interests have been granted in respect of the inventory or trade receivables of a business” (Department of Finance Canada, Unremitted Source Deductions and Unpaid GST (April 7, 1997), at p. 2). If Parliament had intended that the deemed trust have absolute priority, it would not have enacted s. 227(4.2)  at the same time. As noted above, s. 227(4.2)  provides that “a security interest does not include a prescribed security interest”, and thus specifically envisions that the deemed trust will not have absolute priority. In my view, by using the words “in priority to all such security interests” in s. 227(4.1) , Parliament intended that the priority be absolute not over all possible interests, but only over security interests as defined in s. 224(1.3) . What must therefore be determined is whether a court-ordered super-priority charge under the CCAA  falls within that definition.

[61]                         Section 224(1.3)  reads as follows:

security interest means any interest in, or for civil law any right in, property that secures payment or performance of an obligation and includes an interest, or for civil law a right, created by or arising out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for . . . .

[62]                         This definition is expansive. However, the list of illustrative security interests makes it clear that a super-priority charge created under the CCAA  cannot fall within its meaning. Court-ordered super-priority charges are utterly different from any of the interests listed. These super-priority charges are granted, not for the sole benefit of the holder of the charge, but to facilitate restructuring in furtherance of the interests of all stakeholders. In this way, they benefit the creditors as a group. The fact that Parliament chose to provide a list of examples whose nature is so unlike that of a court-ordered super-priority charge demonstrates that it must have had a very different type of interest in mind when drafting s. 224(1.3) . I could not agree more with Professor Wood about the limited class of interests that Parliament had in mind:

[Court-ordered super-priority charges] are fundamentally different in nature from security interests that arise by way of agreement between the parties and from non-consensual security interests that arise by operation of law. Court-ordered charges are unlike conventional consensual and non-consensual security interests in that they are integrally connected to insolvency proceedings that operate for the benefit of the creditors as a group. Given the fundamentally different character of court-ordered charges, it would be reasonable to expect that they would be specifically mentioned in the ITA  definition of a security interest if they were to be included. [Emphasis added; p. 98.]

[63]                         My colleagues Brown and Rowe JJ. allege that this interpretation of s. 224(1.3)  is contrary to our Court’s decision in Caisse populaire Desjardins de l’Est de Drummond, where Rothstein J. wrote that the provided examples “do not diminish the broad scope of the words ‘any interest in property’ (para. 15; see also para. 14). With respect, I disagree with my colleagues. As Justice Rothstein explained at para. 40, his comments were made in response to the argument that the list of examples of security interests was exhaustive. I agree with him that the list of examples provided is not exhaustive. However, the examples remain illustrative of the types of interests that Parliament had in mind and are clearly united by a common theme or class because Parliament employed a compound “means . . . and includes” structure to establish its definition: “security interest means any interest in, or for civil law any right in, property that secures payment or performance of an obligation and includes . . . ”. In my view, this structure evidences Parliament’s intent that the list have limiting effect, such that only the instruments enumerated and instruments that are similar in nature fall within the definition. The critical difference between the listed security interests and super-priority charges ordered under s. 11  of the CCAA  or any of the sections that follow it explains both why the latter are excluded from the list of specific instruments and why there can be no suggestion that they may be included in the broader term “encumbrance” at the end of that list. The ejusdem generis principle supports this position by limiting the generality of the final words on the basis of the narrow enumeration that precedes them (National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 S.C.R. 1029, at p. 1040). All of the other instruments arise by agreement or by operation of law. Therefore, court-ordered super-priority charges under s. 11 or any of the sections that follow it are different in kind from anything on the list.

[64]                         Using the list of specific examples to ascertain Parliament’s intent in this case is also consistent with the presumption against tautology. In McDiarmid Lumber Ltd. v. God’s Lake First Nation, 2006 SCC 58, [2006] 2 S.C.R. 846, McLachlin C.J. defined this presumption in the following way:

It is presumed that the legislature avoids superfluous or meaningless words, that it does not pointlessly repeat itself or speak in vain: Sullivan, at p. 158. Thus, “[e]very word in a statute is presumed to make sense and to have a specific role to play in advancing the legislative purpose” (p. 158). This principle is often invoked by courts to resolve ambiguity or to determine the scope of general words.

 

 

(Para. 36, quoting R. Sullivan, Sullivan and Driedger on the Construction of Statutes (4th ed. 2002), at p. 158; see also Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715, at para. 45.)

[65]                         The ITA contains two definitions of “security interest”, in s. 224(1.3)  and s. 18(5) . For the purposes of computing taxpayer income, Parliament chose to define “security interest” in s. 18(5) in nearly the same manner as in s. 224(1.3) , but without listing the ten specific security instruments: “security interest, in respect of a property, means an interest in, or for civil law a right in, the property that secures payment of an obligation”. The presumption against tautology means that we must presume that Parliament included the specific additional words in s. 224(1.3)  because they “have a specific role to play in advancing the legislative purpose” (Placer Dome, at para. 45, quoting R. Sullivan, Driedger on the Construction of Statutes (3rd ed. 1994), at p. 159). Applying the presumption against tautology demonstrates that Parliament intended interpretive weight to be placed on the examples.

[66]                         To come back to Caisse populaire Desjardins de l’Est de Drummond, I agree with Rothstein J. that the definition of “security interest” in s. 224(1.3)  of the ITA  is expansive such that it “does not require that the agreement between the creditor and debtor take any particular form” (para. 15). However, I am of the view that there is a key restriction in this expansive definition. The definition focuses on interests created either by consensual agreement or by operation of law, and these types of interests are usually designed to protect the rights of a single creditor, usually to the detriment of other creditors. In that case, the Court was considering whether a right to compensation conferred on a single creditor by a contract entered into between that creditor and the debtor was a security interest within the meaning of s. 224(1.3) . The situation at issue in that case was completely different than the one at issue in the present case. Indeed, in the present case, the interest of the participants in the restructuring is created by a court order, not by an agreement or by operation of law. As I have said above, when a judge orders a super-priority charge in CCAA  proceedings, it is quite a different type of interest as the CCAA  restructuring process benefits all creditors and not one in particular.

[67]                         Finally, if Parliament had wanted to include court-ordered super-priority charges in the definition of “security interest”, it would have said so specifically. Parliament must be taken to have legislated with the operation of the CCAA  in mind. In the words of Professor Sullivan, “The legislature is presumed to know its own statute book and to draft each new provision with regard to the structures, conventions, and habits of expression as well as the substantive law embodied in existing legislation” (Sullivan (2014), at p. 422 (footnote omitted)). Given that, in Indalex, this Court has already found that granting super-priority charges is critical as “a key aspect of the debtor’s ability to attempt a workout”, one would expect Parliament to use clearer language where such a definition could jeopardize the operation of another one of its Acts. I am therefore in total disagreement with my colleagues Justices Brown and Rowe that “nothing in the definition of security interest in the ITA  precludes the inclusion of an interest that is designed to operate to the benefit of all creditors” (para. 210). To the contrary, everything hints at priming charges being excluded from the definition of security interest.

[68]                         In conclusion, a court-ordered super-priority charge under the CCAA  is not a security interest within the meaning of s. 224(1.3)  of the ITA . As a result, there is no conflict between s. 227(4.1)  of the ITA  and the Initial Order made in this case. I therefore respectfully disagree with my colleague Justice Moldaver’s suggestion that there may be a conflict between s. 11  of the CCAA  and the ITA  (para. 258). The Initial Order’s super-priority charges prevail over the deemed trust.

C.            Was It Necessary for the Initial Order to Subordinate Her Majesty’s Claim Protected by a Deemed Trust in This Case?

[69]                         Finally, I must now identify the provision in which the Initial Order here should be grounded. While the initial order under consideration in Indalex was based on the court’s equitable jurisdiction, in most instances, orders in CCAA  proceedings should be considered an exercise of statutory power (Century Services, at paras. 65‑66).

[70]                         As discussed above, a supervising court’s authority to order super-priority charges is grounded in its broad discretionary power under s. 11  of the CCAA  and also in the more specific grants of authority under ss. 11.2 , 11.4 , 11.51  and 11.52 . Those provisions authorize the court to grant certain priming charges that rank ahead of the claims of “any secured creditor”. While I have already concluded that Her Majesty does not have a proprietary interest as a result of Her deemed trust, it is less certain whether Her Majesty is a “secured creditor” under the CCAA . Professor Wood is of the view that Her Majesty is not a “secured creditor” under the CCAA  by virtue of Her deemed trust interest; rather, ss. 37  to 39  of the CCAA  create “two distinct approaches — one that applies to a deemed trust, the other that applies when a statute gives the Crown the status of a secured creditor” (p. 96). Therefore, the ranking of a priming charge ahead of the deemed trust would fall outside the scope of the express priming charge provisions. I do not need to definitively determine if Her Majesty falls within the definition of “secured creditor” under the CCAA  by virtue of Her trust. Instead, I would ground the supervising court’s power in s. 11 , which “permits courts to create priming charges that are not specifically provided for in the CCAA ” (p. 98). I respectfully disagree with the suggestion of my colleagues Brown and Rowe JJ. that Professor Wood or any other author has suggested that s. 11  is limited by the specific provisions that follow it (para. 228). To the contrary, this Court said in Century Services, at paras. 68‑70, that s. 11  provides a very broad jurisdiction that is not restricted by the availability of more specific orders.

[71]                         My colleagues Brown and Rowe JJ. also argue that “priming charges cannot supersede the Crown’s deemed trust claim because they may attach only to the property of the debtor’s company” (para. 223 (emphasis in original)). With respect, this argument cannot stand because, although ss. 11.2 , 11.51  and 11.52  of the CCAA  contain this restriction, there is no such restriction in s. 11 . As Lalonde J. recognized, [translation] “In exercising the authority conferred by the CCAA , including inherent powers, the courts have not hesitated to use this jurisdiction to intervene in contractual relationships between a debtor and its creditors, even to make orders affecting the rights of third parties” (Triton Électronique, at para. 31). There may be circumstances where it is appropriate for a court to attach charges to property that does not belong to the debtor — if, for instance, this deemed trust were to be equivalent to a proprietary interest. However, that circumstance does not arise in this case because the property subject to Her Majesty’s deemed trust remains the property of the debtor, as the deemed trust does not create a proprietary interest. My colleagues’ reliance on s. 37(2)  of the CCAA  is similarly ill-founded. As I said earlier, s. 37(2)  simply preserves the status quo. It does not alter Her Majesty’s interest. It merely continues that interest and excludes it from the operation of s. 37(1) , which would otherwise downgrade it to the interest of an ordinary creditor.

[72]                         That said, courts should still recognize the distinct nature of Her Majesty’s interest and ensure that they grant a charge with priority over the deemed trust only when necessary. In creating a super-priority charge, a supervising judge must always consider whether the order will achieve the objectives of the CCAA . When there is the spectre of a claim by Her Majesty protected by a deemed trust, the judge must also consider whether a super priority is necessary. The record before us contains no reasons for the Initial Order, so this is difficult to determine in this case. Given that Her Majesty has been paid and that the case is in fact moot, it is not critical for us to determine whether the supervising judge believed it was necessary to subordinate Her Majesty’s claim to the super-priority charges. Based on Justice Topolniski’s reasons for denying the Crown’s motion to vary the Initial Order, it is clear that she would have found that the super-priority charges deserved priority over Her Majesty’s interest (paras. 100‑104). However, I wish to say a few words on when it may be necessary for a supervising judge to subordinate Her Majesty’s interest to super-priority charges.

[73]                         It may be necessary to subordinate Her Majesty’s deemed trust where the supervising judge believes that, without a super-priority charge, a particular professional or lender would not act. This may often be the case. On the other hand, I agree with Professor Wood that, although subordinating super-priority charges to Her Majesty’s claim will often increase the costs and complexity of restructuring, there will be times when it will not. For instance, when Her Majesty’s claim is small or known with a high degree of certainty, commercial parties will be able to manage their risks and will not need a super priority. After all, there is an order of priority even amongst super-priority charges, and therefore it is clear that these parties are willing to have their claims subordinated to some fixed claims. A further example of where different considerations may be in play is in so‑called liquidating CCAA  proceedings. As this Court recently recognized, CCAA  proceedings whose fundamental objective is to liquidate — rather than to rescue a going concern — have a legitimate place in the CCAA  regime and have been accepted by Parliament through the enactment of s. 36  (Callidus Capital, at paras. 42-45). Liquidating CCAA proceedings often aim to maximize returns for creditors, and thus the subordination of Her Majesty’s interest has less justification beyond potential unjust enrichment arguments.

VI.         Disposition

[74]                         I would dismiss the appeal with costs in this Court in accordance with the tariff of fees and disbursements set out in Schedule B of the Rules of the Supreme Court of Canada, SOR/2002-156.

 

The reasons of Karakatsanis and Martin JJ. were delivered by

 

                    Karakatsanis J. —

I.               Overview

[75]                         When a company seeks to restructure its affairs in order to avoid bankruptcy, the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36  (CCAA ), allows the court to order charges in favour of parties that are necessary to the restructuring process: lenders who provide interim financing, the monitor who administers the company’s restructuring, and directors and officers who captain the sinking ship (among others). These charges, often referred to as “priming charges”, are meant to encourage investment in the company as it undergoes reorganization. A company’s reorganization, as an alternative to the devastating effects of bankruptcy, serves the public interest by benefitting creditors, employees, and the health of the economy more generally.

[76]                          In this case, the CCAA  judge ordered priming charges over the estates of Canada North Group and six related companies (Debtor Companies) in favour of an interim lender, the monitor, and directors. Property of two of the Debtor Companies, however, was also subject to a deemed trust in favour of the Crown, under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (ITA ), for unremitted source deductions consisting of employees’ income tax, Canada Pension Plan  contributions, and employment insurance premiums. While this appeal is moot because there are sufficient assets to satisfy both the Crown’s deemed trust claim and the priming charges, this Court is asked to determine which has priority in the restructuring: the priming charges under the CCAA  or the deemed trust under the ITA .

[77]                          Section 227(4.1)  of the ITA  provides that, when an employer fails to remit source deductions to the Crown, a deemed trust attaches to the property of the employer to the extent of the unremitted source deductions. The deemed trust operates “notwithstanding any security interest in such property” and “[n]otwithstanding . . . any other enactment of Canada”. Sections 11.2 , 11.51  and 11.52  of the CCAA  give the court authority to order priming charges over a company’s property in favour of interim lenders, directors and officers, and estate administrators. Priming charges can rank ahead of any other secured claim. Read on their own, these provisions appear to give different parties super-priority in an insolvency. This issue of statutory interpretation has been described as the collision of an unstoppable force with an immoveable object (R. J. Wood, “Irresistible Force Meets Immovable Object: Canada v. Canada North Group Inc.” (2020), 63 Can. Bus. L.J. 85).

[78]                          The appellant, the Crown, argues that s. 227(4.1)  of the ITA  creates a proprietary right in the Crown because, through the mechanism of a deemed trust, it gives the Crown beneficial ownership of the amount of the unremitted source deductions. In other words, that amount is the Crown’s property and a CCAA  judge cannot, therefore, order a charge over it; it should be taken out of the estate and can play no role in the restructuring process.

[79]                          In contrast, the respondents argue that s. 227(4.1)  creates a security interest in the Crown squarely contemplated by ss. 11.2 , 11.51  and 11.52  of the CCAA . They further submit that there is no conflict between the relevant provisions because the policies underlying both Acts can be harmonized in favour of giving effect to the CCAA  provisions.

[80]                          For the reasons below, I conclude that there is no conflict between the ITA  and CCAA  provisions. The right that attaches to “beneficial ownership” under s. 227(4.1)  of the ITA  must be interpreted in the specific statutory context in which it arises. Here, the Crown’s right to unremitted source deductions in a CCAA  restructuring is protected by the requirement that the plan of compromise pay the Crown in full. Because I do not conclude that the Crown’s interest fits within the relevant statutory definition of “secured creditor” under the CCAA , it is not captured by the court’s authority to order priming charges under ss. 11.2 , 11.51  and 11.52  of the CCAA . However, in my view, the broad discretionary power under s. 11  of the CCAA  permits a court to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions. This conclusion harmonizes the purposes of both federal statutes. I would dismiss the appeal.

II.            Facts

[81]                          In July 2017, the Court of Queen’s Bench of Alberta issued an order granting the Debtor Companies protection under the CCAA  (Alta. Q.B., No. 1703-12327, July 5, 2017 (Initial Order)). The Initial Order provided for priming charges in the following order of priority: (1) an Administration Charge of $500,000 in favour of the court-appointed Monitor, Ernst & Young Inc.; (2) an Interim Lender’s Charge of $1,000,000 in favour of the interim lender, Business Development Bank of Canada (BDBC); and (3) a Directors’ Charge of $150,000 (together, Priming Charges). The Interim Lender’s Charge was later increased to $3,500,000 and the Administration Charge to $950,000.

[82]                          Paragraph 44 of the Initial Order provided that the Priming Charges have priority over the claims of secured creditors:

Each of the Directors’ Charge, Administration Charge and the Interim Lender’s Charge . . . shall constitute a charge on the Property and subject always to section 34(11)  of the CCAA  such Charges shall rank in priority to all other security interests, trusts, liens, charges and encumbrances, claims of secured creditors, statutory or otherwise . . . in favour of any Person.

 

[83]                          Paragraph 46 of the Initial Order provided that the Priming Charges “shall not otherwise be limited or impaired in any way by . . . (d) the provisions of any federal or provincial statutes”.

[84]                          At the time of the Initial Order, two of the Debtor Companies had failed to remit source deductions and owed the Crown $685,542.93. The Crown applied to vary the Priming Charges in the Initial Order on the basis that paras. 44 and 46(d) failed to recognize the Crown’s legislated interest in unremitted source deductions. The Crown argued that s. 227(4.1)  of the ITA , s. 23(4)  of the Canada Pension Plan, R.S.C. 1985, c. C-8  (CPP ), and s. 86(2.1)  of the Employment Insurance Act, S.C. 1996, c. 23  (EIA ), require the Crown’s claims for unremitted source deductions to have priority over the claims of all other creditors of a debtor, notwithstanding any other federal statute, including the CCAA . In these reasons, I will only refer to s. 227(4.1)  of the ITA  as the relevant ITA , CPP  and EIA  provisions are identical and the latter two statutes cross-reference the ITA .

III.         Decisions Below

A.           Court of Queen’s Bench of Alberta, 2017 ABQB 550, 60 Alta. L.R. (6th) 103 (Topolniski J.)

[85]                          The application judge held that court-ordered priming charges under ss. 11.2 , 11.51  and 11.52  of the CCAA  have priority over the Crown’s deemed trust for unremitted source deductions. First, she concluded that the Crown’s deemed trust under s. 227(4.1)  of the ITA  creates a security interest rather than a proprietary interest because the definition of “security interest” in the ITA  includes an interest created by a deemed or actual trust, and it would be inconsistent to interpret the Crown’s interest under s. 227(4.1)  contrary to its enabling statute. She also reasoned that the deemed trust is a security interest because it lacks certainty of subject matter and is therefore not a true trust.

[86]                          Second, the application judge concluded that s. 227(4.1)  of the ITA  and ss. 11.2 , 11.51  and 11.52  of the CCAA  are not inconsistent because any conflict can be avoided by interpretation. She reasoned that the policy objectives of both Acts have to be respected because they were enacted by the same government. On the one hand, the collection of source deductions is at the heart of the ITA . On the other, the CCAA  aims to facilitate business survival. The application judge concluded that, without the court’s ability to order priming charges, interim lending “would simply end”, along with “the hope of positive CCAA  outcomes” (para. 102). The goals of both Acts can therefore only be achieved if priority is given “to those charges necessary for restructuring”, while the deemed trust ranks in priority to all other secured creditors (para. 112).

B.            Court of Appeal of Alberta, 2019 ABCA 314, 93 Alta. L.R. (6th) 29 (Rowbotham and Schutz JJ.A., Wakeling J.A. Dissenting)

[87]                          A majority of the Court of Appeal dismissed the Crown’s appeal. It agreed with the application judge that the Crown’s deemed trust under s. 227(4.1)  of the ITA  creates a security interest rather than a proprietary interest. It also agreed that the Crown’s position failed to reconcile the objectives of the ITA  and CCAA , and given the importance of interim lending, concluded that absurd consequences could follow if the Crown’s position prevailed.

[88]                          Wakeling J.A. disagreed. He concluded that s. 227(4.1)  of the ITA  makes two unequivocal statements: first, that the Crown is the beneficial owner of the debtor’s property to the extent of the unremitted source deductions; and second, that this amount must be paid to the Crown notwithstanding the security interests of any other secured creditors, including, in his opinion, the holders of a priming charge. As a result, it was unnecessary to reconcile policy objectives. In his view, the notwithstanding clause in s. 227(4.1)  was conclusive because the relevant CCAA  provisions lacked the same language. As a result, there was “no need to look beyond the four corners of s. 227(4.1)  to determine the scope of the unassailable priority it creates” (para. 135). Finally, Wakeling J.A. noted that there is perfect correlation between the purpose of the ITA  and the plain meaning of s. 227(4.1) .

IV.         Parties’ Submissions

A.           The Appellant the Crown

[89]                          The Crown’s submissions before this Court echo the dissent at the Court of Appeal: the text of s. 227(4.1)  unequivocally states that unremitted source deductions become the property of the Crown. The Crown argues that the plain meaning of s. 227(4.1)  aligns with its purpose, which is to protect the largest source of government revenue.

[90]                          The Crown makes two principal submissions. First, it submits that the Crown’s interest under s. 227(4.1)  of the ITA  is a proprietary interest rather than a security interest because the text of s. 227(4.1)  causes the unremitted source deductions to become the property of the Crown. There is no need to rely on the “notwithstanding clause” in s. 227(4.1)  because the ITA  and CCAA  provisions work harmoniously; the priming charges can only attach to a company’s property and s. 227(4.1)  provides that the unremitted source deductions are beneficially owned by the Crown.

[91]                          Second, the Crown submits in the alternative that, even if its interest is a security interest, it ranks ahead of the priming charges. This is because a priming charge under the CCAA  is a security interest within the meaning of the ITA , and s. 227(4.1)  specifically states that the deemed trust ranks ahead of all other security interests. 

B.            The Respondent Business Development Bank of Canada

[92]                          The respondent BDBC, urges this Court to follow the approach taken by the courts below. It submits that the Crown’s interest under the deemed trust is a security interest because (1) the enabling statute, the ITA , defines a deemed trust as a security interest; (2) this Court, in First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720, characterized the deemed trust as a “floating charge”, which is a security interest; and (3) the opposite conclusion, that it is a proprietary interest, would be at odds with commercial reality. As the definition of “secured creditor” in the CCAA  includes the holder of a deemed trust, that Act contemplates that a priming charge can rank ahead of the Crown’s deemed trust. Thus, ss. 11.2, 11.51 and 11.52 of the CCAA  contemplate that a priming charge can rank ahead of the Crown’s deemed trust.

C.            The Respondent Ernst & Young, in its Capacity as Monitor

[93]                          Both BDBC and Ernst & Young (together, Respondents) submit that the Crown’s deemed trust is a security interest and that the statutes can be interpreted harmoniously to avoid a conflict. The Monitor submits that a court-ordered priming charge is not a security interest within the meaning of s. 227(4.1)  of the ITA  because it is not specifically listed in the definition of security interest under the ITA , and as a taxing statute, the ITA  requires a strict, textual approach to interpretation.

[94]                          The Monitor also highlights that the Crown is a unique creditor because it has immediate information available to it respecting remittance and can certify and pursue amounts owing immediately.

V.           Issue

[95]                          The issue on appeal is whether court-ordered priming charges under the CCAA  can rank ahead of the Crown’s deemed trust for unremitted source deductions, as created by s. 227(4.1)  of the ITA  and related provisions of the CPP  and EIA . It is clear from the wording of s. 227(4.1)  of the ITA  that, if there is any conflict with a provision from another Act, s. 227(4.1) is to prevail. Accordingly, this appeal turns on whether, and to what extent, the CCAA  regime conflicts with s. 227(4.1)  of the ITA . In answering that question, I proceed in four steps:

1.      What rights does s. 227(4.1)  of the ITA  confer on the Crown in respect of unremitted source deductions?

2.      How is the Crown’s deemed trust for unremitted source deductions treated in Parliament’s insolvency regime?

3.      Do ss. 11.2, 11.51 and 11.52 of the CCAA  permit the court to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions?

4.      If not, does s. 11  of the CCAA  allow the court to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions?

VI.         Analysis

A.           What Rights Does Section 227(4.1) of the ITA Confer on the Crown in Respect of Unremitted Source Deductions?

(1)          General Scheme and Background of Sections 227(4)  and 227(4.1)  of the ITA 

[96]                          Section 153(1)  of the ITA  requires employers to deduct and withhold amounts from their employees’ wages (source deductions) and remit those amounts to the Receiver General by a specified due date. When source deductions are made, s. 227(4)  deems that they are held separate and apart from the property of the employer and from property held by any secured creditor of the employer, notwithstanding any security interest in that property. Source deductions are deemed to be held in trust for Her Majesty for payment by the specified due date.

[97]                          If source deductions are not paid by the specified due date, s. 227(4.1)  extends the trust in s. 227(4) . It deems that a trust attaches to the employer’s property to the extent of any unremitted source deductions; that the trust existed from the moment the source deductions were made; and that the trust did not form part of the estate or property of the employer from the moment the source deductions were made (all regardless of whether the employer’s property is subject to a security interest). It also deems that, to the extent of any unremitted source deductions, the employer’s property is property “beneficially owned” by the Crown, notwithstanding any security interest in the employer’s property:

(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4)  to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for a security interest (as defined in subsection 224(1.3) ) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

 

(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

 

(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest

 

and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

[98]                          The ITA defines “security interest” in s. 224(1.3) :

security interest means any interest in, or for civil law any right in, property that secures payment or performance of an obligation and includes an interest, or for civil law a right, created by or arising out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for . . . .

[99]                          As emphasized by the Crown, ss. 227(4) and 227(4.1) were amended to their current form — excerpted above — to reverse the effect of this Court’s decision in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411. The Crown submits that, in explicitly reversing Sparrow Electric’s result, Parliament meant to always give the Crown super-priority in an insolvency. I do not agree that such a broad conclusion can be drawn from this legislative history. In Sparrow Electric, the issue was who, between a lending bank and the Crown, had priority in the debtor’s bankruptcy. The bank had a general security agreement over all of the debtor’s property, which it entered into several months before successfully petitioning the debtor into bankruptcy. While the debtor also owed the Crown $625,990.86 in unremitted source deductions at the time of the bankruptcy, the first instance of non-remittance to the Crown was after the bank entered its general security agreement.

[100]                      Iacobucci J., writing for a majority of the Court, held in favour of the bank. At that time, the deemed trust was worded differently, triggering only upon an event of “liquidation, assignment, receivership or bankruptcy”, and the amount of the unremitted source deductions was only deemed to be held “separate from and form no part of the estate in liquidation, assignment, receivership or bankruptcy” (para. 13 (emphasis added)). The majority therefore concluded that the deemed trust did not attach to the debtor’s property because, at the relevant time, that property was already “legally the [bank’s]” (para. 98). Because the bank had a fixed and specific charge over all of the debtor’s property, there was nothing left for the trust to attach to. The trust could not be effective unless there was some unencumbered asset in the bankruptcy out of which the trust could be deemed (para. 99).

[101]                      After Sparrow Electric, Parliament amended the deemed trust to ensure that, in a case like Sparrow Electric, the deemed trust attached notwithstanding any security interest held in the debtor’s property (First Vancouver, at para. 27). As Iacobucci J. explained in First Vancouver, Parliament intended “to grant priority to the deemed trust in respect of property that is also subject to a security interest regardless of when the security interest arose in relation to the time the source deductions were made or when the deemed trust takes effect” (para. 28).[1]

[102]                     In this appeal, the Crown argues that a court-ordered priming charge under the CCAA  is a security interest for the purposes of the Crown’s deemed trust. I agree that the definition of “security interest” in s. 224(1.3)  of the ITA  is broad, capturing “any interest in . . . property that secures payment or performance of an obligation and includes an interest . . . created by or arising out of a . . . charge . . ., however or whenever arising, created, deemed to arise or otherwise provided for”. However, Wood makes the observation that court-ordered charges are fundamentally different in nature from the security interests that arise by consensual agreement or by operation of law enumerated in s. 224(1.3)  because “they are integrally connected to insolvency proceedings that operate for the benefit of the creditors as a group” (Wood (2020), at p. 98). As a result, he reasons that “it would be reasonable to expect that they would be specifically mentioned in the ITA  definition of security interest if they were to be included” (p. 98).

[103]                     While s. 227(4.1) undeniably operates notwithstanding any security interest — and priming charge — over the debtor’s property, the legislative history post-Sparrow Electric says nothing about the Crown’s specific right to unremitted source deductions, pursuant to the deemed trust, when a company undergoes restructuring under the CCAA . Even if, as the Crown insists, a priming charge under the CCAA  is a security interest for the purposes of the Crown’s deemed trust (and I do not settle that debate in these reasons), that does not define what rights the Crown has, in a CCAA  restructuring, pursuant to its deemed trust. This Court has never considered how s. 227(4.1)  of the ITA  interacts with the CCAA  regime in light of the seminal insolvency decisions in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, and Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, [2013] 1 S.C.R. 271. This appeal calls on this Court to do so.

(2)          The Right of Beneficial Ownership in Section 227(4.1)  of the ITA 

[104]                     The Crown argues that s. 227(4.1)  creates a proprietary right in the Crown because it gives the Crown beneficial ownership of the amount of the unremitted source deductions. Because this is an ownership right, the amount of the unremitted source deductions is taken out of the debtor’s estate, effectively giving the Crown super-priority. In other words, the Crown agrees with the dissent in the Court of Appeal: that property is the Crown’s property and a CCAA  judge cannot order a charge over it. The Respondents, in line with the Court of Appeal majority, submit that s. 227(4.1)  creates a security interest and can therefore be subordinated to a priming charge under the CCAA .  

[105]                     These submissions rely heavily on characterizing the Crown’s interest as either a “security interest” or as “proprietary” in nature. However, in my view, defining an entitlement as one or the other does not resolve the issues on appeal because neither characterization has essential features in the abstract. Rather, a statutory entitlement takes its character from the statutory provision. General concepts of “proprietary right” and “security interest” — or of “property,” “trust” and “beneficial ownership” — are of limited assistance in this analysis.

[106]                      This Court has noted that property is often understood as a “bundle of rights” and obligations (Saulnier v. Royal Bank of Canada, 2008 SCC 58, [2008] 3 S.C.R. 166, at para. 43). Depending on which rights someone holds, their “bundle of rights” can be viewed as a weak or robust proprietary interest. For this reason, the holder of a security interest has been described as having a proprietary right in its security. In Sparrow Electric, for example, both Iacobucci J., writing for the majority, and Gonthier J., writing for the dissent, explained the secured creditor in that case as having a proprietary right in, and effectively owning, the debtor’s property that secured its debt (paras. 42 and 98).

[107]                      Similarly, Ronald C. C. Cuming, Catherine Walsh and Roderick J. Wood state that, in the context of personal property security legislation, a secured creditor holds a proprietary right in collateral. This is because, for these authors, “[t]he defining characteristic of a proprietary right . . . is that it is . . . enforceable against the world”, and the right of a secured creditor with a perfected security interest is enforceable against the world (Personal Property Security Law (2nd ed. 2012), at p. 613). Without an explanation for what the terms mean in a particular context, it is difficult to draw any conclusion from characterizing something as one or the other. (While there is a clear difference between a right in rem (available against the world at large) and a right in personam (available against a determinate set of individuals), whether the term “proprietary right” means a “right in rem” or the term “security interest” means a “right in personam” depends upon the statutory context. In any event, the submissions before this Court were not framed in these terms).

[108]                      This Court explained in Saulnier that, when analyzing the definition of property under a statute, there is little use in considering property in the abstract or even under the common law because “Parliament can and does create its own lexicon” for particular purposes (para. 16; see also Quebec (Revenue) v. Caisse populaire Desjardins de Montmagny, 2009 SCC 49, [2009] 3 S.C.R. 286, at paras. 11-12). Indeed, “interests unknown to the common law may be created by statute” (Wotherspoon v. Canadian Pacific Ltd., [1987] 1 S.C.R. 952, at p. 999, citing Ross J. in Town of Lunenburg v. Municipality of Lunenburg, [1932] 1 D.L.R. 386 (N.S.S.C.), at p. 390). As a result, caution is required before importing definitions from other contexts, relying on statements or description from cases out of context, and employing general concepts like “proprietary right” and “security interest”. It is crucial in this appeal to stay within the bounds of the statutory provisions being interpreted.

[109]                      Section 227(4.1)  states that the amount of the unremitted source deductions is “beneficially owned” by the Crown. However, it does not follow that this right of beneficial ownership is absolute or that the term imports specific rights that flow from it. This is not a case where Parliament has used a term with an established legal meaning — leading to an inference that Parliament has given the term that meaning in the statute in question (R. v. D.L.W., 2016 SCC 22, [2016] 1 S.C.R. 402, at para. 20). The concept of beneficial ownership does not have a precise doctrinal meaning in the common law of Canada, and it does not exist in the civil law of Quebec. It is also not used consistently in the ITA . The meaning of “beneficially owned” in s. 227(4.1)  can only be understood in the specific, relevant statutory context in which it arises. To that end, while s. 227(4.1)  uses the mechanism of a trust and confers some type of beneficial ownership on the Crown, it modifies even those features of beneficial ownership that are widely associated with it under the common law.

[110]                      As a federal statute with national application, the ITA  rests on the private law of the provinces. This relationship of complementarity is codified in s. 8.1  of the Interpretation Act, R.S.C. 1985, c. I-21 .  However, the federal statute can derogate and dissociate itself from the private law when it legislates on a matter that falls within its jurisdiction: see M. Lamoureux, “The Harmonization of Tax Legislation Dissociation: A Mechanism of Exception Part III” (online). As I shall explain, the trust created by s. 227(4.1)  disassociates itself from the requirements of a trust in both the provincial common law and civil law.

[111]                      I proceed as follows: (1) there is no settled doctrinal meaning of the term beneficial ownership; and (2) s. 227(4.1)  does not create a true trust because there is no certainty of subject matter. A lack of certainty of subject matters means that the Crown cannot, through tracing, claim appreciation of trust value and the trustee (tax debtor) is free to dispose of trust property. These features render the Crown’s beneficial ownership weaker than generally understood at common law. The result is an interest “unknown to the common [or civil] law”. We cannot, therefore, look at s. 227(4.1)  in isolation to define the way in which the Crown’s “beneficially owned” property under s. 227(4.1)  should be treated in an insolvency — that clarification must come from, and indeed does come from, Parliament’s insolvency legislation.

(i)            No Settled Doctrinal Meaning

[112]                      Beneficial ownership is most commonly used in the law of trusts to broadly distinguish between who has legal title to property (the trustee) and who has beneficial enjoyment of that property (the beneficiary). Black’s Law Dictionary (11th ed. 2019), for example, defines a “beneficial owner” as “[o]ne recognized in equity as the owner of something because use and title belong to that person, even though legal title may belong to someone else, esp. one for whom property is held in trust” (p. 1331).

[113]                      Despite this common usage, there is no clear definition of the rights flowing from the term “beneficial ownership” under the common law (see, e.g., C. Brown, “Beneficial Ownership and the Income Tax Act ” (2003), 51 Can. Tax J. 401; M. D. Brender, “Beneficial Ownership in Canadian Income Tax Law: Required Reform and Impact on Harmonization of Quebec Civil Law and Federal Legislation” (2003), 51 Can. Tax J. 311, at p. 316). As well, the Civil Code of Québec does not have a concept of beneficial ownership (see Canada (Attorney General) v. Caisse populaire d’Amos, 2004 FCA 92, 324 N.R. 31, at paras. 48-49).

[114]                      The term itself is also contentious within the academy, giving rise to a heated debate about whether a trust beneficiary should be thought of as an owner at all (see, e.g., D. W. M. Waters, “The Nature of the Trust Beneficiary’s Interest” (1967), 45 Can. Bar Rev. 219; L. D. Smith, “Trust and Patrimony” (2008), 38 R.G.D. 379; B. McFarlane and R. Stevens, “The nature of equitable property” (2010), 4 J. Eq. 1; J. E. Penner, “The (True) Nature of a Beneficiary’s Equitable Proprietary Interest under a Trust” (2014), 27 Can. J.L. & Jur. 473; Brender, at p. 316). The conventional view is that a trust beneficiary only has a right in personam against the trustee to enforce the terms of the trust, which is not a proprietary right in the trust property. A different view is that a trust beneficiary has equitable ownership of trust property, despite the existence of an intermediary with legal title (Brown, at pp. 413-14). Some suggest that there is a midway approach in Canada: depending on the context, a beneficiary’s right is either a personal right against the trustee or a proprietary right in trust property (Brender, at p. 316).

[115]                      In “Beneficial Ownership and the Income Tax Act ”, Brown notes the debate in the academy and analyzes how the terms “beneficial ownership”, “beneficial owner”, and “beneficially owned” are used in the ITA . After examining 26 provisions invoking beneficial ownership in the ITA , she concludes that its meaning is “no longer obvious” (p. 452).

[116]                      This Court need not resolve the ongoing debate. However, it serves to highlight that “the real question is what is the nature of a beneficiary’s interest in a trust when considered in the context of the legislation that is sought to be applied” (Brown, at p. 419). In the ITA  context, Brown concludes that “the matter of what ‘beneficial ownership’ means for tax purposes must be settled within the structure of the ITA ” (p. 435). Further, whether the beneficiary’s rights within the ITA  are in rem or in personam will often depend on a combination of factors, like the wording of the deeming provision, private law concepts, case law, and tax policy (see pp. 435-36).

[117]                      In my view, the works cited above belie the notion that s. 227(4.1)  of the ITA , and its use of the concept of beneficial ownership, is unequivocal in meaning. Not only is there no settled definition of beneficial ownership under the common law, there also appears to be no consistent meaning of the term in the ITA . And the concept does not exist in Quebec civil law. The meaning of beneficial ownership when used in a statute must always be construed within the context of the particular provision in which it occurs. What is necessary is careful scrutiny of s. 227(4.1) , and specifically, the right of beneficial ownership it gives the Crown, particularly in the context of a statutory deemed trust with no specific subject matter.

(ii)         Section 227(4.1)  Does Not Create a “True” Trust

[118]                     A statutory deemed trust is a unique legal vehicle. Unlike an express trust, which can be created by contract, will, or oral and written declarations, and unlike a trust that arises by operation of law, a statutory deemed trust “is a trust that legislation brings into existence by constituting certain property as trust property and a certain person as the trustee of that property” (Guarantee Company of North America v. Royal Bank of Canada, 2019 ONCA 9, 144 O.R. (3d) 225, at para. 18; see also A. Grenon, “Common Law and Statutory Trusts: In Search of Missing Links” (1995), 15 Est. & Tr. J. 109, at p. 110).

[119]                     Being a creature of statute, a statutory deemed trust does not have to fulfill the ordinary requirements of trust law, namely, certainty of intention, certainty of subject matter, and certainty of object (British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; see also Friends of Toronto Public Cemeteries Inc. v. Public Guardian and Trustee, 2020 ONCA 282, 59 E.T.R. (4th) 174, at para. 163).

[120]                     Section 227(4.1), for example, does not fulfill the ordinary requirements of the common law of trusts (see R. J. Wood and R. T. G. Reeson, “The Continuing Saga of the Statutory Deemed Trust: Royal Bank v. Tuxedo Transportation Ltd.” (2000), 15 B.F.L.R. 515, at pp. 522‑24). There is no identifiable trust property and therefore no certainty of subject matter (Henfrey, at p. 35). To use the terminology in Henfrey, s. 227(4.1) is not a “true” trust (p. 34). Moreover, without specific property being transferred to the trust patrimony, s. 227(4.1) does not satisfy the requirements of an autonomous patrimony contemplated by the Civil Code of Québec in arts. 1260, 1261 and 1278: see Bank of Nova Scotia v. Thibault, 2004 SCC 29, [2004] 1 S.C.R. 758, at para. 31.

[121]                     This departure from a standard requirement of trust formation — certainty of subject matter — results in at least two features of s. 227(4.1) that are at odds with the operation of ordinary trusts. First, through equitable tracing, the beneficiary of a trust can claim appreciation in trust value, but this advantage is impossible without identifiable trust property (Rawluk v. Rawluk, [1990] 1 S.C.R. 70, at pp. 79 and 92-93; Foskett v. McKeown, [2001] 1 A.C. 102 (H.L.), at pp. 129‑31; L. D. Smith, The Law of Tracing (1997), at pp. 347‑48). The tracing mechanism in s. 227(4.1) provides that the value of any unremitted source deductions continues to survive in the assets remaining in the tax debtor’s hands. Section 227(4.1) traces the value of the unremitted source deductions, necessarily capping the Crown’s right at that value. In Sparrow Electric, Gonthier J. explained that such a tracing mechanism is “antithetical to tracing in the traditional sense, to the extent that it requires no link at all between the subject matter of the trust and the fund or asset which the subject matter is being traced into” (para. 37; see also Wood and Reeson, at p. 518; Smith (1997), at pp. 310-20 and 347-48; R. J. Wood, “The Floating Charge in Canada” (1989), 27 Alta. L. Rev. 191, at p. 221).

[122]                     While s. 227(4.1) gives the Crown beneficial ownership in the value of unremitted source deductions, it does not allow the Crown to claim more than the value of the source deductions. In other words, it gives the Crown the right of beneficial ownership without at least some of the advantages that beneficial ownership often entails.

[123]                     Second, a trustee cannot normally dispose of trust property in the ordinary course of the trustee’s business. Section 227(4.1), however, allows the tax debtor to dispose of its property, conveying clear title to property subject to the trust.

[124]                     This was the point made by Iacobucci J. in First Vancouver when he likened the deemed trust in s. 227(4.1) to a floating charge. Because a floating charge is a security interest, the Respondents rely on Iacobucci J.’s analogy to argue that s. 227(4.1) only creates a security interest as opposed to a proprietary right. I disagree with the Respondents’ submission — the limited analogy to a floating charge in that context cannot be relied on in this case to liken the Crown’s interest to a security interest for the purposes of the CCAA .

[125]                     One of the issues in First Vancouver was whether the deemed trust in s. 227(4.1) continued to attach to property that had been sold by the tax debtor to a third-party purchaser for value. The Court concluded that, in the event of a sale to a third party, “the trust property is replaced by the proceeds of sale of such property” (para. 40). This is because the deemed trust “does not attach specifically to any particular assets of the tax debtor so as to prevent their sale” and the tax debtor is thereby “free to alienate its property in the ordinary course” (para. 40). In this way, “the deemed trust is in principle similar to a floating charge over all the assets of the tax debtor” (para. 40). As a result, the deemed trust in s. 227(4.1) would not override the rights of third-party purchasers for value (para. 44).

[126]                     In short, the deemed trust in s. 227(4.1) clearly “anticipate[s] that the character of the tax debtor’s property will change over time” (First Vancouver, at para. 41). In making these statements, Iacobucci J. did not, however, equate the deemed trust in s. 227(4.1) to a floating charge for all purposes. Otherwise, the trust would not attach until an event of crystallization, and s. 227(4.1) clearly contemplates that the trust attaches from the moment source deductions are made or withheld (see s. 227(4.1)(a) and (b); see also A. Duggan and J. Ziegel, “Justice Iacobucci and the Canadian Law of Deemed Trusts and Chattel Security” (2007), 57 U.T.L.J. 227, at p. 246; Wood (1989), at p. 195).

[127]                     The Court’s limited analogy to a floating charge in First Vancouver helps explain why “beneficial ownership” in s. 227(4.1) again means something narrower than it does outside of that statutory context. The Crown’s right of beneficial ownership does not prevent the trustee from disposing of trust property until the Canada Revenue Agency (CRA) enforces the deemed trust (Canada Revenue Agency, Tax collections policies (online); see also ITA, ss. 222 , 223(1)  to (3) , (5)  and (6)  and 224(1) ). Freely disposing of trust property, including for one’s own business purposes, is obviously not something a trustee can do under the common law.

[128]                     The Crown’s reliance on s. 227(4.1) (b) of the ITA  is misplaced for similar reasons. That clause specifies that the amount of the unremitted source deductions is deemed to “form no part of the estate or property of the person from the time the amount was so deducted or withheld”. The Crown argues that this is further clarification that a CCAA  judge cannot order a charge over that amount. Again, the deeming words of s. 227(4.1) (b) must be interpreted in the context of a trust without certainty of subject matter. To say that a certain amount does not form part of the debtor’s estate or property reiterates that the Crown has an interest in that amount; it also clarifies that the debtor’s interest in its estate is reduced by that amount. However, it does not change the makeup of the estate itself — it does not change the specific property that constitutes the debtor’s estate. So long as the thing that is deemed not to form part of the debtor’s estate or property is an amount or value of money rather than property with a specific subject matter, the debtor’s estate remains unchanged and the debtor continues to have control over it.

[129]                     To conclude, beneficial ownership under s. 227(4.1)  is a manipulation of the concept of beneficial ownership under ordinary principles of trust law. The logical incoherence of s. 227(4.1)  has prompted some scholars to criticize the provision as using inappropriate legal concepts. For example, Wood and Reeson state:

. . . we believe that the design of [s. 227(4.1)  of the ITA ] is deeply flawed. . . . In large measure, the difficulties have as their source the use of inappropriate legal concepts. The concept of a trust is used in the legislation, but in virtually every respect the characteristics of a trust are lacking. The employer is not actually required to hold the money separate and apart, the usual fiduciary obligations of a trustee are absent, and the trust exists without a res. The law of tracing is similarly corrupted. The tracing exercise does not seek to identify a chain of substitutions, and a proprietary claim is available without the need for a proprietary base.

 

. . .

 

The misuse of the trust concept and the perversion of conventional tracing principles empty these concepts of meaning and will pose a threat to the rationality of the law. [Footnote omitted; pp. 531-33.]

[130]                     Others have similarly commented that, in substance, s. 227(4.1)  only creates a security interest (J. S. Ziegel, “Crown Priorities, Deemed Trusts and Floating Charges: First Vancouver Finance v. Minister of National Revenue” (2004), 45 C.B.R. (4th) 244, at p. 248; Duggan and Ziegel, at pp. 239 and 245-46; M. J. Hanlon, V. Tickle and E. Csiszar, “Conflicting Case Law, Competing Statutes, and the Confounding Priority Battle of the Interim Financing Charge and the Crown’s Deemed Trust for Source Deductions”, in J. P. Sarra et al., eds., Annual Review of Insolvency Law 2018 (2019), 897).

[131]                     Similarly, in Caisse populaire Desjardins de Montmagny, this Court rejected the Crown’s argument that s. 222(3)  of the Excise Tax Act, R.S.C. 1985, c. E‑15  (ETA ), which is nearly identical to s. 227(4.1)  of the ITA , created a proprietary right in the Crown (paras. 20-27). In that case, the debtor companies owed goods and services tax (GST) at the time of their respective bankruptcies. As the Crown’s GST claims are unsecured in bankruptcy, the tax authorities took the position that amounts owing up to the date of the bankruptcy were the Crown’s property. This Court unanimously disagreed with that position, concluding that the manner and mechanism of collecting GST was not consistent with a proprietary right (paras. 21-23).

[132]                     In any event, treating s. 227(4.1)  as only effectively creating a security interest would not resolve the issues in this appeal without reference to how the Crown’s interest arises under the CCAA . As noted above, broad general characterizations do not help in defining the specific attributes of this deemed trust. This Court must grapple with the fact that s. 227(4.1)  is both structured as a security interest, like a charge, but also uses the mechanism of a deemed trust.

[133]                     The takeaway for this appeal is that the structure of s. 227(4.1) , on its own, does not shed light on what to do with the Crown’s beneficial ownership of unremitted source deductions in the insolvency regimes. Although the provision is clear that the Crown’s right operates notwithstanding other security interests, the content of that right for the purposes of insolvency cannot be inferred solely from the text of the ITA . The unique statutory device manipulates private law concepts and cannot be carried through to a logical conclusion for the purposes of insolvency. For this reason, it is not surprising that the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3  (BIA ) and the CCAA  specifically articulate how the deemed trust for unremitted source deductions should be treated.

[134]                     I now turn to that half of the equation: Parliament’s insolvency regime.

B.            How Is the Crown’s Deemed Trust for Unremitted Source Deductions Treated in Parliament’s Insolvency Regime?

(1)          Parliament’s Insolvency Regime

[135]                     There are three main statutes in Parliament’s insolvency regime: the CCAA , which is at issue in this appeal, the BIA  and the Winding-up and Restructuring Act, R.S.C. 1985, c. W‑11  (WURA ). (The WURA covers insolvencies of financial institutions and certain other corporations, like insurance companies, and is not relevant to this appeal (s. 6(1) ; 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, at para. 39)). In Century Services, Deschamps J., writing for the majority, described insolvency as

the factual situation that arises when a debtor is unable to pay creditors . . . . Certain legal proceedings become available upon insolvency, which typically allow a debtor to obtain a court order staying its creditors’ enforcement actions and attempt to obtain a binding compromise with creditors to adjust the payment conditions to something more realistic. Alternatively, the debtor’s assets may be liquidated and debts paid from the proceeds according to statutory priority rules. The former is usually referred to as reorganization or restructuring while the latter is termed liquidation. [para. 12]

[136]                     The BIA contains both a liquidation regime and a restructuring regime (Century Services, at paras. 13 and 78). The liquidation regime provides a detailed statutory scheme of distribution whereby the debtor’s assets are liquidated and distributed to creditors. In contrast, the restructuring regime allows debtors to make proposals to their creditors for the adjustment and reorganization of debt. The BIA is available to debtors, either natural or legal persons, owing $1000 or more (s. 43(1) ).

[137]                     The CCAA is predominantly a restructuring statute and access is restricted to companies with liabilities in excess of $5 million (s. 3(1)). As Deschamps J. explained in Century Services, the purpose of the CCAA  is remedial; it provides a means for companies to avoid the devastating social and economic consequences of commercial bankruptcies (paras. 15 and 59, quoting Elan Corp. v. Comiskey (1990), 1 O.R. (3d) 289 (C.A.), at p. 306, per Doherty J.A., dissenting). Liquidations do not only harm creditors, but employees and other stakeholders as well. The CCAA permits companies to continue to operate, “preserving the status quo while attempts are made to find common ground amongst stakeholders for a reorganization that is fair to all” (Century Services, at para. 77). In enacting a restructuring statute, Parliament recognized that companies have more value as going concerns, especially since they are “key elements in a complex web of interdependent economic relationships” (para. 18).

[138]                     Due to its remedial nature, the CCAA  is famously skeletal in nature (Century Services, at paras. 57-62). It does not “contain a comprehensive code that lays out all that is permitted or barred” (para. 57, quoting Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587, 92 O.R. (3d) 513, at para. 44, per Blair J.A.). Under s. 11, for example, the court may make any order that it considers appropriate in the circumstances, subject to the restrictions set out in the Act. Section 11  has been described as “the engine that drives this broad and flexible statutory scheme” (Stelco Inc. (Re) (2005), 75 O.R. (3d) 5 (C.A.), at para. 36; see also 9354-9186 Québec inc., at para. 48). Deschamps J. observed in Century Services that these discretionary grants of jurisdiction to the courts have been key in allowing the CCAA  to adapt and evolve to meet contemporary business and social needs. Although judicial discretion must always be exercised in furtherance of the CCAA ’s remedial purpose, it takes many forms and has proven to be flexible, innovative, and necessary (paras. 58-61; U.S. Steel Canada Inc., Re, 2016 ONCA 662, 402 D.L.R. (4th) 450, at para. 102).

[139]                     This is in contrast to the liquidation regime in the BIA , which has slightly different purposes. In Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453, Gonthier J. explained that bankruptcy serves two goals: it “ensure[s] the equitable distribution of a bankrupt debtor’s assets among the estate’s creditors inter se [and it ensures] the financial rehabilitation of insolvent individuals” (para. 7; see also 9354-9186 Québec inc., at para. 46). Similarly, Sarra and Houlden and Morawetz JJ. describe the purposes of the BIA  as permitting both “an honest debtor, who has been unfortunate, to secure a discharge so that he or she can make a fresh start and resume his or her place in the business community” and “the orderly and fair distribution of the property of a bankrupt among his or her creditors on a pari passu basis” (The 2020-2021 Annotated Bankruptcy And Insolvency Act (2020), at p. 2).

[140]                     To realize its goals, the BIA  is strictly rules-based and has a comprehensive scheme for the liquidation process (Century Services, at para. 13; Husky Oil, at para. 85). It “provide[s] an orderly mechanism for the distribution of a debtor’s assets to satisfy creditor claims according to predetermined priority rules” (Century Services, at para. 15). The BIA’s comprehensive nature ensures, among other things, that there is a single proceeding in which creditors are placed on an equal footing and know their rights. It also ensures that, post-discharge, the bankrupt will have enough to live on and can have a fresh start (Canada (Superintendent of Bankruptcy) v. 407 ETR Concession Company Ltd., 2013 ONCA 769, 118 O.R. (3d) 161, at para. 41). While proposals under the BIA ’s restructuring regime similarly serve a remedial purpose, “this is achieved through a rules-based mechanism that offers less flexibility” (Century Services, at para. 15).

[141]                     Importantly, the specific goals of restructuring in the CCAA , in contrast to liquidation, result in the introduction of a key player: the interim lender. Interim financing, previously referred to as debtor-in-possession financing, is a judicially-supervised mechanism whereby an insolvent company is loaned funds for use during and for the purposes of the restructuring process. Before the 2009 amendments, there were no statutory provisions on interim financing in the CCAA , but the institution was well-established in the jurisprudence (L. W. Houlden, G. B. Morawetz and J. Sarra, Bankruptcy and Insolvency Law of Canada (4th ed. rev. (loose-leaf)), vol. 4, at N§93; see also Century Services, at para. 62). The 2009 amendments codified much of the existing jurisprudence, and I discuss the statutory provisions in detail below.

[142]                     Interim financing is crucial to the restructuring process. It allows the debtor to continue to operate on a day-to-day basis while a workout solution is being arranged. A plan of compromise would be futile if, in the interim six months, the debtor was forced to close its doors. For this reason, Farley J., in Royal Oak Mines Inc., Re (1999), 7 C.B.R. (4th) 293 (Ont. C.J. (Gen. Div.)), at para. 1, quoting Royal Oak Mines Inc., Re (1999), 6 C.B.R. (4th) 314 (Ont. C.J. (Gen. Div.)), at para. 24, observed that interim financing helps “keep the lights . . . on”. Similarly, in Indalex, Deschamps J. explained that giving interim lenders super-priority “is a key aspect of the debtor’s ability to attempt a workout” (para. 59, quoting J. P. Sarra, Rescue! The Companies’ Creditors Arrangement Act  (2007), at p. 97). Without interim financing and the ability to prime (i.e., to give it priority) the interim lender’s loan, the remedial purposes of the CCAA  can be frustrated (para. 58).

[143]                     With this background in mind, I turn now to consider the treatment of the Crown’s deemed trust for unremitted source deductions in Parliament’s insolvency regime.

(2)          The Deemed Trust for Unremitted Source Deductions in the BIA  and CCAA 

[144]                     The statutes in this case are all federal statutes. The ITA, BIA , and CCAA  make up a co-existing and harmonious statutory scheme, enacted by one level of government (see, e.g., R. Sullivan, Sullivan on the Construction of Statutes (6th ed. 2014), at p. 337, on the presumption of coherence). An example of this co-existence is when, in the insolvency regime, Parliament modifies entitlements that it otherwise grants the Crown outside of insolvency. For example, through s. 222(3)  of the ETA , Parliament provides for a statutory deemed trust in favour of the Crown for unremitted GST. Parliament also renders that deemed trust, which is nearly identical in language to s. 227(4.1)  of the ITA , ineffective in the BIA  and CCAA  (BIA, ss. 67(2)  and 86(3) ; CCAA, s. 37(1) ; Century Services, at paras. 51-56). As I shall explain, Parliament also deals specifically with the deemed trust in s. 227(4.1)  of the ITA  in the BIA  and CCAA , albeit in different ways.

[145]                     In the BIA , the deemed trust for unremitted source deductions appears in s. 67(3) . Section 67  is under the heading “Property of the Bankrupt”. Section 67(1) (a) excludes property held in trust by the bankrupt from property of the bankrupt that is divisible among creditors. Section 67(2)  provides that any provincial or federal deemed trust in favour of the Crown does not qualify as a trust under s. 67(1) (a) unless it would qualify as a trust absent the deeming provision (in other words, unless it would qualify as a common law or true trust) (see Caisse populaire Desjardins de Montmagny, at para. 15; Urbancorp Cumberland 2 GP Inc. (Re), 2020 ONCA 197, 444 D.L.R. (4th) 273, at paras. 32-33). Section 67(3)  states that s. 67(2)  does not apply in respect of the Crown’s deemed trust for unremitted source deductions under the ITA , CPP  or EIA . Thus, while s. 67(2)  provides in general terms an exception to s. 67(1) (a), that exception does not apply to the Crown’s deemed trust for unremitted source deductions by virtue of s. 67(3).

[146]                     The result of this scheme is that the debtor’s estate — to the extent of the unremitted source deductions — is not “property of a bankrupt divisible among his creditors” (BIA, s. 67(1) ). For the purposes of the BIA ’s liquidation regime, it is effectively the Crown’s property. Together, ss. 67(1)(a) and 67(3) give content to the Crown’s right of beneficial ownership under s. 227(4.1)  of the ITA : the amount of the unremitted source deductions is taken out of the pool of money that is distributed to creditors in a BIA  liquidation.

[147]                     In the CCAA , the Crown’s deemed trust appears in ss. 37(2)  and 6(3) , alongside other deemed trusts and devices. Section 37(2)  explicitly preserves the operation of s. 227(4.1)  in CCAA  proceedings:

 (1) Subject to subsection (2), despite any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a debtor company shall not be regarded as being held in trust for Her Majesty unless it would be so regarded in the absence of that statutory provision.

 

(2) Subsection (1) does not apply in respect of amounts deemed to be held in trust under subsection 227(4)  or (4.1)  of the Income Tax Act , subsection 23(3)  or (4)  of the Canada Pension Plan  or subsection 86(2)  or (2.1)  of the Employment Insurance Act  (each of which is in this subsection referred to as a “federal provision”), nor does it apply in respect of amounts deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose of which is to ensure remittance to Her Majesty in right of the province of amounts deducted or withheld under a law of the province if

 

(a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act  and the amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in subsection 227(4)  or (4.1)  of the Income Tax Act , or

 

(b) the province is a province providing a comprehensive pension plan as defined in subsection 3(1)  of the Canada Pension Plan , that law of the province establishes a provincial pension plan as defined in that subsection and the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in subsection 23(3)  or (4)  of the Canada Pension Plan ,

 

and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, despite any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as the corresponding federal provision.

[148]                     Due to this language, the Court in Century Services variously described the s. 227(4.1)  trust as “surviv[ing]”, “continu[ing]”, and “remain[ing] effective” in the CCCA (see paras. 38, 45, 49, 53 and 79). The Crown relies on these observations to argue that the deemed trust remains fully intact in the CCAA , conferring a proprietary right on the Crown that cannot be subordinated to any other party.

[149]                     In my view, the Crown’s submission overextends the analysis in Century Services. The issue in that case was whether the deemed trust under s. 222(3)  of the ETA  for unremitted GST was effective in the CCAA . As mentioned, s. 222(3)  is almost identical in wording to s. 227(4.1)  of the ITA , providing that the deemed trust extends to property of the tax debtor equal in value to the amount of the unremitted GST and extends to property otherwise held by a secured creditor pursuant to a security interest. Section 222(3)  of the ETA  also provides that the deemed trust operates despite any other enactment of Canada, except the BIA . Thus, under the BIA , the Crown priority for unremitted GST is lost. However, under the CCAA, s. 37(1)  provides that statutory deemed trusts in favour of the Crown should not be regarded as trusts unless they would qualify as trusts absent the deeming language. The Court in Century Services grappled with the apparent conflict between s. 222(3)  of the ETA  and s. 37(1)  (then s. 18.3(1) ) of the CCAA .

[150]                     A majority of the Court reasoned that, through statutory interpretation, the apparent conflict could be resolved in favour of the CCAA  (Century Services, at para. 44). Parliament had shown a tendency to move away from asserting Crown priority in insolvency. Under both the BIA  and CCAA , it had enacted a general rule that deemed trusts in favour of the Crown are ineffective in insolvency. It had also explicitly carved out an exception to that general rule for unremitted source deductions. The logic of the CCAA  suggested that only the deemed trust for unremitted source deductions survived (paras. 45-46).

[151]                     Thus, while the Court emphasized that the deemed trust in s. 227(4.1)  “survives” in the CCAA , it did not comment on how it survives. This Court has never considered the scope of the deemed trust under the CCAA , especially in light of the purposes of the CCAA  and the equivocal nature of the beneficial ownership conferred through the deeming provision. For this appeal, it is necessary to probe into ss. 37(2)  and 6(3)  to determine how the CCAA  construes the Crown’s right to unremitted source deductions.

[152]                     To that end, although s. 37(2)  of the CCAA  is almost identical to s. 67(3)  of the BIA , it does not have the same effect because it is not nested under a provision like s. 67(1) (a). Section 37(2)  of the CCAA  carves out an exception to s. 37(1) , which is different from s. 67(1) (a). While s. 67(1)(a) excludes trust property from property of the bankrupt divisible among creditors, s. 37(1)  only provides that “property of a debtor company shall not be regarded as being held in trust for Her Majesty unless it would be so regarded in the absence of that statutory provision”. Unlike the BIA , the CCAA  is silent on how trust property should be treated and silent on what constitutes property of the debtor in a restructuring context — indeed, there is no definition of property in the CCAA  at all. This is in keeping with the CCAA ’s comparatively skeletal nature.

[153]                     The result is that s. 37(2)  provides that the Crown continues to beneficially own the debtor’s property equal in value to the unremitted source deductions; the unremitted source deductions “shall . . . be regarded as being held in trust for Her Majesty”. However, although this signals that, unlike deemed trusts captured by s. 37(1) , the Crown’s deemed trust continues and confers a stronger right, s. 37(2)  does not explain what to do with that right for the purposes of a CCAA  proceeding. It does not, for example, provide that trust property should be put aside, as it would be in the BIA  context. In keeping with the CCAA ’s flexibility, s. 37(2)  says little about what the Crown’s unique right of beneficial ownership under s. 227(4.1)  of the ITA  requires. But as I shall explain, s. 11  gives the court broad discretion to consider and give effect to the Crown’s interest recognized in s. 37(2) .

[154]                     In addition, s. 6(3)  of the CCAA  gives specific effect to the Crown’s right under the deemed trust. Under that provision, the court cannot sanction a plan of compromise unless it pays the Crown in full for unremitted source deductions within six months of the plan’s sanction (assuming the Crown does not agree otherwise):

(3) Unless Her Majesty agrees otherwise, the court may sanction a compromise or arrangement only if the compromise or arrangement provides for the payment in full to Her Majesty in right of Canada or a province, within six months after court sanction of the compromise or arrangement, of all amounts that were outstanding at the time of the application for an order under section 11 or 11.02 and that are of a kind that could be subject to a demand under

 

(a) subsection 224(1.2)  of the Income Tax Act  . . . .

[155]                     Pursuant to s. 6(3) , then, the Crown’s right under s. 227(4.1)  includes a right not to have to compromise. The Crown can demand to be paid in full under the plan “in priority to all . . . security interests”. The right is therefore different in kind than a security interest. While there may be some risk to the Crown that the plan may fail, and the Crown may not be paid in full if the restructuring dissolves into liquidation and the estate is depleted in the interim, the CCAA  recognizes that there is societal value in helping a company remain a going concern. This remedial goal is at the forefront of providing flexibility in preserving the Crown’s right to unremitted source deductions in s. 37(2) , and in giving a concrete effect to that right in s. 6(3)  of the CCAA .

[156]                     In my view, the reason for this difference between the BIA  and CCAA  is straightforward. The purpose of a BIA  liquidation is to give the debtor a fresh start and pay out creditors to the extent possible. The debtor’s property has to be divided according to the statute’s rigid priority scheme. To begin the process of distribution, it is necessary to pool together the debtor’s funds and determine what is, and is not, available for creditors. A comprehensive definition of property of the debtor is necessary, and no flexibility is needed in the regime to facilitate the liquidation process. There is also no other overarching goal, like facilitating the debtor’s restructuring, that requires an institution like interim financing or requires modifying entitlements. 

[157]                     In a restructuring proceeding under the CCAA , however, there is no rigid formula for the division of assets. Certain debt might be restructured; other debt might be paid out. When a debtor’s restructuring is on the table, the goal pivots, and interim financing is introduced to facilitate the restructuring. Entitlements and priorities shift to accommodate the presence of the interim lender — a new and necessary player who is absent from the liquidation scene.

[158]                     The fact that the Crown’s right under s. 227(4.1)  of the ITA  is treated differently between the two statutes is therefore consistent with the different schemes and purposes of the Acts. This is not a circumstance where Parliament attempted to harmonize entitlements across the regimes (see, e.g., Indalex, at para. 51, per Deschamps J.). The CCAA gives the deemed trust meaning for its purposes. The concrete meaning given is that a plan of compromise must pay the Crown in full within six months of approval.

C.             Do Sections 11.2, 11.51 and 11.52 of the CCAA Permit the Court to Rank Priming Charges Ahead of the Crown’s Deemed Trust for Unremitted Source Deductions?

[159]                     In this case, the Initial Order subordinated the Crown’s deemed trust to the Priming Charges. The courts below found that this authority is derived from ss. 11.2 , 11.51  and 11.52  of the CCAA , which allow the court to order priming charges over a company’s property in favour of interim lenders, directors and officers, and estate administrators. Priming charges can rank ahead of any other secured claim. For example, the relevant portions of s. 11.2 , which are substantially similar to the relevant portions of ss. 11.51  and 11.52 , read as follows:

11.2 (1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the company’s property is subject to a security or charge — in an amount that the court considers appropriate — in favour of a person specified in the order who agrees to lend to the company an amount approved by the court as being required by the company, having regard to its cash-flow statement. The security or charge may not secure an obligation that exists before the order is made.

 

(2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.

[160]                     As priming charges can “rank in priority over the claim of any secured creditor”, the definition of “secured creditor” in s. 2(1)  is key:

secured creditor means a holder of a mortgage, hypothec, pledge, charge, lien or privilege on or against, or any assignment, cession or transfer of, all or any property of a debtor company as security for indebtedness of the debtor company, or a holder of any bond of a debtor company secured by a mortgage, hypothec, pledge, charge, lien or privilege on or against, or any assignment, cession or transfer of, or a trust in respect of, all or any property of the debtor company, whether the holder or beneficiary is resident or domiciled within or outside Canada, and a trustee under any trust deed or other instrument securing any of those bonds shall be deemed to be a secured creditor for all purposes of this Act except for the purpose of voting at a creditors’ meeting in respect of any of those bonds . . . .

[161]                     The Respondents submit, in line with the courts below, that the Crown is a “secured creditor” under the CCAA  in respect of its interest in unremitted source deductions because the enabling statute, the ITA , itself defines the holder of a deemed trust as holding a “security interest” (see Temple City Housing Inc., Re, 2007 ABQB 786, 42 C.B.R. (5th) 274). The Respondents also rely on the analogy in First Vancouver likening the Crown’s deemed trust to a floating charge (which is a security interest). Accordingly, the Respondents argue that ss. 11.2 , 11.51  and 11.52  give the court authority to rank priming charges ahead of the Crown’s deemed trust.

[162]                     The Crown, like the dissent at the Court of Appeal, argues that the Crown is not a “secured creditor” because the definition of “secured creditor” in the CCAA  does not list the holder of a deemed trust and because ss. 37  to 39  of the CCAA  clearly draw a distinction between the Crown’s deemed trust for unremitted source deductions, on the one hand, and the Crown’s secured and unsecured claims on the other. Accordingly, the Crown argues that ss. 11.2 , 11.51  and 11.52  do not give the court authority to rank priming charges ahead of the Crown’s deemed trust.

[163]                     As I shall detail, I conclude that ss. 11.2 , 11.51  and 11.52  do not give the court the authority to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions.

[164]                     First, I agree with the Respondents that the general definition of security interest under the ITA  includes the holder of a deemed or actual trust (s. 224(1.3) ). However the reference to security interest in s. 227(4.1)  is not to the Crown’s interest but to others’ interest in the debtor’s property. In my view, any definition of security interest in the ITA  is not relevant to defining the Crown’s interest since it serves an entirely different purpose. What matters is whether the CCAA  provisions give the court authority to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions. This is determined by interpreting the words of the CCAA  and how the CCAA  defines secured creditor.

[165]                     I also agree with the Crown that the definition of “secured creditor” in the CCAA  does not specifically list the holder of a deemed or actual trust. In addition, the Crown’s interest cannot simply be called a “charge”. As explained above, although the Crown’s deemed trust has some parallels with a floating charge, the provision also employs some aspects of beneficial ownership. I would also hesitate to draw analogies with any of the other terms listed in the CCAA  definition. The holders of several of these instruments are often described as having proprietary rights in their security. It was a legislative choice to define them as secured creditors for the purposes of the CCAA . It is difficult to shoehorn the Crown’s deemed trust into the definition of “secured creditor” in the CCAA , particularly as the CCAA  specifically refers to the deemed trust in s. 37(2) .

[166]                     Moreover, I agree with the Crown that ss. 37  to 39  of the CCAA  treat the Crown’s deemed trust and the Crown’s secured claims as distinct interests. After s. 37 of the CCAA , dealing with deemed trusts, s. 38(1)  provides a general rule that secured claims of the Crown rank as unsecured claims. Section 38(2) contains an exemption from s. 38(1) for consensual security interests that are granted to the Crown. Section 38(3) contains an exemption for the CRA’s enhanced requirement to pay. Finally, s. 39(1) preserves the Crown’s secured creditor status if it registers before the commencement of a CCAA  proceeding, and s. 39(2)  subordinates a Crown security or charge to prior perfected security interests.

[167]                     As Wood notes, “These provisions adopt two distinct approaches — one that applies to a deemed trust, the other that applies when a statute gives the Crown the status of a secured creditor” (Wood (2020), at p. 96). If s. 227(4.1) of the ITA  gave the Crown the status of a secured creditor, then the CRA would presumably need to comply with ss. 38  and 39  by registering its security interest. No one suggests that the Crown has to register its claim for unremitted source deductions. In my view, ss. 37  to 39  draw a distinction between deemed trusts on the one hand and secured and unsecured claims on the other, and the Crown is not, therefore, a “secured creditor” under the CCAA  for its right to unremitted source deductions.

[168]                     This is dispositive for the purposes of ss. 11.2 , 11.51  and 11.52  of the CCAA . These sections do not give the court the authority to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions.

D.           Does Section 11 of the CCAA Allow the Court to Rank Priming Charges Ahead of the Crown’s Deemed Trust for Unremitted Source Deductions?

[169]                     The remaining issue is whether another provision in the CCAA , namely s. 11 , confers that jurisdiction. As noted above, s. 11  allows the court to make any order that it considers appropriate in the circumstances, subject to the restrictions set out in the Act:

11 Despite anything in the Bankruptcy and Insolvency Act  or the Winding-up and Restructuring Act , if an application is made under this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers appropriate in the circumstances.

[170]                     In 9354-9186 Québec inc., this Court explained that the discretionary authority in s. 11 is broad, but not boundless (para. 49). There are three “baseline considerations”: (1) the order sought must be appropriate; (2) the applicant must be acting in good faith; and (3) the applicant must demonstrate due diligence (Century Services, at para. 70; 9354-9186 Québec inc., at para. 49). Appropriateness is assessed by inquiring whether the order sought advances the remedial objectives of the CCAA . The general language of s. 11 should not, however, be “restricted by the availability of more specific orders” (Century Services, at para. 70).

[171]                      In keeping with its broad language, s. 11  of the CCAA  has been used to make a wide array of orders. Most recently, for example, this Court clarified that it can be used to bar a creditor from voting on a plan where the creditor has acted for an improper purpose (9354-9186 Québec inc., at paras. 56 and 66).

[172]                     The issue in this case is whether s. 11  can be used to rank an interim lender’s loan, or other priming charge, ahead of the Crown’s deemed trust for unremitted source deductions. In my view, it can, for two reasons.

[173]                     First, given my conclusion about the content of the Crown’s right under s. 227(4.1)  of the ITA  for the purposes of the CCAA  (requiring that it at least be paid in full under a plan of compromise), ranking a priming charge ahead of the Crown’s deemed trust does not conflict with the ITA  provision. So long as the Crown is paid in full under a plan of compromise, the Crown’s right under s. 227(4.1)  remains intact “notwithstanding any security interest” in the amount of the unremitted source deductions. For this reason, it is irrelevant whether a priming charge under ss. 11 , 11.2 , 11.51  or 11.52  of the CCAA  is a “security interest” within the meaning of s. 227(4)  and (4.1)  of the ITA . The analysis above does not depend on finding that a priming charge is not captured within the ITA  definition.

[174]                     In addition, depending on the circumstances, such an order may further the remedial objectives of the CCAA . For example, interim financing is often crucial to the restructuring process. If there is evidence that interim lending cannot be obtained without ranking the interim loan ahead of the Crown’s deemed trust, such an order could, again depending on the circumstances, further the remedial objectives of the CCAA . In general, the court should have flexibility to order super-priority charges in favour of parties whose function is to facilitate the proposal of a plan of compromise that, in any event, will be required to pay the Crown in full.

[175]                     Second, I do not accept the Crown’s argument that s. 11  is unavailable because other CCAA  provisions, namely ss. 11.2 , 11.51  and 11.52 , confer more specific jurisdiction (see 9354-9186 Québec inc., at paras. 67-68).

[176]                     While I agree that s. 11 is restricted by the provisions set out in the CCAA  and cannot be used to violate specific provisions in the Act, s. 11 is not “restricted by the availability of more specific orders”. The fact that specific provisions of the CCAA  allow the court to rank priming charges ahead of a secured creditor does not mean that the court can only rank priming charges ahead of a secured creditor. Such an interpretation would amount to reading words into ss. 11.2 , 11.51  and 11.52  that do not exist. An order that ranks a priming charge ahead of the beneficiary of the deemed trust is different in kind than the orders contemplated by ss. 11.2 , 11.51  and 11.52 , which contemplate the subordination of secured creditors. There is no provision in the CCAA  stipulating what the court can do with trust property and no provision in the CCAA  conferring more specific jurisdiction on whether a priming charge can rank ahead of the beneficiary of a deemed trust. So long as the order does not conflict with other provisions in the Act, namely ss. 37(2)  and 6(3) , and so long as it fulfills the “baseline considerations” of appropriateness, good faith, and due diligence, an order ranking a priming charge ahead of the Crown’s deemed trust would fall under the jurisdiction conferred by s. 11  (Century Services, at para. 70; 9354-9186 Québec inc., at para. 49). As explained above, there would be no conflict with ss. 37(2)  and 6(3)  of the CCAA .

[177]                     Both parties invoked policy concerns to assist in the interpretative exercise. I do not find it necessary to resort to such arguments. However, it is far from evident that interim lending would simply end if the Crown’s deemed trust had super-priority in an appropriate case. It is also far from evident that the Crown would suffer significantly if the priming charges had super-priority in an appropriate case, given the existence of s. 6(3)  of the CCAA  requiring full payment, and the Crown’s favourable treatment in the BIA  liquidation regime in the event the restructuring failed. What is clear is that interim lending is crucial to the restructuring process, and the Crown’s deemed trust for unremitted source deductions is crucial to tax collection. It will be up to the CCAA  judge to weigh and balance the moving pieces.

[178]                     To that end, s. 11  of the CCAA  gives the court discretion and flexibility to weigh several considerations in ranking a priming charge ahead of the Crown’s deemed trust for unremitted source deductions. It requires the court to take a focused look at the specific facts of a case to determine whether such an order is necessary and appropriate. Where relevant, the court will consider the Crown’s interest in the deemed trust as a result of s. 37(2) . Courts may no doubt look to the factors already listed in s. 11.2(4)  — the likely duration of CCAA  proceedings, plans for managing the company during those proceedings, views of the company’s major creditors and the monitor, and the company’s ability to benefit from interim financing, among others — for guidance. Section 11.2(4)  of the CCAA  states:

(4) In deciding whether to make an order, the court is to consider, among other things,

 

(a) the period during which the company is expected to be subject to proceedings under this Act;

 

(b) how the company’s business and financial affairs are to be managed during the proceedings;

 

(c) whether the company’s management has the confidence of its major creditors;

 

                 (d) whether the loan would enhance the prospects of a viable

compromise or arrangement being made in respect of the company;

 

                 (e) the nature and value of the company’s property;

 

                 (f) whether any creditor would be materially prejudiced as a

result of the security or charge; and

 

                 (g) the monitor’s report referred to in paragraph 23(1)(b), if any.

[179]                     In addition, it seems to me that courts may consider:

         whether 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;

         the relative amounts of the interim loan and the unremitted source deductions (if the amount of the unremitted source deductions is a small fraction of the amount of the interim loan, the interim lender may not be significantly prejudiced without super-priority);

         whether, and for how long, the Crown allowed source deductions to go unremitted without taking action (see, e.g., Hanlon, Tickle and Csiszar); and

         finally, the prospects of success of a restructuring; and whether the CCAA  is likely to be used to sell the debtor’s assets.

[180]                     Finally, different considerations will apply if a court is considering ranking a different party’s charge, like the Monitor’s or Directors’ Charge, ahead of the Crown’s deemed trust.

VII.      Conclusion

[181]                     I would dismiss the appeal and clarify that the authority to rank priming charges ahead of the Crown’s deemed trust for unremitted source deductions is derived from s. 11  of the CCAA  rather than ss. 11.2 , 11.51  and 11.52 . The Crown’s interest under s. 227(4.1)  of the ITA  is a deemed trust interest, but beneficial ownership of deemed trust property is a manipulation of private law concepts, without settled meaning. Accordingly, the specific nature of beneficial ownership of deemed trust property must be determined in the relevant context in which it is asserted. Here, the Crown’s right to unremitted source deductions in a CCAA  restructuring is protected by both ss. 37(2)  and 6(3) . The former is flexible, requiring the Crown’s deemed trust property to be considered when appropriate under the Act; the latter specifically requires that a plan of compromise provide for payment in full of the Crown’s deemed trust claims within six months of the plan’s approval. The Crown’s right differs under the BIA , in keeping with the different goals and schemes of liquidation and restructuring. Given the content of the Crown’s right to unremitted source deductions in a CCAA  restructuring, there is no conflict between s. 227(4.1)  of the ITA  and s. 11  of the CCAA . The schemes of both federal Acts can be harmonized and the objectives of both statutes furthered.

[182]                     The Respondents will have their costs in accordance with the tariff of fees and disbursements set out in Schedule B of the Rules of the Supreme Court of Canada, SOR/2002-156.

 

The reasons of Abella, Brown and Rowe JJ. were delivered by

 

                    Brown and Rowe JJ. —

I.               Overview

[183]                     At issue in this appeal is whether the Crown’s deemed trust claim for unremitted source deductions under s. 227(4)  and (4.1)  of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”), s. 23(3)  and (4)  of the Canada Pension Plan, R.S.C. 1985, c. C‑8  (“CPP ”), and ss. 23(4)  and 86(2)  and (2.1)  of the Employment Insurance Act, S.C. 1996, c. 23  (“EIA ”) (collectively, the “Fiscal Statutes”), have priority over court‑ordered priming charges under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36  (“CCAA ”).

[184]                     The present iteration of the deemed trust provision, s. 227(4.1)  of the ITA , was the result of a 1997 amendment enacted by Parliament directly in response to this Court’s interpretation of the provision’s predecessor in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411 (Department of Finance Canada, Unremitted Source Deductions and Unpaid GST (April 7, 1997)). That provision was itself the result of several amendments, beginning in 1942, with the amendment introducing the deemed trust in s. 92(6) and (7) of the Income War Tax Act, R.S.C. 1927, c. 97 (previously S.C. 1917, c. 28) (An Act to amend the Income War Tax Act, S.C. 1942‑43, c. 28, s. 31). The provision and the historical amendments demonstrate Parliament’s intention to safeguard its ability to collect employee source deductions under the relevant statutes, in priority to all other claims against a debtor’s property.

[185]                     The Crown appeals from the decision of the Court of Appeal of Alberta which, like the chambers judge, held that the CCAA  court could subordinate the deemed trust claims under the Fiscal Statutes to the priming charges (2019 ABCA 314, 93 Alta. L.R. 29, aff’g 2017 ABQB 550, 60 Alta. L.R. (6th) 103). Having examined the pertinent provisions of the Fiscal Statutes, and for the reasons that follow, we find ourselves in respectful disagreement with that conclusion, and prefer the view of the dissenting judge, Wakeling J.A. The Crown’s deemed trust claims under the Fiscal Statutes have ultimate priority and cannot be subordinated by priming charges.

[186]                     In our view, the text of the impugned provisions in the Fiscal Statutes is clear: the Crown’s deemed trust operates “[n]otwithstanding . . . any other enactment of Canada” (ITA, s. 227(4.1) ).[2] Parliament used unequivocal language ⸺ indeed, the very language suggested by this Court in Sparrow Electric ⸺ to give ultimate priority to the Crown’s claim. Further, and again in clear and unequivocal text, Parliament imposed limits on the broad grant of authority by which a court can prioritize priming charges, thereby making plain the superiority of deemed trust claims. Finally, no provision of the CCAA  is rendered meaningless by this interpretation. Unlike in other contexts such as the legislative scheme governing the GST/HST, Parliament has left no room for subordinating the deemed trusts under the Fiscal Statutes in pursuit of other legislative objectives. We would, therefore, allow the appeal.

II.            Analysis

A.           General Comments on the Nature of the Deemed Trusts Under the Fiscal Statutes

[187]                     The deemed trust created by the ITA  is an essential instrument to collect source deductions (First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720, at para. 22). The ITA grants special priority to the Crown to collect unremitted source deductions, reflecting its status as an “involuntary creditor” (First Vancouver, at para. 23).

[188]                     Section 227(4)  and (4.1)  of the ITA  reads:

(4) Every person who deducts or withholds an amount under this Act is deemed, notwithstanding any security interest (as defined in subsection 224(1.3) ) in the amount so deducted or withheld, to hold the amount separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for the security interest would be property of the person, in trust for Her Majesty and for payment to Her Majesty in the manner and at the time provided under this Act.

 

(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act  (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4)  to be held by a person in trust for Her Majesty is not paid to Her Majesty in the manner and at the time provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3) ) of that person that but for a security interest (as defined in subsection 224(1.3) ) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

 

(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

 

(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest

 

and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

[189]                     These sections describe two relevant events. First, at the time of the deduction, a trust is deemed in favour of the Crown, binding every person (the “tax debtor”) who collects source deductions in the amount withheld until the person remits the source deductions (ITA, s. 227(4) ). Section 227(4)  deems the tax debtor to hold the source deductions “separate and apart from the property of the person and from property held by any secured creditor (as defined in subsection 224(1.3) ) of that person”.

[190]                     The second event occurs where the tax debtor has failed to remit the source deductions in accordance with the manner and time provided by the ITA . Section 227(4.1)  extends the deemed trust to all “property of the person and property held by any secured creditor . . . equal in value to the amount so deemed to be held in trust”. This is achieved by deeming the source deductions to be held “in trust for Her Majesty” from the moment the amount was “deducted or withheld by the person, separate and apart from the property of the person”. Parliament further provided that the unremitted source deductions under the Fiscal Statutes “form no part of the estate or property of the person” from the time of deduction or withholding, and is “property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests”.

[191]                     This Court has held that the deemed trust is a “creatur[e] of statute” and “is not in truth a real [trust], as the subject matter of the trust cannot be identified from the date of creation of the trust” (Sparrow Electric, at para. 31, per Gonthier J., citing D. W. M. Waters, Law of Trusts in Canada (2nd ed. 1984), at p. 117, and adopted in First Vancouver, at para. 37). This statement fuelled a debate in this appeal about whether the deemed trust is a security interest or a proprietary interest, with the respondents arguing that the Crown cannot hold a proprietary interest in the debtor’s property because there is a lack of certainty in the subject matter.

[192]                     We agree with each of our colleagues Justices Karakatsanis and Côté that the deemed trust is not a “true” trust and that it does not confer an ownership interest or the rights of a beneficiary on the Crown as they are understood at common law or within the meaning of the Civil Code of Québec (Karakatsanis J.’s reasons, at paras. 119‑20; Côté J.’s reasons, at paras. 43 and 49). Respectfully, however, our colleagues miss the point of the deemed quality of the trust. The matters of a property interest, certainty of subject matter and autonomous patrimony that arise from attempts to describe the operation of the deemed trust are entirely irrelevant and do not assist in deciding this appeal, nor in understanding Parliament’s intent. The deemed trust is a legal fiction, with sui generis characteristics that are described in s. 227(4)  and (4.1)  of the ITA . As noted in First Vancouver, at para. 34, “it is open to Parliament to characterize the trust in whatever way it chooses; it is not bound by restraints imposed by ordinary principles of trust law”. While First Vancouver considered the contrast between a statutory trust and a common law trust, the same applies to our colleague Côté J.’s reference to the Civil Code (Canada (Attorney General) v. Caisse populaire d’Amos, 2004 FCA 92, 324 N.R. 31, at para. 49). What matters here is not the characterization of the deemed trust that is at issue, but its operation. And as we explain, it operates to give the Crown a statutory right of access to the debtor’s property to the extent of its corpus and a right to be paid in priority to all security interests.

[193]                     Further, no concerns regarding certainty of subject matter or autonomous patrimony arise here. It is of course true that, in common law Canada, for a trust to come into existence there must be certainty of intention, certainty of subject matter, and certainty of object (D. W. M. Waters, M. R. Gillen and L. D. Smith, eds., Waters’ Law of Trusts in Canada (4th ed. 2012), at p. 140; E. E. Gillese, The Law of Trusts (3rd ed. 2014), at p. 41). Similarly, under the Quebec civil law, “[t]hree requirements must . . . be met in order for a trust to be constituted: property must be transferred from an individual’s patrimony to another patrimony by appropriation; the property must be appropriated to a particular purpose; and the trustee must accept the property” (Bank of Nova Scotia v. Thibault, 2004 SCC 29, [2004] 1 S.C.R. 758, at para. 31). And, again, it is also true that the subject matter of the deemed trust under s. 227(4.1)  cannot be identified from the date of creation of the trust and does not constitute an autonomous patrimony to which specific property is transferred.

[194]                     But again, none of this remotely matters here. Statutory text, not ordinary principles of trust law, determines the nature of, and rights conferred by, deemed trusts (First Vancouver, at para. 34). And this Court has recognized that Parliament, through the trust deemed by s. 227(4.1)  of the ITA , has “revitaliz[ed] the trust whose subject matter has lost all identity” (Sparrow Electric, at para. 31, per Gonthier J., adopted in First Vancouver, at para. 37). This is because the subject matter of the deemed trust is ascertained ex post facto, corresponding to the property of the tax debtor and property held by any secured creditor equal in value to the amount deemed to be held in trust by s. 227(4)  that, but for the security interest, would be property of the tax debtor. In short, the subject matter is whatever assets the employer then has from which to realize the original trust debt. Hence Iacobucci J.’s description in First Vancouver of the operation of s. 227(4.1)  as “similar in principle to a floating charge” (para. 4). Parliament also circumvented the traditional requirements of the Civil Code for constituting a trust by requiring the amount of the unremitted source deductions to be held “separate and apart from the property of the [debtor]” and to “form no part of the estate [patrimoine, in the French version] or property of the [debtor]” (s. 227(4.1) ).

[195]                     In short, the requirements of “true” trusts of civil and common law are irrelevant to ascertaining the operation of a statutorily deemed trust. Parliament did not legislate a “true” trust. Instead, it legislated a deeming provision which “artificially imports into a word or an expression an additional meaning which they would not otherwise convey beside the normal meaning which they retain where they are used” (R. v. Verrette, [1978] 2 S.C.R. 838, at p. 845).

[196]                     On this point, and contrary to the view of the majority at the Court of Appeal, Iacobucci J. did not hold that the deemed trust is a floating charge ⸺ nor that it was “of the same nature” (Côté J.’s reasons, at para. 51) ⸺ but rather that it operated similarly, by permitting a debtor in the interim to alienate property in the normal course of business. They are distinct legal concepts; whereas the deemed trust takes “priority over existing and future security interests”, a floating charge would be overridden by a subsequent fixed charge (Toronto‑Dominion Bank v. Canada, 2020 FCA 80, [2020] 3 F.C.R. 201, at para. 62; see also First Vancouver, at para. 28).

[197]                     Significantly, the s. 227(4.1)  deemed trust does not encompass the whole of the tax debtor’s interest in property, but only the amount deemed to be held in trust by s. 227(4) . But this does not mean the Crown cannot have a property interest in the debtor’s property. It merely limits that interest to the extent of the unremitted source deductions. This makes sense. The Crown may collect only what it is owed.

B.            The Deemed Trust Under the Fiscal Statutes Have Absolute Priority Over All Other Claims in CCAA Proceedings

[198]                     The text, context, and purpose of s. 227(4.1)  of the ITA  support the conclusion that s. 227(4.1)  of the ITA  and the related deemed trust provisions under the Fiscal Statutes bear only one plausible interpretation: the Crown’s deemed trust enjoys priority over all other claims, including priming charges granted under the CCAA . Parliament’s intention when it amended and expanded s. 227(4)  and (4.1)  of the ITA  was clear and unmistakable.

(1)          The Deemed Trusts Apply Notwithstanding the Provisions of the CCAA

(a)           Text of the Fiscal Statutes

[199]                     The text of s. 227(4.1)  of the ITA  is determinative: the Crown’s deemed trust claim enjoys superior priority over all “security interests”, including priming charges under the CCAA . The amount subject to the deemed trusts is deemed “to be held . . . separate and apart from the property of the person” and “to form no part of the estate or property of the person”. It is “beneficially owned by Her Majesty”, and the “proceeds of such property shall be paid . . . in priority to all such security interests”. The Crown’s right pursuant to its deemed trust is clear: it is a right to be paid in priority to all security interests.

[200]                     Parliament granted this unassailable priority by employing the unequivocal language of “[n]otwithstanding any . . . enactment of Canada”. This is a “blanket paramountcy clause”; it prevails over all other statutes (P. Salembier, Legal and Legislative Drafting (2nd ed. 2018), at p. 385). No similar “notwithstanding” provision appears in the CCAA , subordinating the claims under the deemed trusts of the Fiscal Statues to priming charges. Indeed, it is quite the opposite: unlike most deemed trusts which are nullified in CCAA  proceedings by the operation of s. 37(1)  of the CCAA, s. 37(2)  preserves the deemed trusts of the Fiscal Statutes. This distinguishes the deemed trust at issue here from those discussed in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, which were nullified by the operation of what is now s. 37(1) . Deschamps J. repeatedly contrasted the different deemed trusts and specified that “the Crown’s deemed trust and corresponding priority in source deductions remain effective both in reorganization and in bankruptcy” (para. 38). The ITA and CCAA  thus operate without conflict.

(b)          Legislative Predecessor Provisions

[201]                     The predecessor provisions of a statutory provision form part of the “entire context” in which it must be interpreted (Merk v. International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers, Local 771, 2005 SCC 70, [2005] 3 S.C.R. 425, at para. 28). And here, it confirms that, by enacting s. 227(4.1)  of the ITA , Parliament intended for the deemed trusts arising from the Fiscal Statutes to have absolute priority over all secured creditors, as defined in s. 224(1.3)  of the ITA .

[202]                     As already noted, Parliament amended s. 227(4.1)  of the ITA  to its current form in response to this Court’s decision in Sparrow Electric. In Sparrow Electric, both Royal Bank and the Minister claimed priority to the proceeds from the tax debtor’s property. This Court held that the Bank had priority since the inventory was subject to the Bank’s security before the deemed trust arose. In reaching this conclusion, Iacobucci J. invited Parliament to grant absolute priority to the Crown, and showed how this could be achieved:

I wish to emphasize that it is open to Parliament to step in and assign absolute priority to the deemed trust. A clear illustration of how this might be done is afforded by s. 224(1.2)  ITA , which vests certain moneys in the Crown “notwithstanding any security interest in those moneys” and provides that they “shall be paid to the Receiver General in priority to any such security interest”. All that is needed to effect the desired result is clear language of that kind. In the absence of such clear language, judicial innovation is undesirable, both because the issue is policy charged and because a legislative mandate is apt to be clearer than a rule whose precise bounds will become fixed only as a result of expensive and lengthy litigation. [Emphasis added; para. 112.]

[203]                     Parliament proceeded to do just that. It amended the Fiscal Statutes to reinforce its priority. The press release accompanying the amendments stated that the objective of the amendments was to “assert the absolute priority of the Crown’s claim [for] unremitted source deductions [and to] ensure that tax revenue losses are minimised and that delinquent taxpayers and their secured creditors do not benefit from failures to remit source deductions and GST at the expense of the Crown” (Department of Finance Canada, at p. 1 (emphasis added)).

[204]                     The purpose of these amendments was described by Iacobucci J. for this Court in First Vancouver. It was, he recognized, to grant priority to the deemed trusts and ensure the Crown’s claim prevails over secured creditors, irrespective of when the security interest arose (paras. 28‑29). “It is evident from these changes” he added, “that Parliament has made a concerted effort to broaden and strengthen the deemed trust in order to facilitate the collection efforts of the Minister” (para. 29). Parliament’s intention could not have been clearer.

[205]                     Indeed, our colleagues’ view to the contrary leaves us wondering: if the all‑encompassing scope of the notwithstanding clause of s. 227(4.1)  of the ITA  is insufficient to prevail over the priming charges, what language would possibly be sufficient? Courts must give proper effect to Parliament’s plain statutory direction, and not strain to subvert it on the basis that Parliament’s categorical language or “basket clause” did not itemize a particular security interest.

(2)          The Priming Charges Are “Security Interests” Within the Meaning of the Fiscal Statutes

[206]                     The priming charge provisions in ss. 11.2(1) , 11.51(1)  and 11.52(1)  of the CCAA  allow the supervising court to “make an order declaring that all or part of the company’s property is subject to a security or charge” (“charge ou sûreté” in the French version). This does not, however, prevail over the deemed trust created by s. 227(4.1)  of the ITA , which provides that the unpaid amounts of the deemed trust for source deductions have priority over all “security interests”. That term is defined by s. 224(1.3)  of the ITA  as follows:

security interestmeans any interest in, or for civil law any right in, property that secures payment or performance of an obligation and includes an interest, or for civil law a right, created by or arising out of a debenture, mortgage, hypothec, lien, pledge, charge, deemed or actual trust, assignment or encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for . . . . (garantie)

This makes clear that a “security interest” includes a “charge” (a “sûreté” in the French version). Further, ss. 11.2(1), 11.51(1) and 11.52(1) of the CCAA  describe the priming charges as a “security or charge”. There can be no doubt, therefore, that priming charges under the CCAA  are security interests under the ITA .

[207]                     Even were this insufficient, the definition of “security interest” in s. 224(1.3)  of the ITA  is sufficiently expansive to capture CCAA  priming charges. The word “includes”, and the categorical language of “encumbrance of any kind whatever, however or whenever arising, created, deemed to arise or otherwise provided for” could not be any more expansive. As Professor Sullivan explains, “The purpose of a list of examples following the word ‘including’ is normally to emphasize the broad range of general language and to ensure that it is not inappropriately read down so as to exclude something that is meant to be included” (Sullivan on the Construction of Statutes (6th ed. 2014), at para. 4.39).

[208]                     This Court has already recognized, in Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 29, [2009] 2 S.C.R. 94, that Parliament chose “an expansive definition of ‘security interest’ . . . in order to enable maximum recovery by the Crown” (para. 14), such that it captures any interest in the property of the debtor that secures payment or performance of an obligation:

     In order to constitute a security interest for the purposes of s. 227(4.1)  ITA  and s. 86(2.1)  EIA , the creditor must hold “any interest in property that secures payment or performance of an obligation”. The definition of “security interest” in s. 224(1.3)  ITA  does not require that the agreement between the creditor and debtor take any particular form, nor is any particular form expressly excluded. So long as the creditor’s interest in the debtor’s property secures payment or performance of an obligation, there is a “security interest” within the meaning of this section. While Parliament has provided a list of “included” examples, these examples do not diminish the broad scope of the words “any interest in property” . . . . [Emphasis added; para. 15.]

In that case, Rothstein J. held for the Court that a contract providing a right to compensation (or set‑off at common law) could constitute a “security interest” under s. 224(1.3)  of the ITA , despite that it was not enumerated in the definition and that it is not traditionally understood as such (paras. 37‑40).

[209]                     For all these reasons, the priming charges fall under the definition of “security interest”, because they are “interest[s] in the debtor’s property [that] secur[e] payment or performance of an obligation”, i.e. the payment of the monitor, the interim lender, and directors. Consequently, the Crown’s interest under the trust deemed created by s. 227(4.1)  of the ITA  enjoys priority over the priming charges.

[210]                     Our colleague Côté J., however, sees the matter differently. In our respectful view, she disregards this Court’s authoritative statement of the law in Caisse populaire Desjardins de l’Est de Drummond. Specifically, she concludes that priming charges are not “security interests” under the ITA  because “[c]ourt‑ordered charges are unlike conventional consensual and non‑consensual security interests in that they are integrally connected to insolvency proceedings that operate for the benefit of the creditors as a group” (Côté J.’s reasons, at para. 62 (emphasis deleted), quoting R. J. Wood, “Irresistible Force Meets Immovable Object: Canada v. Canada North Group Inc.” (2020), 63 Can. Bus. L.J. 85, at p. 98). With respect, nothing in the definition of security interest in the ITA  precludes the inclusion of an interest that is designed to operate to the benefit of all creditors.

[211]                     Further, and irrespective of the nature of CCAA  proceedings, our colleague’s conclusion is irreconcilable with this Court’s holding in Caisse populaire Desjardins de l’Est de Drummond and with the “expansive definition” Parliament adopted to maximize recovery (Caisse populaire Desjardins de l’Est de Drummond, at para. 14). The fact that the instrument is court‑ordered and is for the presumed benefit of all creditors is irrelevant. It does not affect the nature of the priming charges — to secure the payment of an obligation — which is the only relevant criterion (para. 15). As for the express inclusion of “priming charges” in the definition and their creation by court order, we reiterate that “sûreté” and “charge” are explicitly included “however or whenever arising, created, deemed to arise or provided for” (ITA, s. 224(1.3) ).

[212]                     Nor is Professor Wood’s commentary, and by extension, the reasoning in DaimlerChrysler Financial Services (Debis) Canada Inc. v. Mega Pets Ltd., 2002 BCCA 242, 1 B.C.L.R. (4th) 237, and Minister of National Revenue v. Schwab Construction Ltd., 2002 SKCA 6, 213 Sask. R. 278, of any avail to our colleague Karakatsanis J. (para. 102; see also Wood, at p. 98, fns. 51‑52). While those judgments held that finance leases and conditional sales agreements did not fall under the definition of s. 224(1.3)  of the ITA  because they were not specifically listed, that reasoning was later squarely rejected in Caisse populaire de l’Est de Drummond. And, were that not enough, Mega Pets and Schwab, unlike the instant case, dealt with situations where property was not transferred to the debtor, which facts were treated as determinatively supporting the conclusion that the instruments in those cases were not “security interests”. For example, under a conditional sales agreement, the seller does not have an interest in the debtor’s property because ownership rests with the seller until performance of the obligation (Mega Pets, at para. 32). By contrast, the priming charges secure payment out of property that remains the debtor’s.

[213]                     Finally, this Court’s interpretation of “security interest” in Caisse populaire de l’Est de Drummond is confirmed by the French version of the text. “Sont en particulier des garanties” is illustrative, not limitative. Le Robert (online) defines “en particulier” (in particular) as [translation] “particularly, among others, especially, above all” (emphasis added). Unsurprisingly, the French version of s. 224(1.3)  has been described as being [translation] “as broadly worded as possible” (R. P. Simard, “Priorités et droits spéciaux de la couronne”, in JurisClasseur Québec — Collection droit civil — Sûretés (loose‑leaf), vol. 1, by P.‑C. Lafond, ed., fasc. 4, at para. 20). There is no discordance between both versions of the text. The French version conforms perfectly to the English text’s use of the verb “includes”, and confirms the plain reading of the English version.

[214]                     Respectfully, our colleagues Côté and Karakatsanis JJ. frustrate the clear will of Parliament. Clear, all‑inclusive language should be treated as such, and not circumvented by straining to draw distinctions of no legal significance whatsoever or by searching for what is not specifically mentioned in order to avoid the otherwise inescapable conclusion that Parliament granted absolute priority to the deemed trusts.

(3)          Conclusion

[215]                     It is this simple:

1.      the Fiscal Statutes give absolute priority to the deemed trusts for source deductions over all security interests notwithstanding the CCAA ;

2.      the priming charges are “security interests” within the meaning of the Fiscal Statutes; and

3.      the CCAA  does not subordinate the claims under the deemed trusts of the Fiscal Statutes to the priming charges.

[216]                     This is sufficient to decide the appeal: the deemed trusts of the Fiscal Statutes have priority over the priming charges. However, in view of the respondents’ submissions that such a finding leaves the deemed trust provisions in the Fiscal Statutes in conflict with the CCAA , and that recognizing the ultimate priority of the Crown’s deemed trust renders certain provisions of the CCAA  meaningless, we are compelled to explain why this is not so.

C.            The CCAA and the Fiscal Statutes Operate Harmoniously

(1)          The Broad Grant of Authority Under Section 11 of the CCAA Is Not Unlimited

[217]                     It is not disputed that s. 11  of the CCAA  contains a grant of broad supervisory discretion and the power to “make any order that it considers appropriate in the circumstances” to give effect to that supervisory role (see J. P. Sarra, Rescue! The Companies’ Creditors Arrangement Act  (2nd ed. 2013), at pp. 18‑19). What is in dispute, however, are the limits to this broad power.

[218]                     A supervising judge’s authority to grant priming charges was not always contained in the CCAA . Prior to the 2009 amendments, it was derived from the courts’ inherent jurisdiction (Temple City Housing Inc., Re, 2007 ABQB 786, 42 C.B.R. (5th) 274, at para. 14; Q.B. reasons, at para. 105). While the amendments in some respects represented a codification of the past practice, they clarified how priming charges operated (CCAA, ss. 11.2 , 11.51  and 11.52 ). Despite being “the engine driving the statutory scheme”, s. 11 ’s exercise was expressly stated by Parliament to be “subject to the restrictions set out in this Act” (see 9354‑9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, at paras. 48‑49, citing Stelco Inc. (Re) (2005), 75 O.R. (3d) 5 (C.A.), at para. 36). Three such restrictions are significant here.

(a)           The Continued Operation of the Deemed Trusts for Unremitted Source Deductions (Section 37(2))

[219]                     The first restriction on the authority to grant priming charges is found in s. 37(2)  of the CCAA . This provides for the continued operation of the deemed trusts under the Fiscal Statutes in a CCAA  proceeding ⸺ a point this Court repeatedly highlighted in Century Services, at paras. 78‑81. At the hearing of this appeal, the respondents argued that s. 37(1)  nullifies the Crown’s priority in respect of all deemed trusts under the CCAA , and that s. 37(2)  acts merely to reincorporate the deemed trusts under the Fiscal Statutes into CCAA  proceedings without their absolute priority. This tortured interpretation misconceives the effect of s. 37(1) .

[220]                     Section 37(1)  provides that, despite any deemed trust provision in federal or provincial legislation, “property of a debtor company shall not be regarded as being held in trust for Her Majesty unless it would be so regarded in the absence of that statutory provision”, but it is expressly made “[s]ubject to subsection (2)”. Through s. 37(2), Parliament also preserved the operation of the deemed trusts under the Fiscal Statutes within CCAA  proceedings by providing that “[s]ubsection (1) does not apply in respect of amounts deemed to be held in trust under [the Fiscal Statutes]”. In the face of Parliament’s clear direction that the deemed trusts operate “notwithstanding” any other enactment, and the express preservation of the deemed trusts in the CCAA , there is simply no basis whatsoever for reading s. 37  as invalidating the deemed trust provisions under the Fiscal Statutes only to revive them with a conveniently lesser priority. Such an interpretation finds no support in the text, context, or purpose of the statutory schemes. Rather, all those considerations support the view that the deemed trusts under the Fiscal Statutes are preserved in CCAA  proceedings in both form and substance, along with their absolute priority.

[221]                     Before turning to the second restriction, we note each of our colleagues Karakatsanis J. and Côté J. fail to give effect to Parliament’s decision, expressed in clear statutory text, to “preser[ve] deemed trusts and asser[t] Crown priority only in respect of source deductions” under the CCAA  (Century Services, at para. 45). For the same reason, the reliance they place on British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24, is misconceived. There, the Court held that the deemed trust created by provincial legislation was not a “true trust” so as to fall outside the debtor’s property under what is now s. 67(1) (a) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3  (“BIA ”). That is not this case. Unlike the deemed trust in Henfrey, the deemed trusts of the Fiscal Statutes receive a particular treatment in bankruptcy and insolvency proceeding because they are preserved by s. 37(2)  of the CCAA  and s. 67(3)  of the BIA . Further, while the Court in Henfrey concluded that the deemed trust was ineffective in bankruptcy because the commingling of assets rendered the money subject to the deemed trusts untraceable, this rationale has no application to s. 227(4.1) . In First Vancouver, this Court noted that “by deeming the trust to be effective ‘at any time’ the debtor is in default, the amendments serve to strengthen the conclusion that the Minister is not required to trace its interest to assets which belonged to the tax debtor at the time the source deductions were made” (para. 37). Again, no conclusions regarding the nature of the deemed trusts flow from the fact that tracing is irrelevant under s. 227(4.1) : the deemed trusts are statutory instruments and the question is one of operation, not characterization.

(b)          Priming Charges Attach Only to the Property of the Debtor Company

[222]                     The second restriction on the CCAA ’s broad authority to grant priming charges is that the CCAA  requires priming charges to attach only to “all or part” of the property of the debtor’s company (s. 11.2(1) ; see also ss. 11.51(1)  and 11.52(1) ). Here, Parliament evinces a clear intent to preserve the ultimate priority it afforded the deemed trusts under the Fiscal Statutes. This is because, by operation of s. 227(4.1)  of the ITA  and s. 37(2)  of the CCAA , the unremitted source deductions are deemed not to form part of the property of the debtor’s company.

[223]                     Parliament could not have been more explicit: the source deductions are deemed never to form part of the company’s property and, if there is a default in remittances, the Crown is deemed to obtain beneficial ownership in the tax debtor’s property in the amount of the unremitted source deductions that it can collect “notwithstanding” any other enactment or security interest. Whether this is a true ownership interest is irrelevant to this appeal as the legislation deems the Crown to obtain beneficial ownership for these purposes. It follows that the priming charges cannot supersede the Crown’s deemed trust claim because they may attach only to the property of the debtor’s company, of which Parliament took great care to ensure the source deductions were deemed to form no part. As Michael J. Hanlon explains:

While it has been held that an interim financing charge may rank ahead of the deemed trusts existing in favour of the Canada Revenue Agency with respect to amounts owing on account of unremitted source deductions, this appears to be incorrect. Property deemed to be held in trust pursuant to the provisions creating the deemed trust are deemed not to form part of the debtor’s estate, and given that those deemed trusts with respect to source deductions, are preserved in a CCAA  context, the interim financing charge would not attach to those assets. [Emphasis added; footnotes omitted.]

 

(Halsbury’s Laws of Canada Bankruptcy and Insolvency (2017 Reissue), at HBI‑376)

(c)           The Definition of “Secured Creditor” (Section 2 )

[224]                     The third restriction on the CCAA ’s broad authority to grant priming charges is that the court “may order that the security or charge rank in priority over the claim of any secured creditor of the company” (ss. 11.2(2) , 11.51(2)  and 11.52(2) ). Also, the definition of “secured creditor” in s. 2(1)  of the CCAA  makes it manifestly clear that the Crown is not a “secured creditor” in respect of its deemed trust claims under the Fiscal Statutes:

secured creditor means a holder of a mortgage, hypothec, pledge, charge, lien or privilege on or against, or any assignment, cession or transfer of, all or any property of a debtor company as security for indebtedness of the debtor company, or a holder of any bond of a debtor company secured by a mortgage, hypothec, pledge, charge, lien or privilege on or against, or any assignment, cession or transfer of, or a trust in respect of, all or any property of the debtor company, whether the holder or beneficiary is resident or domiciled within or outside Canada, and a trustee under any trust deed or other instrument securing any of those bonds shall be deemed to be a secured creditor for all purposes of this Act except for the purpose of voting at a creditors’ meeting in respect of any of those bonds . . . .

This definition highlights two relevant considerations. First, the definition should be read as encompassing two classes of creditors. And second, the use of the word “trust” must be given legal significance.

[225]                     As to the first consideration, we accept the Crown’s submission that the proper reading of the definition of secured creditor references only two classes of secured creditors: (i) holders of direct security, and (ii) holders of secured bonds. So understood, a secured creditor means either

a holder of a mortgage, hypothec, pledge, charge, lien or privilege on or against, or any assignment, cession or transfer of, all or any property of a debtor company as security for indebtedness of the debtor company,

or

a holder of any bond of a debtor company secured by a mortgage, hypothec, pledge, charge, lien or privilege on or against, or any assignment, cession or transfer of, or a trust in respect of, all or any property of the debtor company . . . .

The reference to “trust” appears only in relation to an instrument securing a bond of the debtor company. The definition must be read as “secured creditor means . . . a holder of any bond of a debtor company secured by . . . a trust in respect of, all or any property of the debtor company”. Accordingly, holders of an interest under a deemed trust are not a third class of creditors (A. Prévost, “Que reste‑t‑il de la fiducie réputée en matière de régimes de retraite?” (2016), 75 R. du B. 23, at p. 58).

[226]                     While finding this interpretation “initially attractive”, the majority of the Court of Appeal ultimately rejected this reading. It did so because, irrespective of whether the definition needs a third reference to a “holder of a trust” drafted in parallel to the first two classes of creditors, the Crown’s interest could be classified as a “charge” and is therefore captured by the first class of secured creditors (C.A. reasons, at paras. 42‑43). Respectfully, this is incorrect. Deemed trusts are not covered by the word “charge”. To conclude that the word “charge” encompasses “deemed trusts” under the first class of secured creditors when “charge” and “trust” are listed distinctly under the second class of secured creditors (holders of secured bonds) would be incoherent and run contrary to legislative presumptions in statutory interpretation. Why would Parliament include a specific reference to trusts if they are already covered by charge? Parliament is presumed to avoid “superfluous or meaningless words, [and] phrases” (Bristol‑Myers Squibb Co. v. Canada (Attorney General), 2005 SCC 26, [2005] 1 S.C.R. 533, at para. 178). The deliberate and distinct text of “trust” and “charge” shows that it was not Parliament’s intention to have holders of deemed trusts subsumed under “charge” such that the Crown in this circumstance would become a secured creditor.

[227]                     In any case, if there were only one class of creditor, the Crown would not be a secured creditor with respect to the deemed trust claim under the Fiscal Statutes. While Parliament distinguished between “deemed or actual trust[s]” in s. 224(1.3)  of the ITA , it made no such distinction in the definition of secured creditor. Parliament is presumed to legislate with intent and chose its words carefully. Our role as a court with respect to legislation is interpretation, not drafting. We must ascribe legal significance to Parliament’s choice of text ⸺ that is, to the words Parliament chose and did not choose.

(d)          “Restrictions” Under Section 11 of the CCAA 

[228]                     Our colleague Karakatsanis J. agrees with our analysis of the priming charge provisions, but she does not seem to view them as “restrictions” within the meaning of s. 11 because “[t]he general language of s. 11 should not . . . be ‘restricted by the availability of more specific orders’” (Karakatsanis J.’s reasons, at para. 170, citing Century Services, at para. 70). With respect, as a matter of law and statutory interpretation this view is simply unavailable to our colleague. Neither s. 11 nor the court’s inherent jurisdiction can “empower a judge . . . to make an order negating the unambiguous expression of the legislative will” (Baxter Student Housing Ltd. v. College Housing Co‑operative Ltd., [1976] 2 S.C.R. 475, at p. 480; see also R. v. Caron, 2011 SCC 5, [2011] 1 S.C.R. 78, at para. 32). Parliament has imposed clear restrictions on the courts’ power to give priority to priming charges. It is one thing to rely on s. 11 as a source of general authority even when other specific orders are available; it is another to misconstrue s. 11 as a source of unfettered authority to circumvent such unambiguous restrictions. While courts may use their general s. 11 power to create priming charges for purposes other than those that are specifically enumerated (see Wood, at pp. 90‑91), Parliament has clearly expressed its intention to restrict any such charge in a critical way ⸺ it cannot take priority over the Crown’s deemed trust.

[229]                     For the same reason, we respectfully find untenable our colleague Justice Moldaver’s suggestion that it is unclear whether there are restrictions internal to the CCAA  itself that would prevent a court from using its power under s. 11  to order a priming charge in priority to the Crown’s deemed trust claim. This statement does not account for Parliament’s clear intention, recorded in s. 37(2) , to preserve the Crown’s right to be paid in absolute priority over all secured creditors in CCAA  proceedings. It also renders superfluous the restrictions on the court’s authority to prioritize priming charges under ss. 11.2(2) , 11.51(2)  and 11.52(2)  of the CCAA .

[230]                     Further, our colleague Moldaver J. says it is unnecessary to “define the particular nature or operation of the” deemed trust under the ITA  (para. 255), and relies on the “notwithstanding” language of s. 227(4.1)  of the ITA  to determine whether the Crown’s claim can have priority over priming charges. This interpretation effectively reads in a conflict in the statutory schemes, despite this Court’s clear direction that “an interpretation which results in conflict should be eschewed unless it is unavoidable” (Lévis (City) v. Fraternité des policiers de Lévis Inc., 2007 SCC 14, [2007] 1 S.C.R. 591, at para. 47). In any event, this is not an unavoidable conflict: there is simply no conflict. Parliament avoided any conflict between the CCAA  and the ITA  by imposing restrictions upon the court’s authority under s. 11  of the CCAA .

(e)           Structure of Crown Claims Under the CCAA 

[231]                     Finally, while not a “restrictio[n] set out in [the CCAA ]”, as specified in s. 11 , the cogency of the statutory scheme as a whole depends on an interpretation where the Crown cannot be a secured creditor. This is so because classifying the Crown as “secured creditor” would disrupt the structure of Crown claims that the CCAA  clearly defines at ss. 37  to 39  (Wood, at p. 98). Section 37  applies to deemed trust claims, with s. 37(1)  providing that deemed trusts in favour of the Crown are ineffective under the CCAA , as a general rule, and s. 37(2)  providing an exemption for the deemed trust for source deductions. Section 38(1) sets out the general rule that the Crown’s secured claims rank as unsecured claims, with specific exemptions at s. 38(2) and (3). Finally, s. 39(1) preserves the Crown’s secured creditor status if it registers before the commencement of the CCAA  proceedings but, under s. 39(2) , that security is subordinate to prior perfected security interests.

[232]                     This leads us to question why Parliament would expressly “preserve” the deemed trusts of the Fiscal Statutes by operation of s. 37(2) , only then to rank the Crown as an unsecured creditor by the operation of s. 38(1). Unlike the interpretation that affords the deemed trusts ultimate priority, allowing the Crown to be reduced to an unsecured creditor in respect of its deemed trust claims would render s. 37(2)  almost meaningless. Further, this interpretation would require the Crown to register its claim under s. 39(1) to preserve its status because the deemed trust is not afforded the exemption under s. 38 . It would be illogical for Parliament to confer greater protection on secured claims afforded an exemption under s. 38(2) or (3) than it conferred on deemed trusts for source deductions, when the clear objective was to confer “absolute priority” on the latter (First Vancouver, at paras. 26‑28).

[233]                     We note that Professor Wood is not alone in recognizing that “sections 38  and 39  of the CCAA  govern the conditions upon which a Crown claim can be viewed as ‘secured’ for the purposes of the CCAA ” (F. L. Lamer, Priority of Crown Claims in Insolvency (loose‑leaf), at §79.2). Since the deemed trusts for unremitted source deductions under the Fiscal Statutes do not meet the conditions of these sections, it follows that the Crown’s claim is not “secured”.

[234]                     In our view, a plain reading of the definition of secured creditor within the context of the broader statutory scheme results in a single inescapable conclusion. That is, there are three classes of Crown claims under the CCAA : (1) claims pursuant to deemed trusts continued under the CCAA ; (2) secured claims; and (3) unsecured claims. The claims for unremitted source deductions fall under the first type: claims pursuant to deemed trusts continued under the CCAA .

(2)          Recognizing the Ultimate Priority of the Crown’s Deemed Trust Does Not Defeat the Purpose of any Provision of the CCAA 

[235]                     For two further and related reasons, the majority at the Court of Appeal and the respondents resist the conclusion that the Crown’s deemed trust enjoys absolute priority.

(a)           Protection of Crown Claims Under Section 6(3)

[236]                     First, the majority held that granting ultimate priority to the deemed trusts would render s. 6(3)  of the CCAA  meaningless. This provision prohibits the court from sanctioning a compromise or arrangement unless it provides for payment in full to the Crown, within six months of the sanction of the plan, of all amounts due to the Crown. The majority reasoned that if the Crown is always paid first for its deemed trust claims under the Fiscal Statutes, there would be no need to protect the Crown claims under s. 6(3) .

[237]                     Respectfully, this conclusion is erroneous. A review of the purpose and scope of s. 6(3)  of the CCAA  is clear: it operates only where there is an arrangement or compromise put to the court, and it protects the entirety of the Crown claim pursuant to s. 224(1.2)  of the ITA  and similar provisions of the Fiscal Statutes. This includes claims not subject to the deemed trusts under the Fiscal Statutes, such as income tax withholdings, employer contributions to employment insurance and CPP , interest and penalties. In contrast, the deemed trusts arise immediately and operate continuously “from the time the amount was deducted or withheld” from the employee’s remuneration, and apply to only those deductions. It follows, then, that, without s. 6(3) , the Crown would be guaranteed entitlement only to unremitted source deductions when the court sanctions a compromise or arrangement, and not to its other claims under s. 224(1.2)  of the ITA . This is because most of the Crown’s claims rank as unsecured under s. 38  of the CCAA .

[238]                     It bears emphasizing that s. 6(3)  does not apply where no arrangement is proposed or to CCAA  proceedings which involve the liquidation of the debtor’s assets. Such “liquidating CCAAs” are “now commonplace in the CCAA  landscape” (Callidus Capital Corp., at para. 42). The absolute priority of the deemed trusts under the Fiscal Statutes, continued by s. 37(2)  of the CCAA , provides protection to the Crown’s claim for unremitted source deductions in liquidating CCAAs. Each of our colleagues Côté and Karakatsanis JJ. deprive the Crown of its guaranteed entitlements in such cases, despite Parliament having unambiguously granted “absolute priority” to claims for unremitted source deductions (Department of Finance Canada).

[239]                     We note that our colleague Karakatsanis J. does not conclude that s. 6(3)  is rendered nugatory by our interpretation; rather, she says that, since the term “beneficial ownership” as it is used in the deemed trusts does not have the same meaning at common law, we must look to the CCAA  to ascertain the Crown’s rights. This “manipulation of private law concepts, without settled meaning”, she further says, raises the question of how the deemed trust survives under the CCAA  (para. 181). And the answer, she finds, is furnished by s. 6(3) .

[240]                     This is wrong for three reasons. First, there is no question as to how the deemed trust survives. Section 37(2)  operates to exempt the deemed trusts under the Fiscal Statutes from any change in form or substance under the CCAA ; this continues the operation of s. 227(4.1) , which confers absolute priority on the Crown’s claim to the deemed trusts under the Fiscal Statutes. In other words, the deemed trust survives as it was under the Fiscal Statutes. It is unsurprising, therefore, that this Court did not opine on how the trust “survives” in CCAA  proceedings in Century Services: it is, with respect, plain and obvious.

[241]                     Secondly, our colleague Karakatsanis J.’s suggestion that the understanding of the rights conferred on the Crown under the deemed trust must arise from reading s. 6(3)  of the CCAA  entirely bypasses the text of the ITA  which specifically sets out those rights. After providing that the Crown has “beneficial ownership” of the value of the unremitted source deduction, the ITA  continues: “the proceeds of such property shall be paid to the Receiver General in priority to all such security interests” (s. 227(4.1) ). This is the right of the Crown under the deemed trust, and our colleague fails to give effect to this right.

[242]                     Finally, as we have discussed, s. 6(3) protects different interests than those captured by the deemed trusts. If s. 6(3) were to exhaust the Crown’s rights under the CCAA , our colleague Karakatsanis J. correctly observes that “there may be some risk to the Crown that the plan [under s. 6(3) ] may fail, and the Crown may not be paid in full if the restructuring dissolves into liquidation and the estate is depleted in the interim” (para. 155 (emphasis added)). This, however, only supports our interpretation. The right “not to have to compromise” under s. 6(3) is a right independent of the Crown’s right under deemed trusts (para. 155 (emphasis deleted)).

(b)          Power to Stay the Crown’s Garnishment Right (Section 11.09)

[243]                     Secondly, the majority at the Court of Appeal and the respondents say that giving effect to the clear statutory wording would be contrary to the purpose of s. 11.09  of the CCAA , which grants courts the power to stay the Crown’s garnishment right under the ITA  (C.A. reasons, at para. 54). This demonstrates, the argument goes, Parliament’s intent to have the court exercise control over the Crown’s interests while monitoring the restructuring proceedings. On this view, granting absolute priority to the deemed trusts under the Fiscal Statutes necessarily implies that s. 11.09  of the CCAA  does not apply to the deemed trust claim.

[244]                     Again respectfully, this is not so. A court‑ordered stay of garnishments under s. 11.09  of the CCAA  can apply to the Crown’s deemed trust claims under the Fiscal Statutes because the deemed trust provisions and s. 11.09  each serve different purposes: the deemed trusts grant a priority to the Crown, while s. 11.09  imposes conditions on when and how the Crown can enforce its garnishment rights under s. 224(1.2)  of the ITA . In other words, s. 11.09  permits the Court to stay the Crown’s ability to enforce its claims under the deemed trusts, but it does not remove its priority.

[245]                     The critical point is this: giving effect to Parliament’s clear intent to grant absolute priority to the deemed trust does not render s. 6(3)  or s. 11.09  meaningless. To the contrary, s. 6(3)  and s. 11.09  respect the ultimate priority of the deemed trusts under the Fiscal Statutes by allowing for the ultimate priority of the Crown claim to persist, while not frustrating the remedial purpose of the CCAA .

(3)          Conclusion

[246]                     As with our discussion of the deemed trust’s absolute priority, the harmonious operation of the CCAA  and the Fiscal Statutes can be summarized as follows:

1.      the CCAA  preserves the Crown’s right to be paid in priority to all security interests for its claims for source deductions under the Fiscal Statutes;

2.      under the CCAA , the Crown is not a “secured creditor” in respect of its deemed trust claims under the Fiscal Statutes;

3.      as priming charges can attach only to the debtor’s property, and as Parliament has made it clear that unremitted source deductions form no part of the debtor’s property, the Crown’s interest under the deemed trust is not subject to the priming charges;

4.      section 6(3)  of the CCAA , which operates only where there is an arrangement or compromise put to the court, protects the entirety of the Crown claim under s. 224(1.2)  of the ITA  and similar provisions of the Fiscal Statutes; and

5.      the deemed trust’s grant of priority to the Crown is unaffected by s. 11.09 , which instead imposes conditions on when and how the Crown can enforce its garnishment rights under s. 224(1.2)  of the ITA .

D.           Policy Reasons Do Not Support a Different Interpretation

[247]                     The majority of the Court of Appeal and the respondents place significant weight on what they view as the potentially “absurd consequences” that would result from concluding that the deemed trusts under the Fiscal Statutes have priority over the priming charges. The same point implicitly underlies our colleague Côté J.’s reasons. Indeed, the majority at the Court of Appeal went as far as to warn that, under this interpretation, interim financing would “simply end”, an assertion that “almost certainly goes too far” (C.A. reasons, at para. 50; Wood, at p. 99). It added that it would lead to more business failures and, in turn, undermine tax collection (paras. 48 and 50). We disagree.

[248]                     The “absurd consequences” identified by the majority at the Court of Appeal rest on faulty premises. The conclusion that interim financing would “simply end” was not supported by the record. The majority extrapolated from admittedly incomplete and dated data about interim financing drawn from a textbook which does not indicate the presence of a deemed trust claim. This sweeping statement elides cases where there is no interim lending and cases, such as this one, where the debtor’s assets are sufficient to satisfy both the interim lending and the Crown’s deemed trust claim. This is an omission that cannot be readily ignored as there are usually enough funds available to satisfy both the Crown claim and the court‑ordered priming charges (Wood, at p. 100). Equally unfounded is the majority’s claim that confirming the priority of the deemed trusts of the Fiscal Statutes would “inject an unacceptable level of uncertainty into the insolvency process” (C.A. reasons, at para. 51). A company applying under the CCAA  is required to provide its financial statements (s. 10(2)(c)), which include the source deductions owed to the Crown. Interim lenders can rely on this information to evaluate the risk of providing financing.

[249]                     Moreover, the majority at the Court of Appeal did not consider that Parliament can, and did, choose to prioritize the integrity of the tax system over the interests of secured creditors. Indeed, and with respect, the majority’s own interpretation arguably itself produces absurd results, whereby employees’ gross remuneration are conscripted as a subsidy to secure interim financing and the services of insolvency professionals.

[250]                     We therefore do not remotely see the consequences of our interpretation as rising to the level of absurdity. And Parliament has unambiguously struck the balance it considered appropriate in pursuit of the dual objectives of collecting unremitted source deductions, which are not the property of the debtor, and avoiding the “devastating social and economic effects of bankruptcy” (Century Services, at para. 59, quoting Elan Corp. v. Comiskey (1990), 1 O.R. (3d) 289 (C.A.), at p. 306, per Doherty J.A., dissenting). Whether s. 227(4.1) of the ITA  is an effective means to protect the fiscal base or whether “the Crown is biting off the hand that feeds it” are not questions that this Court has the competence or legitimacy to answer (C.A. reasons, at para. 48).

[251]                     In any event, even were there evidence that giving priority to the deemed trusts under the Fiscal Statutes over the priming charges produced absurd results, our conclusion would be no different. The presumption against absurdity is exactly that: a presumption. Nothing more. Illogical consequences flowing from the application of a statute do not give rein to courts to disregard clear legislative intent. As Lamer C.J. noted in R. v. McIntosh, [1995] 1 S.C.R. 686, at para. 41, “Parliament . . . has the right to legislate illogically (assuming that this does not raise constitutional concerns). And if Parliament is not satisfied with the judicial application of its illogical enactments, then Parliament may amend them accordingly.”

[252]                     Here, Parliament’s intention to give absolute priority to the deemed trust of the Fiscal Statutes is unequivocal. Our role is to give effect to this intention.

III.         Disposition

[253]                     We would allow the appeal. The respondents should be entitled to costs in accordance with “Schedule B” to the regulations (Rules of the Supreme Court of Canada, SOR/2002‑156). There are no exceptional circumstances that would justify enhanced costs. Despite the appeal being moot, it was not improper for the Crown to seek the correct interpretation of the Fiscal Statutes.

 

The following are the reasons delivered by

 

                    Moldaver J. —

[254]                     I have had the benefit of reading the reasons of my colleagues, Justice Côté, Justice Karakatsanis, and Justices Brown and Rowe. While I substantially agree with the analysis and conclusions of Brown and Rowe JJ., there are two points that I wish to address. 

[255]                     First, unlike Brown and Rowe JJ., I see no reason to define the particular nature or operation of the Crown’s interest under s. 227(4.1)  of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”), in the context of proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36  (“CCAA ”). While a future appeal may require this Court to determine exactly how the Crown’s interest under s. 227(4.1)  “survives”, and whether it amounts to some form of ownership interest in the debtor’s property, as Brown and Rowe JJ. maintain, some form of security interest in that property, or something else entirely (e.g., a right not to have to compromise, as Karakatsanis J. maintains), such an inquiry is not necessary in this case. Properly interpreted, the relevant provisions of the CCAA  and ITA  work in harmony to direct that the Crown’s interest — in whatever form it takes — must be given priority over court-ordered priming charges. This conclusion is sufficient to dispose of the appeal. 

[256]                     In my view, to the extent that Brown and Rowe JJ. conclude that the Crown’s interest under s. 227(4.1)  affords the Crown beneficial ownership over the source deductions such that “the source deductions are deemed never to form part of the company’s property”, they have effectively decided the appeal by two paths — first, by way of the Crown’s absolute priority under s. 227(4.1) , and second, by way of the Crown’s beneficial ownership over any unremitted source deductions (para. 223). As they note, if the Crown’s interest amounts to an ownership interest and unremitted source deductions do not form part of the debtor company’s property, priming charges could never attach to those source deductions, whether ordered under the specific priming charge provisions or the court’s broad power under s. 11  of the CCAA  (paras. 222-23). If this is indeed the case, it is not clear that the issue of competing priority between the Crown’s interest and court‑ordered priming charges ever arises, as the source deductions would be simply inaccessible to anyone other than the Crown. As I am not necessarily convinced that the Crown’s interest under s. 227(4.1)  amounts to an ownership interest, and as the Crown’s absolute priority does not depend on this conclusion, I would leave the question of the nature of the Crown’s interest to another day.

[257]                     Second, while I agree with Brown and Rowe JJ. that s. 37(2)  of the CCAA  can be interpreted as an internal restriction on s. 11 , I hesitate to accept this conclusion, as it strikes me that in order to give proper effect to Parliament’s intention for s. 11  to serve as “the engine” that drives the CCAA  and empowers supervising judges to further its remedial objectives, any restrictions on that discretionary power should be explicit and unambiguous (9354‑9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, at para. 48, citing Stelco Inc. (Re) (2005), 75 O.R. (3d) 5 (C.A.), at para. 36). With respect, s. 37(2)  does not amount to such an explicit and unambiguous restriction. Rather, s. 37(2) is a simple exception to s. 37(1) , which serves to nullify the effect of any statutory provision that deems property to be held in favour of the Crown:

37(1) Subject to subsection (2), despite any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a debtor company shall not be regarded as being held in trust for Her Majesty unless it would be so regarded in the absence of that statutory provision.

 

(2) Subsection (1) does not apply in respect of amounts deemed to be held in trust under subsection 227(4)  or (4.1)  of the Income Tax Act  . . . .

[258]                     In effect, then, the function of s. 37(2) is merely to preserve the Crown’s deemed trust under s. 227(4.1)  from extinguishment under s. 37(1) . In preserving the Crown’s interest, however, “s. 37(2) does not explain what to do with that right for the purposes of a CCAA  proceeding”, nor does it say anything that would limit the court’s power under s. 11  to order priming charges in priority to the Crown’s deemed trust claim (Karakatsanis J.’s reasons, at para. 153). Indeed, as Karakatsanis J. notes, “There is no provision in the CCAA  stipulating what the court can do with trust property and no provision in the CCAA  conferring more specific jurisdiction on whether a priming charge can rank ahead of the beneficiary of a deemed trust” (para. 176). Rather, it is only when one looks to s. 227(4.1)  that the absolute priority of the Crown’s interest — and the resulting limitations on s. 11  — become apparent. It is thus not entirely clear that interpreting s. 37(2)  as an internal restriction accords with the function of s. 37(2)  or the leeway that Parliament intended for the scope of powers under s. 11 . In other words, the relationship between ss. 11  and 37(2)  may not be as clear‑cut as my colleagues seem to suggest. Accordingly, while I ultimately agree with Brown and Rowe JJ. that s. 37(2)  can be interpreted as an internal restriction so as to avoid a conflict between the CCAA  and ITA , I feel it important to explain that, if this interpretation is mistaken, s. 11  is nonetheless restricted by the external text of s. 227(4.1) .

[259]                     If s. 37(2) does not amount to an internal restriction on s. 11 , using s. 11  to prioritize priming charges over the Crown’s deemed trust claim would put the provision in direct conflict with s. 227(4.1)  which, as my colleagues Brown and Rowe JJ. have explained, requires that the Crown’s claim be ranked in priority to all security interests, including priming charges. The direct conflict would trigger the “[n]otwithstanding” language in s. 227(4.1) , which states that “[n]otwithstanding . . . any other enactment of Canada”, the Crown’s claim is to have priority. This language thus imposes an external restriction on the court’s power under s. 11 . Indeed, the supremacy of s. 227(4.1)  is implicitly acknowledged by the text of s. 11  as, unlike s. 227(4.1) , which operates despite “any other enactment of Canada”, s. 11  only operates “[d]espite anything in the Bankruptcy and Insolvency Act  or the Winding‑up and Restructuring Act ”, but not despite anything in the ITA . Accordingly, while the court’s discretionary authority under s. 11  could, in theory, empower a court to subordinate the Crown’s interest in unremitted source deductions, that power is ultimately stopped short by the express language of s. 227(4.1) .

[260]                     In outlining this position, I consider it important to contextualize this Court’s statement in Callidus that “the jurisdiction granted by s. 11  is constrained only by restrictions set out in the CCAA  itself, and the requirement that the order made be ‘appropriate in the circumstances’” (para. 67). The focus in Callidus was on the discretionary authority of supervising CCAA  judges within the confines of the CCAA  itself; it was not on addressing the question of the authority of CCAA  judges to apply s. 11  in the face of overriding federal legislation. Respectfully, where, as here, Parliament has expressly indicated the supremacy of a statute over the provisions of the CCAA , the court’s power under s. 11  is correspondingly restricted.

[261]                     The Crown’s deemed trust claim must thus take priority over all court‑ordered priming charges, whether they arise under the specific priming charge provisions, or under the court’s discretionary authority.

[262]                     A necessary consequence of the absolute supremacy of the Crown’s deemed trust claim over court‑ordered priming charges is that the Crown’s interest under s. 227(4.1)  cannot be given effect by s. 6(3)  of the CCAA . Section 6(3)  of the CCAA  provides that

[u]nless Her Majesty agrees otherwise, the court may sanction a compromise or arrangement only if the compromise or arrangement provides for the payment in full to Her Majesty in right of Canada or a province, within six months after court sanction of the compromise or arrangement, of all amounts that were outstanding at the time of the application for an order under section 11  or 11.02  and that are of a kind that could be subject to a demand under

 

(a) subsection 224(1.2)  of the Income Tax Act  . . . .

[263]                     In my view, there are two reasons why s. 6(3)  cannot represent the Crown’s interest under s. 227(4.1) . First, the focus of s. 6(3)  is to establish a timeframe for payment to the Crown of certain outstanding debts in the event that the debtor company succeeds in staying viable as a going concern. By contrast, s. 227(4.1)  is focused on ensuring the priority of the Crown’s claim. The key point of distinction here is that, under s. 6(3) , the Crown could be ranked last, so long as it is paid within six months of any arrangement. Such an outcome would be plainly inconsistent with the absolute priority of the Crown’s claim, as established by the CCAA  and ITA . Second, as s. 6(3)  applies only where a compromise or plan of arrangement is reached, the Crown’s deemed trust claim would not operate in the event that a liquidation occurred under the CCAA , thereby depriving the Crown of its priority over security interests in such circumstances. Again, this potential consequence would be at odds with the clear intention of the CCAA  and ITA .

[264]                     Before concluding, I would note that it cannot be doubted that Parliament considered the potential consequences of its legislative actions, including any consequences for CCAA  proceedings. If circumstances do arise in which the priority of the Crown’s claim threatens the viability of a particular restructuring, it clearly lies with the Crown to be flexible so as to avoid any consequences that would undermine the remedial purposes of the CCAA .

[265]                     I would, therefore, allow the appeal. The respondents are entitled to costs in this Court in accordance with Schedule B of the Rules of the Supreme Court of Canada, SOR/2002-156.

 

                    Appeal dismissed with costs, Abella, Moldaver, Brown and Rowe JJ. dissenting.

                    Solicitor for the appellant: Attorney General of Canada, Vancouver.

                    Solicitors for the respondents Canada North Group Inc., Canada North Camps Inc., Campcorp Structures Ltd., DJ Catering Ltd., 816956 Alberta Ltd., 1371047 Alberta Ltd., 1919209 Alberta Ltd. and Ernst & Young Inc. in its capacity as monitor: Duncan Craig, Edmonton.

                    Solicitors for the respondent the Business Development Bank of Canada: Cassels Brock & Blackwell, Calgary.

                    Solicitors for the intervener the Insolvency Institute of Canada: Blake, Cassels & Graydon, Calgary.

                    Solicitors for the intervener the Canadian Association of Insolvency and Restructuring Professionals: Osler, Hoskin & Harcourt, Calgary.



[1] It bears noting, however, that ss. 227(4)  and 227(4.1)  of the ITA  do not give the Crown priority over all creditors. They explicitly carve out an exception for the rights of unpaid suppliers (Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 81.1 ) and the rights of farmers, fisherman, and aquaculturists (s. 81.2 ). In addition, s. 227(4.2)  of the ITA  carves out an exception for a prescribed security interest, defined in the Income Tax Regulations, C.R.C., c. 945, s. 2201. Broadly, a prescribed security interest is a mortgage in land or a building which is registered before the failure to remit the source deductions at issue (Regulatory Impact Analysis Statement, SOR/99-322, Canada Gazette, Part II, vol. 133, No. 17, August 18, 1999, at pp. 2041-42).

[2]  The wording of the deemed trust provisions in the relevant provisions of the Fiscal Statutes is materially identical. This decision focuses on the deemed trusts in s. 227(4)  and (4.1)  of the ITA . The reasoning herein, however, applies with equal force to each of the other statutes.

 You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.