Crown Loses Priority Battle Over GST Funds: Century Services Inc v Canada (Attorney General)

To mark the looming onslaught of bills from holiday expenses, it is fitting, albeit in somewhat of a sadistic way, to discuss the Supreme Court of Canada’s (“SCC”) most recent pronouncements in the field of insolvency law. On December 16, 2010 the SCC released its decision in Century Services Inc v Canada (Attorney General), 2010 SCC 60. This decision marks the first time that the SCC has had to directly interpret the provisions of the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 [CCAA]. Specifically, the SCC had to reconcile the CCAA with the Excise Tax Act, RSC 1985, c E-15 [ETA], and determine the scope of a court’s discretion when supervising reorganization.

A Quick Lesson on Bankruptcy and Insolvency Law

Before getting into the facts of this case, a short introduction to insolvency law is required. This area of law involves two major regimes which are embodied in separate statutes: the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA], and the CCAA. Whereas the BIA applies to an “insolvent person,” which may include individuals and corporations of any size, the CCAA applies only the companies with more than $5 million in debt. Both regimes allow debtors make proposals. If a proposal under the BIA fails, then the debtor can use the bankruptcy provisions in the BIA.

Generally speaking, bankruptcy proceedings under the BIA involve selling off a debtor’s assets and distributing the proceeds to creditors according to a distribution scheme set out in the BIA. In comparison, the CCAA does not have any provisions that allow for the liquidation of a debtor’s assets where reorganization fails. The debtor or creditor(s) must rely upon the provisions in the BIA to assign into bankruptcy or apply for a bankruptcy order, respectively.

The traditional view is that the CCAA seeks to avoid liquidation by allowing the debtor to restructure its business. During reorganization a stay is granted by the supervising court so that none of the creditors can enforce their debts. The purpose of the stay is to allow the struggling company to focus on its rehabilitation and reach a compromise with its creditors. Rehabilitation is facilitated by the relatively flexible regime that is facilitated by the CCAA’s skeletal legislative framework. The CCAA is described as skeletal because there are, or rather, there used to be, a lot of gaps in the legislation. The gaps in the legislation enabled the courts to exercise a wide degree of discretion so to facilitate rehabilitation, the ultimate goal of the CCAA.

The Crown Wages War Against Century 21 Inc. Over GST Funds

In Century 21 Inc. a debtor had initiated proceedings under the CCAA. Its creditors included the Crown and Century 21 Inc. The former was owed $305,202.30 in GST funds that were collected but not yet remitted to the Crown. While the reorganization was in progress, the funds were held in a separate trust held by the monitor of the reorganization pursuant to a court order.

When the debtor’s reorganization failed, the Supreme Court of British Columbia (“BCSC”) partially lifted the stay of proceedings that was imposed pursuant to the CCAA to allow the debtor to voluntarily assign into bankruptcy under the BIA. The CCAA stay was continued partially so to allow for the orderly disposition of the debtor’s assets in order to maximize the recoveries for the interested parties. In response to the debtor’s application, the Crown petitioned for the GST funds to be paid out to it. The legal dispute at hand arises out of the fact that this case involves the simultaneous use of two pieces of conflicting legislation.

According to s. 222(1) of the ETA, the GST funds were held in a deemed trust in favour of the Crown. Part of the complication arises from s. 222(3) which states that the trust operates notwithstanding any other enactment of Canada except the BIA. The other part of the complication is that s. 18.3 of the CCAA states that subject to certain exceptions, none of which mentions GST funds, deemed trusts in favour of the Crown do not operate under the CCAA. Thus, the SCC had to determine which provision took precedence.

At the BCSC, Brenner C.J. held that the Crown lost its preference under the BIA and thus it was not entitled to the GST funds. The money was only to be paid out in the event that a viable plan was formed at the end of the CCAA process. Since there was going to be a sale of assets under the BIA as well as under the continued CCAA stay the Crown lost its preference under the BIA.

The BC Court of Appeal (“BCCA”) overturned the BCSC by holding that there were two independent bases upon which to find in favour of the Crown. For the first ground of appeal, Tysoe J.A. for the unanimous Court of Appeal relied upon his Ontario counterpart’s decision in Canada (Attorney General) v Fleet National Bank (2005), 73 OR (3d) 737 [Ottawa Senators], to overturn the lower court decision. In that decision, the Ontario Court of Appeal held that s. 222(3) of the ETA had precedence over s. 18.3(1) of the CCAA because the latter was enacted earlier and was more specific than the former.

The result of this decision was that the deemed trust for GST funds in question survived in a CCAA proceeding and the Crown was entitled to its unremitted GST funds. Accordingly, Tysoe J.A. applied Ottawa Senators in favour of the Crown. For the second ground of appeal, Tysoe J.A. held that an express trust was created when Brenner C.J. ordered that GST funds be segregated in the monitor’s trust account.

Ottawa Senators Loses in Overtime

In the final round of appeal, the precedent in Ottawa Senators was crushed by a 8:1 SCC majority led by Deschamps J. The SCC overturned the BCCA’s decision because it disagreed with the result and reasoning in Ottawa Senators. At paragraph 44, Deschamps J. states,

While a conflict may exist at the level of the statutes wording, a purposive and contextual analysis to determine Parliament’s true intent yields the conclusion that Parliament could not have intended to restore the Crown’s deemed trust priority in GST claims under the CCAA when it amended the ETA in 2000 with the Sparrow Electric amendment.

The “Sparrow Electric amendment” mentioned by Deschamps refers to the amendment to the BIA that strengthened the deemed trust in favour of the Crown created by s. 227(4.1) of the Income Tax Act, RSC 1985, c 1 (5th Supp). Parliament could have expressly legislated that s. 222(3) had precedence but it did not. Further, she adds that Parliament has “shown its willingness to move away from asserting priority for Crown claims in insolvency law.”

In dissent, Abella J. employs a different method of interpretation to hold that the Crown did have priority over the GST funds. Firstly, she upholds the precedent in Ottawa Senators. The interpretation issue before her was uncomplicated: since s. 222(3) unambiguously states that the deemed trust therein operates notwithstanding any law except the BIA, it is clear that there is no legislative intent to exempt the CCAA from the operation of the ETA. Secondly, Abella J. shores up her argument by stating that there is no policy reasons for interfering with what she views as clear legislative intention.

While her approach to interpretation is well-reasoned and logically sound, I find myself persuaded by the majority’s decision based on its homage to the different policies that drive the BIA and CCAA. The majority points out that adopting Abella J.’s approach could lead to statute shopping because the BIA, unlike the CCAA, would shield the debtor from the Crown’s interest in GST funds. Another persuasive argument rooted in policy is the majority’s observation that:

If Ottawa Senators were to be followed, Crown priority would differ depending on whether restructuring took place under the CCAA or the BIA. The anomaly of this result is made manifest by the fact that it would deprive companies of the option to restructure under the more flexible and responsive CCAA regime, which has been the statute of choice of complex reorganizations.

Notwithstanding the increasing parallels between the two regimes, the distinguishing characteristic of the CCAA is that it  provides the flexibility for debtors to achieve the ultimate goal of rehabilitation. The minority’s position has the potential to make the CCAA impotent, which in turn, necessitates that it not be adopted.


This case also provided the SCC with the opportunity to develop the exercise of discretion under the CCAA. First, the exercise of discretion must be in furtherance of the CCAA’s purposes. As an example it cites the following excerpt from Elan Corp. v. Comiskey (1990), 41 O.A.C. 282, at para. 57, per Doherty J.A., dissenting:

The legislation is remedial in the purest sense in that it provides a means whereby the devastating social and economic effects of bankruptcy or creditor initiated termination of ongoing business operations can be avoided while a court-supervised attempt to reorganize the financial affairs of the debtor company is made.

Second, courts must “rely first on an interpretation of the provisions of the CCAA text before turning to inherent or equitable jurisdiction to anchor measures taken in a CCAA proceeding.” Third, “the requirements of appropriateness, good faith, and due diligence are baseline considerations that a court should always bear in mind when exercising CCAA authority.  Appropriateness under the CCAA is assessed by inquiring whether the order sought advances the policy objectives underlying the CCAA.”

Living in Harmony

I find this decision particularly interesting because of the detailed history of the law’s development and certain comments made by Deschamps J. which somewhat touches on a key debate in insolvency law.  At paragraph 24 she discusses the harmonization of the BIA and CCAA:

With parallel CCAA and BIA restructuring schemes now an accepted feature of the insolvency law landscape, the contemporary thrust of legislative reform has been towards harmonizing aspects of insolvency law common to the two statutory schemes to the extent possible and encouraging reorganization over liquidation [.]

What is noteworthy about the majority’s observation of harmonization is that it undermines the criticism that the increasing parallels between the two regimes make the CCAA redundant. One key debate in insolvency law involves the argument that that as the CCAA’s skeletal framework is fleshed out via judicial decisions that parallel the framework of the BIA, the latter’s existence as a separate statue comes into question.

Harmonization seems to imply that the each statute plays a separate function: whereas the CCAA provides for flexible reorganization that can lead to rehabilitation, the BIA provides a structured route for liquidation. Concerns about parallelism are valid insofar that they reinforce the need to distinguish the CCAA as a flexible and creative tool for the courts to exercise discretion. The majority does not explicitly touch on parallelism, though its decision does manage to preserve the distinctiveness of the CCAA, thus allaying concerns that the former is increasingly becoming redundant.

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