Clash of the Interpretative Titans: Canada v. Canada North Group Inc.
In Canada v. Canada North Group Inc., 2021 SCC 30 [Canada v CNG], the Supreme Court of Canada (“SCC”) considered whether courts can order a super-priority charge that takes primacy over Her Majesty’s interest under s. 227(4.1) of the Income Tax Act, RSC 1985, c 1 (5th Supp.) [ITA]. The decision turned on robust statutory interpretation that considered legislative intent and the text and the nature of a complex mix of statutes pertaining to tax, bankruptcy, and insolvency law.
For the insolvency community, according to Thomson Reuters’ Practical Law Canada, this decision does provide a change in law and practice: it “incorporates a requirement that courts specifically consider the special nature of the Crown deemed trust when ranking CCAA court-ordered priority charges.” As a law student writing for law students, however, Canada v. Canada North Group Inc. provides an excellent example of statutory interpretation at work.
Canada North Group and six other corporations (together the “Respondents”) started proceedings for corporate restructuring under the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 [CCAA]. Under their CCAA application, the Respondents sought a number of super-priority charges to facilitate the insolvency proceedings: an administration charge, a financing charge, and a directors’ charge. The application also attested to a debt owing to Her Majesty under the ITA.
The application judge ordered the requested super-priority charges, along with an order that these new court-ordered charges be ranked over all other interests. The Crown sought to protect the priority of the Respondents’ obligations to Her Majesty. Its motion for variance and subsequent appeal were both dismissed. The Crown appealed to the SCC.
The courts faced a question of complex statutory interpretation, and the SCC split four ways. The SCC had to consider not only the provisions of the ITA and the CCAA and how they interact, but also how they interact with provisions of the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 [BIA]. The seven debtors in this case originally started restructuring proceedings under the BIA before continuing under the CCAA.
Ultimately, a majority of the SCC held that the CCAA did empower judges to order super-primary charges that outrank Her Majesty’s interest in s. 227(4.1) of the ITA.
Understanding Charge Ranking in an Insolvency
A debtor company usually has multiple debts to multiple creditors. Repayment of these debts is ranked, or prioritized, based on factors including the nature of the debt and the order in which debts were incurred. Generally, companies must repay creditors in the order they incur debt; however, a secured creditor has a right to be repaid before an unsecured creditor. When a debtor company becomes bankrupt or insolvent, this ranking becomes important for determining which debts, in what order and amounts, will be paid from available assets.
When a party makes an application under the CCAA, courts have authority to “make any order that it considers appropriate in the circumstances” (CCAA, s. 11). Court-ordered super-priority charges (a.k.a. “priming charges”) allow specific new debts to take priority over older ones. This means that new lenders (e.g., counsel who represent an insolvent company) can claim their payment ahead of other creditors, including secured creditors.
During an insolvency, companies may use the corporate restructuring strategy to avoid financial crisis. This restructuring process carries new costs. The insolvent company will need to pay counsel or other professionals, such as a monitor who oversees the insolvency process. The company may also need to secure its directors against liabilities. For these counsel or professionals, providing a service to an insolvent company carries significant risks. Courts can alleviate this risk by ordering super-priority charges.
Understanding ITA Obligations to the Crown
Under the ITA, taxpayers have specific obligations to the Crown. Specifically, s. 227(4) states that when an entity deducts or withholds an amount, the ITA deems that amount to be held in trust for Her Majesty. For example, the tax that an employer deducts from an employee’s paycheque is held “in trust” for repayment to Her Majesty at a specified time.
Section 227(4.1) extends this trust if the company does not repay the held amount. When this happens, s. 227(4.1) deems property “equal in value” to the amount owed to be held apart from the debtor’s property and to form no part of their estate. This deemed property value then becomes “property beneficially owned” by Her Majesty. Section 227(4.1) explicitly puts this Crown interest above all other interests, including security interests.
Clashing Approaches to Statutory Interpretation
Although a majority determined that the CCAA does empower judges to order super-priority charges that outrank all other claims, the statutory interpretation question split the SCC four ways. A three-justice majority (authored by Justice Suzanne Coté) with a two-justice concurrence, a three-justice joint dissent (authored by Justices Russell Brown and Malcolm Rowe), and another sole dissent (authored by Justice Michael Moldaver).
The key issue dividing the court was whether s. 227(4.1) of the ITA created a “super priority” over all other interests.
Justices Brown and Rowe leaned heavily on s. 227(4.1)’s legislative history to illustrate Parliament’s intention to grant absolute priority to Her Majesty’s interest. They showed how Parliament had amended the provision as suggested by the SCC in an earlier case, Royal Bank of Canada v. Sparrow Electric Corp.,  1 SCR 411 [Sparrow Electric] (Canada v CNG, para 202). (In Sparrow Electric, Justice Frank Iacobucci offered specific language Parliament could use to give effect to absolute priority; this language appears now as part of s. 227(4.1).)
The joint dissent also used the SCC’s own jurisprudence to show that court-ordered super-priority charges are security interests, “because they are ‘interest[s] in the debtor’s property [that] secur[e] payment or performance of an obligation’” (Canada v CNG, para 209, quoting Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 29). Thus, as s. 227(4.1) creates a Crown interest “notwithstanding any security interest,” even a court-ordered super-priority charge cannot outrank the Crown’s s. 227(4.1) interest.
Justice Coté’s position rested on a simple proposition: that Parliament is “presumed to know its own statute book and to draft each new provision with regard to…existing legislation” (Canada v Canada North Group, para 67, quoting Ruth Sullivan (2014)). She acknowledged the legislative history that Justices Brown and Rowe relied on, with one key distinction: reference to the “presumption against tautology” (Canada v CNG, para 64): briefly, it can be expected that Parliament does not use “superfluous or meaningless words, that it does not pointlessly repeat itself” (McDiarmid Lumber Ltd. v. God’s Lake First Nation, 2006 SCC 58, para 36).
Despite the “absolute priority” written into s. 227(4.1) over security interests, Justice Coté found that a court-ordered super-priority charge was not a security interest. Why? Because of the specificity with which Parliament defined “security interest” in the ITA, s. 227(1.3) (Canada v CNG, paras 63–68). That section includes ten specific examples of a security interest that were not included in the definition of “security interest” elsewhere in the Section 18(5) of the ITA (Canada v CNG, para 65). The inclusion of the examples therefore operates to alter what “security interest” means in s. 227; a court-ordered super-priority charge, being “different in kind from anything on the list” is therefore not a security interest that the s. 227(4.1) Crown interest outranks (Canada v CNG, para 63).
Certainly, Canada v CNG will have impacts for insolvency practitioners. It also provides a thorough approach to a complex question of statutory interpretation that exemplifies different ways the modern approach can be applied. Statutory interpretation demands precision, as does law more broadly.
Justices Brown and Rowe raise an important point about legislative intent: when it is clear, as the response to Sparrow Electric appears, it should be protected. They ask a clear question to challenge Justice Coté’s analysis: “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?” (Canada v CNG, para 205).
I do not presume to speak for Justice Coté, but to me, the answer is obvious. If Parliament wishes to give full effect to its intention, it must do so with regard to its own “statute book.” It is the responsibility of Parliament, and not the SCC, to draft legislation that works. If Parliament’s intention has been frustrated, it will always remain open to them to fix the flaws that have been exposed. But copying the words of a court—even the highest court in the country—and pasting them verbatim will not fix a broken statutory scheme. Only Parliament has the power to legislate, and only Parliament can decide what words will do it.
Image found here.