Insolvency Strategies on Construction Claims

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Insolvency Strategies on Construction Claims

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Trust Issues on Insolvency

• Revenue Canadas Super Priority

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Liquidation Remedy
Federal BIA
Trust Issues
S. 68 CLA Super-Priority
Federal CCAA
Provincial CLA
Livent Case Study
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What is Super-Priority?
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S. 224(1.2) Income Tax Act

• Notwithstanding any other provision of this Act,
  the Bankruptcy Act, any other enactment of
  Canada, any enactment of a province or any law,
  where the Minister has knowledge or suspects that
  a particular person is or will become, within 90
  days, liable to make a payment

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S. 224(1.2) Income Tax Act

• (a) to another person who is liable to pay an
  amount assessed under subsection 227(10.1) or a
  similar provision, or to a legal representative
  of that other person (each of whom is in this
  subsection referred to as the "tax debtor"), or
• (b) to a secured creditor who has a right to
  receive the payment that, but for a security
  interest in favour of the secured creditor, would
  be payable to the tax debtor,

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S. 224(1.2) Income Tax Act

• the Minister may, by registered letter or by a
  letter served personally, require the particular
  person to pay forthwith, where the moneys are
  immediately payable, and in any other case, as
  and when the moneys become payable, the moneys
  otherwise payable to the tax debtor or the
  secured creditor in whole or in part to the
  Receiver General on account of the tax debtor's
  liability under subsection 227(10.1) or a similar
  provision,

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S. 224(1.2) Income Tax Act

• and on receipt of that letter by the particular
  person, the amount of those moneys that is
  required by that letter to be paid to the
  Receiver General shall, notwithstanding any
  security interest in those moneys, become the
  property of Her Majesty and shall be paid to the
  Receiver General in priority to any such security
  interest.

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Constitutional Question

• Does the manner in which moneys are obtained
  pursuant to s. 224(1.2) and (1.3) of the Income
  Tax Act constitute an infringement of the
  jurisdiction of the Provincial Legislature with
  respect to the regulation of property and civil
  rights pursuant to s. 92(13) of the Constitution
  Act, 1867, or any other provincial power under
  that Act, so that the manner in which moneys are
  obtained or any part of it is ultra vires the
  Parliament of Canada?

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In Other Words

• Did the federal government exceed its
  constitutional powers in enacting the
  super-priority garnishment provisions of the
  Income Tax Act?

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TransGas Ltd. v. Mid-Plains Contractors Ltd.
(1994), 18 C.L.R. (2d) 157 (S.C.C.)

• Supreme Court of Canadas answer, in its
  entirety
• No.

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After Trans-Gas

• S. Tatrallyay paper, (1995)
• Some hope to be found in the following
  argument
• Lien Claimants who have status of purchaser pro
  tanto cannot be defined as a holder of a security
  interest and should be exempt from Revenue
  Canadas super-priority

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Then, in 1996Alberta (Treasury Branches) v.
M.N.R. (1996), 133 D.L.R. (4th) 609 (S.C.C.)

• Issue priority between garnishment and general
  assignment of book debts
• S.C.C Conditional assignment is a security
  interest
• Super-priority applies
• Garnishment takes priority

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S. Tatrallyay (1998)

• So much for some hope!
• However, Supreme Court of Canadas Sparrow
  decision gives rise to a thin ray of hope

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Royal Bank of Canada v. Sparrow Electric Corp.
(1997), 143 D.L.R. (4th) 385 (S.C.C.)

• Income Tax Act, ss. 227(4) and (5)
• Employer who deducts source deductions deemed to
  hold such deductions in trust for Her Majesty
• Act does not provide for super-priority for
  deductions similar to s. 224(1.2)
• Deemed trust of ss. 227(4) and (5) has no
  priority over any other deemed trust

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Royal Bank of Canada v. Sparrow Electric Corp.
(1997), 143 D.L.R. (4th) 385 (S.C.C.)

• In cases of competing deemed trusts, priority
  goes to trust that attached or crystallized
  first
• Therefore where tax debtor has been paid and
  paid neither Revenue nor suppliers such that s.
  224(1.2) priority is not available, suppliers
  might argue that their trust crystallized first
  and have priority over Revenue

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• Tatrallyay, 1998
• Obviously the scenario is an unlikely one and
  the circumstances in which it might apply may
  never arise. Nevertheless as counsel for lien
  claimants we are reduced to finding what cold
  comfort we can and this was the best that I could
  offer.

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Only to be followed byPaper by G.W. MacDonald,
Q.C.(1999), 47 C.L.R. (2d) 112

• Thin ray of hope as a result of Sparrow turned
  out to be the headlight of a train bearing the
  most recent legislative amendment obtained by
  Revenue Canada to protect its unfettered priority
  rights.

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Amendments to Income Tax Act in Response to
Sparrow

• 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.

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Amendments to Income Tax Act in Response to
Sparrow

• Notwithstanding any other provision of this Act,
  the Bankruptcy and Insolvency 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 of
  that person that but for a security interest
  would be property of the person, equal in value
  to the amount  so deemed to be held in trust is
  deemed

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Amendments to Income Tax Act in Response to
Sparrow

• (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

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Amendments to Income Tax Act in Response to
Sparrow

• 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.

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Result

• No party, including secured creditors, can defeat
  Revenue Canadas super-priority
• Donnie Brasco fuggedaboutit

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But What About Conflict between Federal BIA and
Federal ITA?

• Case Study
• Metal Fabricating Construction Ltd. (Trustee
  of) v. Husky Oil Operations Ltd.
• (1997), 37 C.L.R. (2d) 159 (Sask. C.A.)

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Facts I

• Construction company gave bank general assignment
  of present and future book debts
• Contractor became indebted to company
• Company became bankrupt before being paid by
  contractor

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Facts II

• After bankruptcy, Revenue Canada sent requirement
  to pay notice to contractor under s. 224(1.2)
  Income Tax Act in respect of moneys deducted by
  company from its employees wages but not
  remitted

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Trustees Argument

• Section 71(2) of the BIA vested title to the
  money in question to the trustee
• Revenue Canada has nothing to attach by serving
  the requirement to pay notice

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Judgment

• In order for Minister to be able to issue s.
  224(1.2) notice, particular person must be held
  liable to make payment to another person
• After bankruptcy, contractor was liable to pay
  trustee

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Judgment

• Trustee, as companys legal representative, is
  person for purposes of s. 224(1.2)
• After bankruptcy, trustee became liable for
  source deductions

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Judgment

• S. 224(1.2) applies notwithstanding BIA
• Trustee has to ignore other provisions of Act
  when facing a s. 224(1.2) requirement to pay
  notice
• No inconsistency between s. 224(1.2) ITA and s.
  71(2) BIA

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Judgment

• Minister, not trustee in bankruptcy, was entitled
  to amount owed by company

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Conclusion

• 1. Revenue Canada is not to be confronted, it is
  to be negotiated with.
• A half loaf is better than no loaf at all.
• 2. To make matters worse
• Breach of trust issues may survive discharge from
  bankruptcy