CALLIDUS CAPITAL CORPORATION. and HER MAJESTY THE QUEEN. and

Transcription

1 S.C.C. File No IN THE SUPREME COURT OF CANADA (ON APPEAL FROM THE FEDERAL COURT OF APPEAL) BETWEEN: CALLIDUS CAPITAL CORPORATION and APPELLANT (Applicant) HER MAJESTY THE QUEEN and RESPONDENT (Respondent) INSOLVENCY INSTITUTE OF CANADA, THE CANADIAN ASSOCIATION OF INSOLVENCY AND RESTRUCTURING PROFESSIONALS, and THE CANADIAN BANKERS ASSOCIATION INTERVENERS FACTUM (Canadian Association of Insolvency and Restructuring Professionals, Intervener) (Pursuant to Rules 37 and 42 of the Rules of the Supreme Court of Canada) McMillan LLP McMillan LLP Sherbrooke Street West O Connor Street Montreal QC H3A 3G4 Ottawa ON K1P 1A4 Eric Vallières Michael J. Hanlon Emile Catimel-Marchand David Debenham Tel: Tel: Fax: Fax: eric.vallieres@mcmillan.ca david.debenham@mcmillan.ca michael.hanlon@mcmillan.ca Counsel for the Intervener, Canadian Association of Insolvency and Restructuring Professionals Ottawa Agent for the Intervener, Canadian Association of Insolvency and Restructuring Professionals

2 TO: The Registrar Supreme Court of Canada 301 Wellington Street Ottawa ON K1A 0J1 COPIES TO: Chaitons LLP Osler, Hoskin & Harcourt LLP 10 th Flr., 5000 Yonge Street Albert Street Toronto ON M2N 7E9 Ottawa ON K1R 7Y6 Harvey G. Chaiton Sam Rappos Geoffrey Langen Tel: Tel: Fax: Fax: Counsel for the Appellant Ottawa Agent for the Appellant Attorney General of Canada Department of Justice Howe Street O Connor Street Vancouver BC V6Z 2S9 Ottawa ON K1A 0H8 Michael Taylor Christopher Rupar Tel: Tel: Fax: Fax: michael.taylor@justice.gc.ca christopher.rupar@justice.gc.ca Counsel for the Respondent Ottawa Agent for the Respondent Thornton Grout Finnigan LLP Borden Ladner Gervais LLP Wellington Street West Queen Street Toronto ON M5K 1K7 K1P 1J9 Grant B. Moffatt D. J. Miller Nadia Effendi Tel : Tel: Fax : Fax: gmoffat@tgf.ca neffendi@blg.com Counsel for the Intervener, Insolvency Institute of Canada Ottawa Agent for the Intervener, Insolvency Institute of Canada

3 McCarthy Tétrault LLP Conway Baxter Wilson LLP De La Gauchetière Ouest Roosevelt Avenue Montréal QC H3B 0A2 Ottawa ON K2A 3X9 Philippe H. Bélanger Jocelyn Perreault Pascale Klees-Themens David Taylor Tel: Tel: Fax: Fax: Counsel for the Intervener, Canadian Bankers Association Ottawa Agent for the Intervener, Canadian Bankers Association

4 -i- Table of Contents Page Part I: Overview and Statement of Facts.. 1 Part II: Statement of Issues.. 2 Part III: Argument a) Mischaracterization of Deemed Trust and its Effects.. 2 b) Practical Consequences.. 7 Part IV: Costs Submissions Part V: Order Sought Part VI: Table of Authorities

5 1 PART I: OVERVIEW AND STATEMENT OF FACTS a) Overview 1. It is respectfully submitted that the judgment of the Federal Court of Appeal (the FCA ) under appeal in this matter upholds an unworkable interpretation of the interplay between Canada s insolvency and tax legislation. More specifically, the effect of the FCA judgment is that any payment made to a creditor prior to the commencement of formal insolvency proceedings under the Bankruptcy and Insolvency Act 1 or the Companies Creditors Arrangement Act, 2 remains subject to review by the tax authorities at any time, including after the commencement of such formal insolvency proceedings, in order to recover any unremitted GST/HST that may have been outstanding at the time of the payment. 2. This solution is wholly incompatible with the nature of Canada s insolvency restructuring regime. Among others, it would cast a cloud of uncertainty over the work and responsibilities of the members of the undersigned Canadian Association of Insolvency and Restructuring Professionals ( CAIRP or the Intervener ). 3. Indeed, if any payment is subject to review at any time, when will a debt be definitely settled? How will the quantum of a claim be determined with any finality? To whom should the proceeds of realization be attributed? These questions pose particular challenge for insolvency professionals given the nature of their roles, as more fully set out in Part II hereof. As another undesirable side effect, it would encourage creditors to forego any tolerance with debtors and rapidly force them into formal insolvency proceedings. 4. The judgment under appeal is in clear conflict with this Honourable Court s prior judgments on crown priorities, notably First Vancouver Finance v. Minister of National Revenue 3 and Québec (Revenue) v. Caisse Populaire Desjardins de Montmagny. 4 b) Background and Statement of Facts 5. CAIRP adopts the statement of facts set out in Part II the Factum of the Appellant, Callidus Capital Corporation. 1 RSC 1985, c B-3 [BIA] 2 RSC 1985, c C-36 [CCAA] SCC 49 [First Vancouver] SCC 49 [Montmagny]

6 2 PART II: STATEMENT OF ISSUES 6. CAIRP adopts the statement of issues set out in Part III of the Factum of the Appellant. 7. The outcome of this appeal will, as aforesaid, directly affect CAIRP members in their day-to-day practice. Whether in the determination of the amount of a creditor s claim, the establishment of an appropriate scheme of distribution, or advising a debtor and its guarantors on the viability of an informal arrangement with its secured creditors. Should the appeal be denied, and the tax authorities be given the right to attack all payments made by a debtor at a time when it was also a tax debtor with respect to unremitted GST or HST under the Excise Tax Act (Canada), 5 it will significantly hinder the ability of insolvency professionals to discharge their professional and statutory obligations with any degree of certainty. PART III: ARGUMENT a) Mischaracterization of Deemed Trust and its Effects 8. The FCA mischaracterizes the deemed trust mechanism created by s. 222(3) ETA (the Deemed Trust ), and the rights afforded to the tax authorities thereunder. As this Honourable Court previously held in First Vancouver, with respect to the deemed trust created under the Income Tax Act, 6 the deemed trust is akin to a floating charge which attaches to all of a debtor s property, present and future, so long as that property is in the hands of the tax debtor; it does not follow that property once the property is transferred to a purchaser for value Subsequent case law also similarly framed the tax authorities interest under statutory deemed trusts as an absolute priority 8 and a security interest that takes priority 9 and not as an ownership interest in the trust property. 10. Moreover, section 222(3) ETA does not attribute a personal liability to a third party just for having received proceeds from the assets of the debtor, but rather attributes an obligation to a secured creditor to account to the tax authorities for assets that the secured creditor is holding and that would be assets of the tax debtor but for the security interest, and proceeds from such 5 RSC 1985, c E-15 [ETA] 6 RSC 1985, c 1 (5th Supp) [ITA] 7 First Vancouver, at para 40 8 Canada (Attorney General) v National Bank of Canada, 2004 FCA 92 [National Bank] 9 See Temple City Housing Inc. (Companies' Creditors Arrangement Act), 2007 ABQB 786 and Canada v Canada North Group Inc., 2017 ABCA 363

7 assets. 3 In other words, as regards the secured creditor, section 222(3) ETA addresses the situation of a secured creditor who has taken possession and control of the assets of the tax debtor. Attributing a liability to a third party would require specific, clear language from the legislator, which does not appear in section 222(3) ETA. Contrary to the findings of the FCA or the subsequent findings of the Federal Court in Canada v. Toronto-Dominion Bank, 10 there is no statutory provision nor public policy reason to attribute a higher responsibility to a recipient of a payment who happens to be a secured creditor, as opposed to any other recipient of a payment from the tax debtor. 11. Furthermore, the FCA judgment erroneously conflates the concept of the tax payable by a tax debtor, i.e. the amount calculated pursuant to section 225 ETA, with the amount of the Deemed Trust, calculated under subsections 222(1) and 222(2) ETA. The two amounts are different as they are calculated differently. The amount of the Deemed Trust will likely be lower than the tax due at any point in time, and may decrease even if no payment is made, in view of the computation mechanics of section 222(2) ETA. In view of the fact that there is no requirement to report on the amount of the Deemed Trust, a secured creditor cannot know what this obligation might be at any point in time, which would render impossible a strict compliance with section 222(3) ETA, if this Honourable Court were to conclude that section 222(3) ETA creates an obligation to a secured creditor recipient of a payment to remit same to the Crown. 12. Following that logic, in Montmagny the Supreme Court rejected an interpretation that the Deemed Trust created a property right in favour of the tax authorities. 13. In Montmagny, a number of debtors had become bankrupt, and accounts receivable were outstanding at the time of the respective bankruptcies. Cognizant that claims for GST/HST/QST are unsecured claims in the bankruptcy of a tax debtor, the tax authorities 11 took the position that any amounts owing at the date of bankruptcy on account of GST/HST/QST on uncollected accounts receivable were their property, and that, as such, any collections of those accounts receivable by the trustee were collections done as mandatary, or agent, of the tax authorities with respect to the portion thereof relating to GST/HST/QST. 14. Unanimously, this Honourable Court disagreed. It reviewed the legislative evolution of the BIA, and the policy decision to restrict Crown claims to unsecured status except in very FC 538 [Toronto-Dominion Bank] 11 The tax authorities in this case included both CRA and the Ministère du Revenu (Québec)

8 4 specific situations. It considered the fact that the manner and mechanism of collecting the GST/HST/QST were not consistent with a proprietary right being granted to the tax authorities in the property subject to the Deemed Trust, 12 especially considering that in actual fact, the amounts collected with respect to GST/HST/QST are not typically kept separate and apart from the debtor s other assets. But for the deemed trust, those amounts are the debtor s property. In short, the tax authorities have no proprietary right in the uncollected amounts at the time of the bankruptcy, and to conclude otherwise would have the effect of reviving the deemed trust postbankruptcy, which the ETA clearly excludes, whether the amounts were collected before or after the bankruptcy If the tax authorities have no proprietary right in the trust property, it follows that they have no proprietary right in the proceeds of the trust property. 16. Moreover, the Deemed Trust is a creature of statute and distinct from a true trust in common law. If the Deemed Trust were a true trust, the tax authorities would have a true proprietary interest in the debtor s trust property that would defeat all other security interests in the same property. 14 In British Columbia v Henfrey Samson Belair Ltd., the Supreme Court of Canada rejected this characterization, as it found, on the contrary, that statutory deemed trusts [do] not give [the tax authorities] the same property interest a common law trust would. 15 Similarly, the Federal Court of Appeal in National Bank stated, the deemed trust mechanism, whether applied in Quebec or elsewhere effectively creates in favour of the tax authorities a security interest In the same vein, the operation of the Deemed Trust, as applied by the courts, is consistent with a security interest over a class of collateral, not a property right in individual assets. If this were otherwise, debtors would not have the ability to convey clear title to the trust property when disposing of it in the ordinary course. Likewise, a secured creditor exercising its enforcement remedies would not be able to sell the trust property under judicial authority, let alone take that property in satisfaction of its secured debt because its security would not extend 12 Montmagny at paras Montmagny at paras 16 and BIA, s 67(3) 15 [1989] SCR 24 at para National Bank at para 47

9 5 to such property. However, when the Deemed Trust is viewed as a security interest (rather than a proprietary interest), these issues do not arise. 18. Accordingly, once a statutory deemed trust is conceptualized as a floating charge, it becomes clear that any property coming into the possession of the debtor is caught by the trust, whereas any property disposed of by the debtor is released from the trust, with the proceeds thereof taking its place. The majority in First Vancouver found that interpreting deemed trust provisions in this way not only ensures that the tax authorities interest in the trust property is protected, but also promotes commercial certainty, as third party purchasers are free to transact with tax debtors without fearing that Her Majesty may subsequently assert an interest in the property so acquired. 17 To interpret the deemed trust provisions otherwise would, according to the Court, result in an unprecedented level of uncertainty and have a general chilling effect on commercial transactions. 18 The same chilling effect would result from upholding the interpretation of the FCA for the Deemed Trust, notably affecting the professional practice of CAIRP members and the industry they are a part of, as detailed further herein Had the Deemed Trust been intended to effect an actual transfer of property, one could reasonably assume that such a transfer would be effective from the moment the trust arose, and would continue as a true trust as long as the trust property was kept separate and apart from the debtor s other assets. However, such an interpretation was expressly rejected by the Supreme Court of Canada in Montmagny, where the tax debtor s mandate to collect GST and QST on behalf of the tax authorities was described as involving the performance of obligations to collect and then to remit, not the amounts collected, but a balance resulting from offsetting claims of the Crown and the supplier. 20 The fact that the tax is ultimately borne by the recipient does not support a finding that the tax debtor merely collects and remits the tax authorities property or thing. 21 According to this Court in Montmagny, to conclude that the tax authorities have a right of ownership in the tax debtor s property by virtue of its Deemed Trust would be to disregard the overall context of the system for collection and remittance as well as the provisions of the BIA First Vancouver at para 5 18 First Vancouver at para See e.g. para 27 hereof 20 Montmagny at para Montmagny at para Montmagny at para 29

10 6 20. By way of contrast, the ETA provides the tax authorities with the means to become the absolute owner of the debtor s accounts receivable, namely the enhanced requirement to pay mechanism. 23 The Supreme Court of Canada recognized in Toronto-Dominion Bank v. Canada 24 that upon receipt of such a notice, the debtors of a tax debtor become the debtors of the tax authorities and the debts owing to the tax debtor are effectively assigned to the tax authorities, to the extent of the amounts set out in the notice. The subsequent bankruptcy of the tax debtor does not disturb this conclusion. Parliament has not created a similar remedy with respect to the other property of the debtor, and if such a remedy were considered appropriate, this Honourable Court decided in Royal Bank v. Sparrow Electric Corp that it would have to be stated in the legislative provision in clear, unequivocal terms If one accepts that the Deemed Trust is in fact a security interest, then prior to enforcement by a secured creditor, a debtor should be free to deal with its property as it sees fit, subject to any replacement property becoming encumbered by the Deemed Trust. Third parties should be secure in the knowledge that when the debtor transfers property to them in the ordinary course, whether as a result of a sale for value, or as repayment of a debt, that the transfer will not be subsequently undone by another creditor, even if that creditor is the Crown. In that respect, it should not matter if the repayment occurs under a forbearance agreement, outside of a formal enforcement process. Conversely, if the debtor s property is realized by a secured creditor exercising its enforcement rights, whether by direct enforcement or through a court-appointed receiver, the proceeds of realization will be applied in accordance with the relevant scheme of distribution, including on account of any applicable deemed trust. 22. This difference is the key distinction between the facts of this case and those at issue in National Bank, on which the FCA relied so heavily, and CAIRP respectfully submits, wrongly. In National Bank, the secured creditors had, by various methods, realized the security they held over the debtors assets. The proceeds from that realization were required to be distributed to all secured creditors in accordance with the applicable scheme of distribution and the failure to remit those proceeds would properly give rise to liability under s. 222(3) ETA. In the instant case, however, a voluntary payment was made by the debtor to the Appellant for value, namely the equivalent reduction of the debtor s obligations to the Appellant. While the Appellant was 23 ETA, s SCC 1, aff g 2010 FCA [1997] 1 S.C.R. 411

11 7 aware that the payments it received were derived from the sale of the debtor s assets, that is true of every payment a debtor makes to a secured creditor holding a general security interest in, or universal hypothec over, the debtor s property. Surely it was not Parliament s intention that upon a default in the remittance of the GST/HST, the proceeds of every subsequent sale of the debtor s property, whether in the ordinary course of its business or otherwise, must be immediately remitted to the tax authorities. 23. Interestingly, the Court in National Bank did not hold that the secured creditors were required to pay an amount equivalent to the unremitted source deductions to the tax authorities on the basis of an unlawful appropriation of the tax authorities property, but rather on the basis of an absolute priority. The secured creditors liability stemmed from section 222 of the ITA, which stated that any amount payable under that statute was a debt owed to the tax authorities, and recoverable by action. 26 This conclusion is consistent with a characterization of the ITA Deemed Trust as creating a security interest, rather than a proprietary interest, in that when a secured creditor enforces its security, the proceeds thereof must be distributed in accordance with existing priorities. Particularly, National Bank did not deal with voluntary payments made by the tax debtor in the course of its business. b) Practical Consequences 24. The comprehensive involvement of CAIRP s members in the insolvency process provides CAIRP with an in-depth understanding of the complexities of the roles and responsibilities of insolvency professionals in formal and informal insolvency situations and as Court-appointed officers. CAIRP s members are tasked daily with making a number of decisions and recommendations that have a material impact on the treatment of creditors and other stakeholders in the insolvency process. Insolvency professionals have been able to assess the property and balance sheets of debtors with a certain level of certainty in order to discharge their functions in that regard as they understood the Deemed Trust was extinguished by operation of law upon the start of insolvency proceedings. 25. Throughout any professional engagement, insolvency professionals must be cognizant of the impact of their decisions on creditors and other stakeholders. If insolvency professionals are not able to assess the impacts of their decisions on such parties, notably because of uncertain tax 26 ITA, s 222

12 8 burdens on a debtor and its creditors, it becomes much more challenging to discharge their professional and statutory duties, including duties as basic or fundamental as evaluating and eventually taking possession of a debtor s property 27 or the eventual treatment of claims against such property The above is not hypothetical and the decision under appeal in this matter is already being relied upon by the tax authorities to require other creditors having received amounts from the tax debtors to remit those amounts to the tax authorities without recourse and years after having received them, as was decided by the Federal Court in Toronto-Dominion Bank The unsettling consequence of the judgment under appeal, taken to its logical extreme, is that if the proceeds of any sale of property, including a sale in the ordinary course of business, subject to the Deemed Trust must immediately be remitted to the tax authorities to satisfy unremitted GST/HST obligations, then no payment can be made to any secured creditors until such time as those obligations are met. Likewise, any payment made to any secured creditor will be recoverable from that creditor if the payment was made at a time when unremitted GST/HST obligations were outstanding. This situation is far removed from the floating charge analogy used by this Honourable Court in First Vancouver and can only reduce the commercial certainty it sought to preserve. 28. More specifically, the mischaracterization outlined above could lead to unintended consequences in the practice of insolvency professionals and the Canadian insolvency regime in general, in that: a. The quantum of the claims, and even the identity of an insolvent entity s creditors would become unascertainable as any party having done business and received value from such an entity that is also a tax debtor would be subject to being assessed by the tax authorities and, as a result, having an equivalent provable claim against the insolvent entity. b. An insolvency professional advising the creditors of an insolvent entity could offer little assurance to those creditors as they receive payments from the insolvent entity. Would the insolvency professional, for instance, have to 27 BIA, s BIA, s Supra note 10

13 9 recommend that the creditors segregate the amounts received and manage specially opened accounts for this purpose, thereby imposing significant additional responsibilities on them? c. Conversely, would an insolvency professional advising an insolvent entity have any certainty when collecting amounts owed to the insolvent entity by others that are potentially tax debtors? Would the insolvency professional have to review the tax accounts of its counterparty every time it receives a payment? Would distribution orders need to account for potential adjustment, should the tax authorities attack a previous payment made to the insolvent entity, leading to a reduction in the property available for the creditors. d. The FCA decision also conflicts with the traditional tax collection mechanism, as nothing would, in principle, prevent the tax authorities from claiming amounts against a bankrupt company and separately and personally against a third party. This risk of double taxation could only be managed on a case-by-case basis and through a complex study of the debtors' finances and assets. e. Uncertainty would arise regarding the exact amount of claims at stake and complicate administrative and technical aspects of the insolvency practice, such as the voting rights of creditors. This uncertainty reaches absurd levels in cases of creditors offering facilities that fluctuate frequently (revolvers usually fluctuate weekly or overnight whereas overdrafts fluctuate with every transaction). Would the draws against such facilities be credited back to the lender or would the tax authorities consider all repayments to the lender as being eligible to fund the debtor s unremitted GST/HST arrears? f. The processing times of insolvency matters would considerably lengthen and make their final closure much longer and more complex, as they are now dependent on the tax authorities' green light and unintended veto. In effect, the tax authorities are claiming the right to an unlimited right to challenge and review payments made to any third parties by any person who may have been a tax debtor, going back for an unspecified period of time.

14 Additionally, Parliament s intention to treat the tax authorities as unsecured creditors, which have been the subject of major policy considerations, will be defeated. 30. Finally and as a result of the above uncertainty, the forced increased reliance by creditors on early formal insolvency proceedings, in addition to reducing the flexibility of the Canadian insolvency industry, can only give rise to increased delay, cost, and uncertainty in the insolvency process, all of which are borne by participants in the system. PART IV: COSTS SUBMISSIONS 31. CAIRP requests that no costs be awarded to or against it. PART V: ORDER SOUGHT 32. N/A. ALL OF which is respectfully submitted at Ottawa, Ontario, this 19 th day of September, McMillan LLP McMillan LLP Sherbrooke Street West O Connor Street Montreal QC H3A 3G4 Ottawa ON K1P 1A4 Éric Vallières Michael J. Hanlon Emile Catimel-Marchand David Debenham Tel: Tel: Fax: Fax: eric.vallieres@mcmillan.ca david.debenham@mcmillan.ca michael.hanlon@mcmillan.ca Counsel for the Intervener, Canadian Association of Insolvency and Restructuring Professionals Ottawa Agent for the Intervener, Canadian Association of Insolvency and Restructuring Professionals

15 11 PART VI: TABLE OF AUTHORITIES Cases At Para.(s) British Columbia v Henfrey Samson Belair Ltd, [1989] SCR Canada (Attorney General) v National Bank of Canada, 2004 FCA 92 Canada v Canada North Group Inc., 2017 ABCA Canada v Toronto-Dominion Bank, 2018 FC , 16, 22, , 16, 26 First Vancouver Finance v. Minister of National Revenue, 2002 SCC 49 4, 8, 18, 27 Québec (Revenue) v Caisse populaire Desjardins de Montmagny, 2009 SCC 49 4, 12, 13, 14, 19 Royal Bank v. Sparrow Electric Corp., [1997] 1 S.C.R Temple City Housing Inc. (Companies Creditors Arrangement Act), 2007 ABQB Toronto-Dominion Bank v Canada, 2012 SCC 1, aff g 2010 FCA Legislation and Regulations Bankruptcy and Insolvency Act, RSC 1985, c B-3 Companies' Creditors Arrangement Act, RSC 1985, c C-36 Excise Tax Act, RSC 1985, c E-15 Income Tax Act, RSC 1985, c 1 (5 th Suppl) At Para. (s) 1, 14, 16, 19, , 8, 10, 11, 14, 20, 22 8, 23