The Doorcorp Case: The Court of Appeal renders yet another decision on section 139 BIA and the postponement of claims

June 1, 2012

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Last June we discussed the Court of Appeal decision in Stonehaven Country Club, which dealt with the application of section 139 BIA to a claim by Investissement Québec. The Court of Appeal has ruled on the scope of this section once again.

On April 17, 2012, the Honourable Marc Beauregard, writing for the Court of Appeal with Justices Marie-France Bich and Jean Bouchard concurring, quashed in part the Superior Court decision rendered by the Honourable Pierre Journet dated June 11, 2010. This case involved the bankruptcy of Doorcorp Installations Inc. (“Doorcorp”). In it, the Court of Appeal examined the characterization of advances of funds by Ballylickey Investments (“Ballylickey”) to Doorcorp. Given that Ballylickey is the parent company and sole shareholder of Doorcorp, did the advances constitute claims falling under section 139 of the Bankruptcy and Insolvency Act (“BIA”), i.e. postponed claims, or were they claims that should be ranked with those of the unsecured creditors?

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October 19, 2020

Tax Aspects of Insolvency and Bankruptcy

The current crisis caused by the COVID-19 pandemic has already caused, and will continue to cause, significant liquidity problems for some businesses. Companies whose financial difficulties threaten their very existence will have to restructure in order to avoid bankruptcy, either by availing themselves of the protection of the Companies' Creditors Arrangement Act1 (the "CCAA") or by using the proposal mechanism of the Bankruptcy and Insolvency Act2 (the "BIA"). Tax considerations related to an arrangement or a proposal accepted by creditors Making use of the provisions of the CCAA or the BIA entails tax considerations for the debtor corporation that directors and owner-operators need to consider. Some of these tax considerations are discussed below. In the context of the restructuring of a debtor company, creditors may accept a partial settlement of their claim or a conversion of their claim into shares in the debtor company. If a corporation is not bankrupt within the meaning of the Bankruptcy and Insolvency Act, the settlement of a debt for an amount less than its principal will have tax consequences for the debtor corporation. For example, certain tax attributes of the debtor corporation such as the balance of loss carryforwards, the undepreciated portion of the capital cost of depreciable property or the adjusted cost base of capital assets will be reduced by the amount of the reduction in the receivable, if any. In certain cases, if the tax attributes of the debtor corporation are insufficient to absorb the amount of debt forgiven, inclusion in the calculation of its taxable income may occur, creating a tax liability. Several strategies can be adopted to limit undesirable consequences in the context of a restructuring under the Companies' Creditors Arrangement Act. As mentioned, it may be possible, among other things, to convert the debt into shares of the debtor company without causing adverse consequences, if the fair market value of the shares issued upon conversion of the debt is equal to the principal of the debt. In some cases, a debt held by a shareholder of the debtor company could be written off without consideration and without the need to issue shares. Finally, it may be possible, in certain situations, to avoid inclusion in the income of the debtor corporation through the use of certain reserve mechanisms or through tax deductions. Insolvency is a delicate situation for any business. Proper tax planning will allow the debtor company to maximize the effectiveness of the restructuring process offered by the CCAA. Our taxation team can help you set up effective planning in this context. R.S.C. 1985, c. C-36 and amendments R.S.C. 1985, c. B-3 and amendments

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March 23, 2017

Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

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December 14, 2015

Farmers, drivers and debtors: The Supreme Court considers the conflicts between the Bankruptcy and Insolvency Act and several provincial statutes

On November 14, 2015, the Supreme Court of Canada rendered three decisions on the application of the the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 (BIA) and its interaction with certain provincial statutes. OVERVIEW OF THE FACTS In Saskatchewan (Attorney General) v. Lemare Lake Logging Ltd. Ltd., 2015 SCC 53 (Lemare), the Court, sitting as a bench of seven judges, considered the conflict between a provincial statute, which imposes a 150-day notice period before instituting any action relating to farm land, and the BIA, which permits a secured creditor to apply for the appointment of a receiver for the property of a debtor upon the expiry of a 10-day notice period under section 244 BIA. In Alberta (Attorney General) v. Moloney, , 2015 SCC 51 (Moloney), and 407 ETR Concession Co. v. Canada (Superintendent of Bankruptcy), 2015 SCC 52 (ETR), the nine judges considered the conflict between a provincial statute which allowed for the revocation or suspension of the motor vehicle permits or driver’s licences of persons who failed to pay certain driving-related debts, even where these drivers were discharged bankrupts and the debt targeted by the provincial statute was a provable claim in bankruptcy. APPLICABLE RULES In these three cases, the Court had to determine whether the BIA and the provincial statutes could coexist or whether they were in conflict, in which case the provincial statutes had to be declared inoperative and give way to the BIA, which would take precedence pursuant to the principle of the paramountcy of federal law over provincial law. The Supreme Court noted that when reviewing the interaction between different laws of different jurisdictions, the courts must be careful, in that they should favour an interpretation seeking to reconcile the two laws in question, and only declare the provincial law inoperative where the inconsistency with the federal law is inescapable. In this regard, a conflict may be operational, i.e. where one law prohibits what the other imposes, or in the purpose, where the effects of one frustrate the purposes of the other. Since a conflict could arise both with respect the effects or the purposes, to resolve the alleged conflicts at bar, the Court had to assess the rationale behind the BIA and the provincial laws in question, as well as their respective mechanisms. APPLICATION In Lemare, the review was limited to the purposes which underlie the existence of the 150-day notice period in favour of the debtor/ owner of farm land under the provincial statute, which protects farms and farming operations, and to the purposes of the 10-day notice period provided in section 244 BIA before the appointment of a receiver can be required under section 243 BIA. For the majority of the Court, the time period in the provincial statute constitutes a grace period, whereas the purpose of the 10-day notice period in section 244 BIA is to avoid the multiplication of proceedings. The BIA does not require the appointment of a receiver upon the expiry of the 10 days. Moreover, this time period can be extended or abridged, depending on the circumstances. The creditor’s right to obtain the appointment of a receiver is in all cases subject to court authorization. According to the majority of the Court, there is therefore no inconsistency between the two regimes: in complying with the 150-day time period under the provincial statute, one is by the same token also only exercising one’s option to apply to the courts beyond the 10-day time period under the BIA. Justice Côté dissented: for her, timeliness and effectiveness were also purposes of the BIA and the objective of protecting farm land must therefore yield to this imperative. She would have declared the provincial law inoperative. In Moloney and ETR, the Court considered the purposes of the BIA as a whole. In this regard, the Court was unanimous: on the one hand, the bankruptcy and insolvency regime lays down the principle of the equitable distribution of the bankrupt’s assets among his creditors and, on the other hand, the principle of the financial rehabilitation of the bankrupt, which is achieved through his discharge from all provable claims at the end of the process. The Court also unequivocally found that there was a conflict between the fact that the bankrupt could be discharged of his debts under the BIA and the fact that a provincial statute could continue to attach sanctions to one of these debts. However, the seven majority judges diverged from their two dissenting colleagues on how this conflict was to be characterized. For the majority, there was a true operational conflict between the BIA and the provincial statutes because the BIA neutralizes the debt while the provincial statutes continued to give some effect to the debt. Since one statute prohibited what the other required, the inconsistency was direct. According to Justices McLachlin and Côté, there was no operational conflict between the BIA and the provincial statutes because it was still possible for a bankrupt to renounce the privilege which the provincial statute sought to deprive him of by giving up his driver’s licence or willingly paying his debt. However, since the provincial statutes frustrated the purpose of the BIA, they were inoperative in the insolvency context. EFFECTS AND LESSONS In Moloney and ETR, the Supreme Court reaffirmed known concepts (bankrupt’s discharge and rehabilitation), and these decisions therefore do not revolutionize insolvency practice. However, the Court’s decision in Lemare could potentially change practice by making the appointment of a receiver under section 243 BIA subject to the time periods provided in provincial statutes. For instance, in Quebec, one can easily imagine that debtors might attempt to convince the courts that a receiver cannot be appointed under the BIA until the time limits provided for in the Civil Code of Québec for the exercise of a hypothecary recourse have expired (20 days for movable property and 60 days for immovable property). Lavery has the knowledge and experience necessary to assist you in any bankruptcy and insolvency matters and protect your assets and property. Do not hesitate to contact us.

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August 18, 2015

The interim receiver: A “Trustee in Bankruptcy” dispensed from obtaining a clearance certificate

In a judgment rendered in the case of 9210-6905 Québec Inc. (proposal of),1 the Superior Court of Québec held that an interim receiver is not required to obtain a clearance certificate from the tax authorities before proceeding with the distribution of a debtor's property, and is not subject to personal liability for this reason. Indeed, the Court stated that an interim receiver appointed under the Bankruptcy and Insolvency Act2 is a "trustee in bankruptcy" within the meaning of subsection 159(2) of the Income Tax Act3 ("BIA") is a "trustee in bankruptcy" within the meaning of subsection 159(2) of the Income Tax Act ("ITA"). Therefore, the interim receiver benefits from the exception dispensing the "trustee in bankruptcy" from obtaining a certificate ("clearance certificate") attesting that all amounts due under the ITA have been paid. CONTEXT On March 24, 2014, the debtor 9210-6905 Québec Inc. (“Debtor”) filed a notice of intention to make a proposal and Richter Advisory Group Inc. (“Richter”) was appointed to act as trustee under the notice of intention. On March 27, 2014, the Court rendered an order appointing Richter to act as interim receiver under the BIA. The Debtor, with Richter’s help, then undertook a process aimed at soliciting offers from potential purchasers for its assets. On July 17, 2014, the Court rendered an order authorizing the sale of the majority of the Debtor’s assets and ordering that the proceeds of sale be remitted to Richter for distribution to the Debtor’s creditors. DISTRIBUTION OF THE AMOUNTS COLLECTED BY RICHTER Following the sale of the assets and the collection of the Debtor’s claims, Richter wished to distribute a net amount of more than $500,000 to the creditors, according to their respective rights. As part of this distribution, Richter proposed to pay first the amounts that were owed to the tax authorities in respect of source deductions made by the Debtor which were subject to deemed trusts within the meaning of the tax statutes or certain other statutes. The amounts owed by the Debtor to the tax authorities which were not source deductions subject to deemed trusts were however not paid under the proposed distribution. Indeed, the Debtor’s secured creditors ranked ahead of the tax authorities in respect of these amounts, and the balance of the net amount to be distributed by Richter was clearly insufficient to allow for the full payment of the amounts owed to the secured creditors. QUESTION IN ISSUE Richter presented a Motion for directions to the Court for authorization to proceed with the proposed distribution and asked the Court to declare that it was not required to obtain a clearance certificate under the relevant federal and Quebec statutory provisions (i.e. section 159(2) ITA and section 14 of the Tax Administration Act4 (the “TAA”)). Revenu Québec did not contest Richter’s motion, as opposed to the Canada Revenue Agency (the “CRA”), which essentially alleged that the exception provided for in section 159(2) ITA did not apply to Richter acting as an interim receiver, so that Richter would be bound to obtain a clearance certificate. Section 159(2) ITA states that “[e]very legal representative (other than a trustee in bankruptcy) of a taxpayer shall, before distributing to one or more persons any property in the possession or control of the legal representative acting in that capacity, obtain a [clearance] certificate from the Minister”. Under section 159(3) ITA, where a legal representative fails to obtain a clearance certificate before proceeding with a distribution, such representative is personally liable for the amounts owed to the tax authorities to the extent of the value of the property distributed. It should be noted that section 14 TAA contains provisions to the same effect. DECISION Analyzing the practical effects of the terms of sections 159(2) and 159(3) ITA in light of the position put forward by the CRA, the Court stated as follows: [Translation] [11] However, the trustee will not be able to get a clearance certificate because, as we saw above, an amount of $29,640 remains due to the CRA. [12] The trustee is therefore caught in this predicament in which it has fulfilled the Court’s order, but must retain the proceeds of sale due to the lack of a clearance certificate which it will never be able to obtain, whereas in the case of a bankruptcy, the issue would not arise. The Court rejected the position taken by the CRA that the expression “trustee in bankruptcy” used in section 159(2) ITA excludes an interim receiver appointed under the BIA. Firstly, the Court noted that only a “trustee” can act as an interim receiver within the meaning of the BIA. Next, the Court explained that the expression “in bankruptcy” was added after the word “trustee” in section 159(2) ITA because it was the federal legislator’s intention [translation] “to distinguish the trustee acting under the Bankruptcy Act from, for example, the syndic of a professional corporation or an agent chosen by the co-owners of a building.”5. The Court held as follows: [Translation] [23] Since only a licensed trustee, commonly referred to as a trustee in bankruptcy, is authorized to act under section 47 BIA, what the legislator had in mind was that the immunity in section 159(2) ITA applied to a trustee appointed under the BIA to act as an interim receiver. This interpretation is also consistent with the spirit of section 215 BIA which provides that the interim receiver, like the trustee, benefits from relative immunity when carrying out any duty under the law.6. Finally, the Court rejected the CRA’s argument to the effect that it could not grant the conclusion sought by Richter without exceeding its jurisdiction on the grounds that only the Tax Court of Canada could dispense Richter from the requirement to obtain a clearance certificate. Indeed, the judge held that the Superior Court has jurisdiction to interpret the meaning of the expression “trustee in bankruptcy” and to declare that an interim receiver appointed under the BIA is included in this expression. CONCLUSION Therefore, the Court declared that Richter, acting as interim receiver, was a “trustee in bankruptcy” within the meaning of section 159(2) ITA. Given the similar terminology used in the Quebec statute,7 in our view, the Court’s holding applies both to the federal statute and the provincial statute. As well, we are of the opinion that the Court’s holding also applies to a trustee under a notice of intention, a trustee under a proposal, a receiver appointed under section 243 BIA, a monitor appointed under the Companies’ Creditors Arrangement Act,8 and a liquidator appointed under the Winding-up and Restructuring Act.9 This judgment is important in practice because it permits any person licensed as a trustee and acting in any of the aforementioned functions to benefit from the “trustee in bankruptcy” exception and to be dispensed from the requirement to obtain a clearance certificate when such person distributes the property of an insolvent person. 1 S.C.M. 500-11-046426-140, Revised transcript of the reasons for judgment rendered from the bench on June 25, 2015 by the Honourable Danielle Turcotte, J.S.C. 2 R.S.C. (1985), c. B-3. 3 R.S.C. (1985), c. 1 (5th Supp.). 4 CQLR, c. A-6.002. 5 Paragraph 19 of the judgment. 6 Paragraph 22 of the judgment. 7 See s. 14 TAA. 8 R.S.C. (1985), c. C-¬36. 9 R.S.C. (1985), c. W-11.

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