Do municipal taxes have priority over receiver’s expenses?

  • June 18, 2018
  • Allan Delgado and Carly Androschuk

Alberta courts have recently been grappling with questions around the priority of municipal property taxes under s. 348 of the Municipal Government Act, in the context of proceedings under the Bankruptcy and Insolvency Act. In June 2017, the Court of Queen’s Bench, in the unreported decision of Bank of Nova Scotia et. al. v Virginia Hills Oil Corp et. al., found that “linear” property taxes are an unsecured claim, rather than a claim secured against the land. That decision is scheduled for an appeal on June 12, 2018. More recently, in late February, 2018, Graesser J. delivered a decision in Royal Bank of Canada v Reid-Built Homes Ltd. et. al., that granted the City of Edmonton priority for its property taxes over the fees and borrowing expenses of the receiver. With the current Alberta Template Receivership Order including sections which grant the fees and borrowing expenses of a receiver a “super-priority” over all other creditors, this decision, though it too is now under appeal, suggests that there are circumstances in which a receiver’s super-priority may be subordinate to municipal property taxes. The writers are legal counsel who made submissions for Edmonton and the following will outline the legal issues in Reid-Built specific to Edmonton and what it may mean for how receiverships deal with municipal property taxes in Alberta, and, perhaps, in other provinces as well.

In Reid-Built, the Royal Bank of Canada successfully applied to have a receiver appointed over all the assets of the numerous entities comprising the Reid-built Group. The receivership order largely mirrored the Alberta Template Receivership Order; as such, it included sections granting the receiver a broad super-priority over all creditors for its fees and borrowing expenses related to enhancing or preserving property. Two creditors challenged, among other things, the receiver’s super-priority during a comeback application. Edmonton did not initially challenge the receiver’s super-priority, but decided to do so once it became clear that the receiver interpreted the receivership order to grant it a super-priority ahead of the city despite section 348(c) of the Municipal Government Act. In Edmonton’s view, section 348(c) gives the city priority for its property taxes ahead all creditors except the Crown, however, at the time that Edmonton made its Application, there was no case law in Alberta that addressed this question in relation to a receiver’s super-priority. Under the circumstances, Edmonton brought an application asking the court to clarify the receivership order and have its municipal property taxes be declared in priority to the fees and borrowing expenses of the receiver.

The receiver in Reid-Built raised several arguments to support its position: (1) that the Robert F. Kowal Investments Ltd. v Deeder Electric Ltd. test supports the receiver’s super-priority; (2) that the Alberta Template Receivership Order, which is similar to the template order in Ontario, includes a super-priority for fees and borrowing expenses; (3) that the receiver’s authority under the receivership order is granted by the Bankruptcy and Insolvency Act and, therefore, has paramountcy over the Municipal Government Act; (4) that its borrowing-powers priority is necessary to preserve and enhance the assets within the receivership; and, (5) that the super-priority is necessary in all cases of receivership, otherwise there would be a chilling effect on the incentive for receivers to take on these tasks.

Edmonton relied on decisions from Ontario, including from the Court of Appeal, that seemed to support the argument that municipal property taxes are not subordinate to the fees and borrowing charges of a receiver. Section 349(c) of Ontario’s Municipal Act has language similar to section 348(c) of the Alberta statute, which grants a special lien for property taxes ahead of all creditors except the Crown. The cases of Hamilton Wentworth Credit Union Ltd. (Liquidator of)v Courtcliffe Parks Ltd., and, Toronto Dominion Bank v Usarco Ltd., state respectively that the statutory scheme forbids the receiver’s super-priority relative to municipal property taxes, and, that it is part of the receiver’s duty to pay property taxes.

The court in Reid-Built decided that Edmonton’s case was distinguishable given that none of the cases dealt with the priority of municipal property taxes over a priority order under the BIA. Graesser J. found that the provisions of the BIA, and the exercise of the court’s powers under it, prevail over provincial legislation dealing with priorities. However, Graesser J., based on the specific facts of the case, exercised his authority under the BIA to find that Edmonton’s property taxes were not subordinate to the receiver’s super-priority. Sections 31 and  243(6) of the BIA grant the court discretion to grant the receiver a charge for borrowing powers and fees. The court’s analysis placed particular emphasis on the application of the social policy goals of the BIA and the Companies' Creditors Arrangement Act, to reorganize and restructure corporations to “avoid the social impact of business failure” (para. 45). In this context, a distinction was made between receivership proceedings that seek to restructure rather than liquidate assets. Since the Reid-Built case is a case of liquidating assets, the court could not see any benefit to the City not being paid, as non-payment of the property taxes simply results in increased penalties. The court states:

157 In a liquidating receivership, it seems to me that it is appropriate that the taxing authority's contribution to the receivership is the potential delay in receiving payment of outstanding taxes, penalties, and interest. It is evident from my analysis that I see no reason why Edmonton should be subordinate to any borrowings.

The Reid-Built decision has been appealed. Still, it may provide guidance for counsel dealing with receivership proceedings where priority to municipal property taxes are at issue and the proceedings follow a liquidation process rather than a restructuring / rearrangement process. It is also a reminder that template receivership orders may be amended where the circumstances warrant it.

Allan Delgado and Carly Androschuk are with the City of Edmonton - Law Branch