Métaux Kitco Inc. v. ARQ and AG, 2016 QCCS 444

The appellant (“Kitco”), a gold refiner, went into protection under the CCAA, after the CRA and ARQ (the “Agencies”) reassessed it for $313 million to deny input tax credits and input tax refunds ("ITCs/ITRs") on its purchases of scrap gold - on the basis that the purchases were fictitious (which Kitco denied). Following its insolvency filings, Kitco continued to operate and claim ITCs/ITRs, whose validity was not challenged. However, the Agencies set off these subsequent claims against the disputed claims (i.e., effected “compensation”), rather than paying them.

After noting (at para. 102) that s. 97(3) of the Bankruptcy and Insolvency Act permitted recourse to compensation in the context of an insolvency, Paquette J quoted from para. 55 of D.I.M.S. Construction Inc. (Trustee of) v Québec (Attorney General), [2005] 2 S.C.R. 564:

Since s. 97(3) BIA is an exception to the rule of equality between creditors, it must be interpreted narrowly. It must therefore be read in conjunction with ss. 121, 136(3) and 141 BIA as implicitly requiring that the mutual debts come into existence before the bankruptcy.

She then stated (at para. 105):

There is no need to distinguish between the compensation mechanism in the context of an insolvency and of a proposal in the context of an arrangement.

She accordingly concluded that the Agencies could not set off the uncontested ITCs/ITRs against the disputed claims under s. 21 of the CCAA.

She also stated (at para. 122) that “the presumptions of validity and exigibility arising under tax statutes in favour of the Agencies are not applicable in the context of insolvency proceedings under the CCAA,” as such presumptions go against the principle of equality among creditors and the Crown's status as an unsecured creditor under the CCAA.

Paquette J found that CRA and ARQ could not use their statutory set-off rights, under CCAA s. 21, ETA s. 318 and LAF s. 31, to set off input tax credit and input tax refund claims generated by an insolvent company (“Kitco”) after it went into protection under the CCAA against (disputed) assessments made by them in which they denied ITCs and ITRs of $313 million that had been claimed and paid by Kitco before the CCAA proceedings. She found that to permit such set-off would give the Agencies an advantage over the unsecured creditors (by taking all of the post-CCAA credits for themselves) and therefore violate the principle that all unsecured creditors should be treated equally.

After finding that CRA and ARQ could not use their statutory set-off rights to set off input tax credit and input tax refund claims generated by an insolvent company after it went into protection under the CCAA against (disputed) assessments made by them in which they denied ITCs and ITRs of $313 million that the company had claimed before the CCAA proceedings, Paquette J went on to state (at para. 122) that “the presumptions of validity and exigibility arising under tax statutes in favour of the Agencies are not applicable in the context of insolvency proceedings under the CCAA,” as such presumptions go against the principle of equality among creditors and the Crown's status as an unsecured creditor under the CCAA.

After finding that CRA and ARQ could not use their statutory set-off rights to set off input tax credit and input tax refund claims generated by an insolvent company after it went into protection under the CCAA against (disputed) assessments made by them in which they denied ITCs and ITRs of $313 million that the company had claimed before the CCAA proceedings, Paquette J went on to find that the statutory presumptions (e.g., ETA, s. 299(3)) that assessments are valid and binding did not apply in CCAA proceedings.