Agence du revenu du Québec v. FTI Consulting Canada Inc., 2022 QCCA 1740

The appellants (the “ARQ”) were owed approximately $13.4 million of tax by a corporation (“CQIM”) immediately before it was placed into protection under the CCAA. Over three years later, the monitor for CQIM made interim distributions including the partial payment of damages claims which generated input tax credit claims (the “ITC claims”) of approximately $7.5 million as a result of the deemed supplies occurring to CQIM pursuant to ETA s. 182 and QSTA s. 318 (the “Tax provisions”). Whether the ARQ could set off the ITC claims against the amount of tax owing to it (which clearly was a pre-CCAA filing claim) turned principally on whether the ITC claims were pre-filing claims (set-off available) or post-filing claims (set-off likely unavailable).

In summarizing an ARQ submission, Kalichman JA stated (at para. 24):

The ARQ places particular emphasis on s. 32(7) of the CCAA, which provides that parties, like the Suppliers, who suffer a loss in relation to disclaimed contracts, are considered to have provable claims. Since, according to s. 19(1)(b) of the CCAA, a provable claim is one that relates to debts or liabilities incurred before the initial order (i.e., pre-filing claims) and since CQIM’s contracts with the Suppliers were all entered into before the initial order, the judge erred in concluding that the Damage Claims were post-filing claims.

In rejecting this and other ARQ submissions and in finding that the ITC claims were post-filing claims, Kalichman JA stated (at paras. 29-30):

[I]t was only when the interim distribution was made three years after the initial CCAA filing, that payment for the supply of a taxable service was deemed to have been made and the taxes due in respect of that payment were deemed to have been collected. …

The taxable supply that triggers payment (and the duty to pay tax) was never provided because the agreement that contemplated it was disclaimed. The Tax provisions create a fiction for the purpose of collecting the tax that would have been paid at some point in the future had the agreement not been disclaimed and the services continued to be provided. While the Tax provisions are based on a fiction, their logic is sound. If payment must be deemed to have been made and taxes collected, it stands to reason that the triggering event be the payment of the damages that replace what would otherwise have been paid. … Conversely, what the ARQ proposes – that the payment be deemed to have been paid years before - would create a fiction that is entirely arbitrary.

In also finding that the Court below had not erred in declining to exercise its residual discretion to permit the ITC claims (viewed as a post-filing claim) against the tax owing, he stated (at para. 48) that this would have been “inconsistent with the remedial objectives of the CCAA, regardless of whether the focus is on restructuring the debtor’s affairs or on liquidation.”

The appellants (the “ARQ”) were owed approximately $13.4 million of tax by a corporation (“CQIM”) immediately before it was placed into protection under the CCAA. Over three years later, the monitor for CQIM made interim distributions including the partial payment of damages claims which generated input tax credit claims (the “ITC claims”) of approximately $7.5 million as a result of the deemed supplies occurring to CQIM pursuant to ETA s. 182 and QSTA s. 318 (the “Tax provisions”). Whether the ARQ could set off the ITC claims against the amount of tax owing to it (which clearly was a pre-CCAA filing claim) turned principally on whether the ITC claims were pre-filing claims (set-off available) or post-filing claims (set-off likely unavailable).

In summarizing an ARQ submission, Kalichman JA stated (at para. 24):

The ARQ places particular emphasis on s. 32(7) of the CCAA, which provides that parties, like the Suppliers, who suffer a loss in relation to disclaimed contracts, are considered to have provable claims. Since, according to s. 19(1)(b) of the CCAA, a provable claim is one that relates to debts or liabilities incurred before the initial order (i.e., pre-filing claims) and since CQIM’s contracts with the Suppliers were all entered into before the initial order, the judge erred in concluding that the Damage Claims were post-filing claims.

In rejecting this and other ARQ submissions and in finding that the ITC claims were post-filing claims, Kalichman JA stated (at paras. 29-30):

[I]t was only when the interim distribution was made three years after the initial CCAA filing, that payment for the supply of a taxable service was deemed to have been made and the taxes due in respect of that payment were deemed to have been collected. …

In also finding that the Court below had not erred in declining to exercise its residual discretion to permit the ITC claims (viewed as a post-filing claim) against the tax owing, he stated (at para. 48) that this would have been “inconsistent with the remedial objectives of the CCAA, regardless of whether the focus is on restructuring the debtor’s affairs or on liquidation.”

In finding that provisions of the CCAA dealing with whether contractual claims were claims arising prior to the CCAA filing were not in pari materia with ETA s. 182 and QSTA s. 312 (the “Tax provisions” - dealing with a deemed supply on the payment of contractual damages to the supplier), Kalichman JA stated (at para. 34, footnotes omitted):

The purpose of the CCAA is to provide companies with the means to avoid “the social and economic consequences of commercial bankruptcies” whereas the purpose of the ETA and of the QSTA is to raise revenue for the government. Furthermore, the Tax provisions and the relevant sections of the CCAA can be read separately without leading to an absurd or contradictory result. The fact that they overlap in a particular situation does not make them part of a single legislative scheme. Furthermore, as the judge noted, when Parliament intended for the provisions of the ETA to be read in conjunction with those of the CCAA, that was made explicit.