Canada: Too Taxing? CCAA Debtors' Post-Filing Municipal Tax Obligations Suspended

Last Updated: October 3 2018
Article by Jeremy Opolsky and Melody Burke

I. Introduction

Under the Companies' Creditors Arrangement Act,1 debtors have certain post-filing obligations. Unlike the United States Bankruptcy Code, which specifically details and protects obligations incurred after an insolvency filing, the CCAA provides fewer codified protections for those who the debtor owes post-filing obligations.

This article focuses on one of the newest frontiers in post-filing obligations: municipal tax. Unlike certain federal and provincial tax obligations, there are no specific protections for these taxes in the CCAA. While such taxes are generally paid in the ordinary course during the pendency of CCAA proceedings, recent cases have challenged that assumption.

In two Ontario CCAA decisions, Re US Steel Canada Inc.2 and Re Essar Steel Algoma Inc.,3 debtors sought to cease municipal property tax payments in the post-filing stage. Both CCAA courts allowed the debtors' requested relief.

This paper first provides a brief summary of regime surrounding post-filing obligations of CCAA debtors, followed by addressing the decisions in US Steel and Essar Algoma Steel.

II. Post-Filing Obligations

The CCAA provides only skeletal protections for post-filing obligations. These include protections for certain federal and provincial tax obligations and protections for critical suppliers.4 Importantly for this article, there is no express statutory protection for the payment of post-filing municipal tax obligations.

The broadest statutory protection for post-filing expense is found in section 11.01 of the CCAA, which prohibits the forced extension of credit for the provision of post-filing services. It provides:

Rights of Suppliers

11.01 No order made under section 11 or 11.02 has the effect of:

(a) prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made; or

(b) requiring the further advance of money or credit.

What constitutes the use of goods, services, the use of leased or licensed property or other valuable consideration is itself the subject of a complicated line of jurisprudence. An exploration of these cases is beyond the scope of this short article.

Nonetheless, the gravamen of section 11.01, consistent with general practice under the CCAA, was summarized by the Ontario Court of Appeal: "while the company is given the opportunity and privilege to carry on during the CCAA restructuring process without paying its existing creditors, it is on a pay-as-you-go basis only."5 Post-filing obligations are generally paid as they are incurred.

Courts in Ontario have broadly adopted this "pay-as-you-go" framework to post-filing obligations in the form of the model CCAA initial order.6 Terms in the model order includes the obligation to remit any and all "municipal realty, municipal businesses or other taxes, assessment or levies of any nature or kind which are entitled at law to be paid in priority to claims of secured creditors."7

III. US Steel Canada Inc.

U.S. Steel Canada Inc. ("USSC"), an integrated steel manufacturer, filed for CCAA protection in September 2014. In 2015, the debtor's parent company, United States Steel Corporation ("USS"), made two announcements: (a) the parent would divert certain steel production and finishing work scheduled for production at USSC facilities and (b) the parent would refrain from submitting customer bids that contemplated any steel production at USSC facilities. These two decisions by USS combined with a deteriorating steel market placed the debtor in a precarious financial state.

As a consequence, USSC developed and sought prospective court approval of a Business Preservation Plan ("BPP"). The BPP provided for continued operations at a significantly reduced level for 12 to 15 months.

A critical element to the BPP was a series of "cash conservation measures" to ensure sufficient liquidity. The cash conservation measures included the suspension of property tax payments to the City of Hamilton and the

County of Haldimand (the "Municipalities"). USSC had paid all municipal realty taxes before that date.

Justice Wilton-Siegel considered and approved the suspension of these tax obligations.

Does the Court have the authority under section 11 to suspend the property tax payments?

The debtor sought for the CCAA court to stay municipal tax obligations under the court's broader section 11 discretion.

The Municipalities' principal argument was that section 11.01 restricted the court's ability to suspend the property tax payments. The Municipalities contended that approving the suspension of payments would force the Municipalities to either (a) provide post-filing services or (b) require the Municipalities to advance further credit to USSC.8

Justice Wilton-Siegel disagreed. He held that section 11.01 does not prevent the Court from suspending the property tax payments because property taxes could not be characterized as services under section 11.01(a):

I do not think that municipal realty taxes are properly characterized as a payment for the provision of post-filing services as the concept of "services" is understood for the purposes of section 11.01. Rather, municipal realty taxes are a levy imposed on property owners to fund the operations of a municipality exercising its authority and obligations as a local governmental body.9

Justice Wilton-Siegel relied on the Alberta Court of Appeal's decision in Montreal Trust Co. of Canada v Smoky River Coal Ltd.10 While Smoky River was not decided within the context of section 11.01, the decision explores why municipal property taxes cannot be characterized as "services". A municipality cannot deny the benefit of municipal operations to the debtor and, therefore, the municipality could not be said to be selling its services: "[p]roperty taxes are not the purchase price for the services provided by [the municipality]; instead they are the means of generating the revenue to provide those services."11

Second, Justice Wilton-Siegel also found that the phrase "further advance of money or credit" in section 11.01(b) "assumes a pre-existing credit relationship which is maintained on an involuntary basis after the commencement of CCAA proceedings." This did not describe the creditor-debtor relationship between the Municipalities and USSC.12

Should the Court exercise its discretion under section 11 to suspend the payments?

After determining that section 11.01 did not prevent the suspension of payments, Wilton-Siegel J. considered whether he should exercise his discretion under section 11 to grant the debtor's requested order.

The Municipalities argued the critical importance of taxation to society. If a taxpayer fails to meet its tax-paying obligations, then the municipality will not have the money, to which it is legally entitled and on which it has counted, available to support the education, recreation, housing, social support and other programs which it is required to provide.13 The Municipalities emphasized that during any suspension, they would be required to cover part of the taxes that would otherwise be payable by USSC, such as provincial education taxes, even though they would not be in receipt of those funds required to cover the obligation.14

Justice Wilton-Siegel rejected this argument. He relied on the Municipalities' statutory lien under the Municipal Act for unpaid taxes as means to recover unpaid taxes.15 This motion was not a compromise of their claims but merely a suspension of their payment: there was no evidence that their security for the payment of the taxes would be eliminated.16 On the other hand, the debtor required a suspension of the property tax payments to facilitate the BPP, which was vital to the possibility of a successful restructuring.17

Ultimately, Wilton-Siegel J. held that the suspension of payment was in fact in the the Municipalities own interest—despite the fact that they were vociferously opposing it. While the reduction in the municipalities cash flows may result to a short term need to raise realty taxes, the failure for USSC to restructure would have "permanent consequences" for the Municipalities.18 The balance weighed in favour of ordering the suspension of payments.

IV. Essar Steel Algoma Inc.19

In Essar Steel Algoma, the City of Sault Ste. Marie (the "City") brought a motion for an order requiring the CCAA debtor, Essar Steel Algoma Inc. ("ESAI"), to pay post-filing municipal property tax obligations.

Without seeking Court approval, ESAI had stopped paying these taxes. In response to the City's motion, ESAI sought retroactive and prospective suspension of the tax obligations.

Unlike US Steel, where the debtors sought to suspend municipal property tax payments during the prospective 12 to 15 month preservation plan period, ESAI never made any post-filing payments to the City nor had any timeline for the resumption of payments. The City emphasized that ESAI's property tax payments formed a large part of the City's tax base and that the continued accumulation of arrears would create significant difficulties for the City.20

Justice Newbould dismissed the City's motion and allowed ESA's motion. Section 11.01 did not play any role in the decision. While the City sought to distinguish US Steel,21 it argued the motion on different grounds.

In this motion, the City emphasized the importance of initial order and the debtors' obligations to pay municipal taxes from that order. The City argued that the debtor could not deviate from the order at will. Relying on the recent decision of Morawetz J. in Target, the City argued that the debtors could not ignore post-filing obligations when counter-parties, like the City, had relied on debtors' Court-ordered obligations to fund these taxes. This would in effect, change the rules mid-stream to benefit the debtors and its DIP lenders and retroactively suspend payments that were already supposed to have been paid under the initial order.22

In response, ESAI pointed to the constraints on its cash flow given the liquidity requirements in its DIP facility. It needed to preserve sufficient cash level through its sales process to implement a restructuring plan. The post-filing tax obligations would put any such plan at risk.23

Justice Newbould balanced the prejudice to the debtor and the City and exercised his discretion under section 11 to suspend the payments. Justice Newbould relied upon many of the same factors as in US Steel. ESAI faced a serious liquidity crisis with a sale process in the balance.24 On the other hand, while Newbould J. recognized the City's needs,25 he also pointed to its lien under the Municipal Act, its commercially high rate of interest for unpaid taxes and that the survival of the debtor would ultimately be in the City's longterm benefit.26 The Monitor's approval of the non-payment and its concern about the debtor's dwindling cash cushion bolstered Newbould J.'s conclusion.27

The City renewed its motion approximately one year later. Justice Newbould recognized that the "lack of payment of taxes is causing great difficulty to the City" but refused to order the post-filing back taxes to be paid. Instead, as supported by the Monitor and the DIP lenders, the debtors were ordered to pay approximately half of the monthly tax obligation.28 The City sought leave to appeal but then abandoned the appeal in favour of a settled resolution.

V. Conclusion

US Steel and Essar Steel may begin a trend of debtors seeking during the pendency of the CCAA proceedings to suspend municipal tax obligations. It will be important to see how this trend evolves. Will debtors seek relief only in the narrow circumstances outlined in US Steel, seeking prospective relief for a fixed period of time, or will they take the broader approach in Essar Steel Algoma, seeking retroactive relief and a prospective protection for an unlimited period of time? Even if a municipality reviews the initial order and is satisfied that the payment of its tax obligations are respected, this may not be sufficient to prevent retroactive amendment later in the CCAA proceedings. The courts' treatment of section 11.01 to-date has shown that there is little statutory protection against such changes.

Both the US Steel and Essar Steel Algoma courts have pointed to the municipalities' liens on the relevant properties. The assumption here is that the municipalities will eventually be paid. But given the length of complex CCAA proceedings, municipalities could find themselves waiting for years for the receipt of tax revenue. This may be the new CCAA reality.


1R.S.C., 1985, c. C-36 ["CCAA"].

22015 ONSC 6331 ["US Steel"] (unreported decision, found in Motion Record at pages 20-50).

3 Endorsement of Justice Newbould (re Property Taxes), dated June 15, 2016 ["Essar Steel"]. See also the City's motion for payment of outstanding post-filing property tax obligations in Re Essar Steel Algoma Inc., 2017 ONSC 3031 at para. 4, leave to appeal refused October 20, 2017 by the Court of Appeal for Ontario (unreported decision).

4CCAA ss. 11.09, s. 11.4.

5Nortel Networks Corp. (Re), 2009 ONCA 833 at para. 34.

6The Model Initial CCAA Order, Ontario Superior Court of Justice, available online at:

7Ibid., para. 8(c).

8US Steel, supra note 3 at para 119.

9US Steel, supra note 3 at para 120.

102001 ABCA 209 at paras. 28-33 ["Smoky River"].

11Ibid., at para 31.

12US Steel, supra, note 3 at para 120.

13TD Bank, supra note 14.

14Factum and Brief of Authorities of the Responding Party, City of Hamilton dated September 25, 2015 at para. 25.

15US Steel, supra note 3 at para 127.

16US Steel, supra note 3 at para 127.

17US Steel, supra note 3 at para 129.

18US Steel, supra note 3 at para 129.

19One of the Authors of this article is counsel in In re Essar Steel Algoma Inc. to the ultimate parent and affiliates of the Debtor. Any views expressed in this article are the views of the authors alone.

20Application for leave to appeal refused October 20, 2017 by the Court of Appeal for Ontario (unreported decision) at para. 5.

21Factum of The Corporation of the City of Sault Ste. Marie at para. 47.

22Factum of The Corporation of the City of Sault Ste. Marie dated June 6, 2016 at para. 40.

23 ESA's Responding Factum dated June 10, 2016.

24Essar Steel, supra note 4 at p. 3

25Essar Steel, supra note 4 at p. 3.

26Essar Steel, supra note 4 at p. 4.

27Neither of the US Steel and Essar Algoma Steel Inc. decisions address another protection for municipalities – i.e. a municipality's status as a preferred creditor under s. 136(1)(e) of the BIA. In the event of a distribution of assets under the BIA, a municipality is entitled to preferred status for all municipal taxes assessed or levied within the two years immediately preceding the bankruptcy not exceeding the value of the debtor's interest in the property.

28Essar Steel Algoma Inc., 2017 ONSC 3031

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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