Secured Creditors Can Appeal to Tax Court on Behalf of a Bankrupt

December 02, 2014

The Tax Court of Canada recently confirmed in International Hi-Tech Industries Inc v The Queen, 2014 TCC 198, that in certain circumstances a secured creditor can commence or continue a tax appeal on behalf of a bankrupt estate.

The Appellant was a bankrupt corporation. Prior to bankruptcy, it granted a general security agreement (GSA) to its holding company and other related companies. The appeal related to alleged GST miscalculations of input tax credits (ITCs) by the CRA during a GST audit and subsequent assessments. The Trustee in Bankruptcy accepted the validity of the GSA, waived redemption of the security and released its interest in the collateral charged by the GSA.

The CRA sought to quash the appeal on the basis that the legal proceeding was not authorized or filed by the Trustee, and the secured creditors had no legal capacity to bring an appeal.

The Court agreed that if the entity seeking to enforce the taxpayer's rights of appeal were a general creditor of the estate, a bankrupt or an alleged indemnitee under a pari pasu or unliquidated claim, then no right to commence an appeal would exist in the absence of the Trustee's consent or a court order.

However, the Court found that the facts in the present case supported the secured creditors' right to commence or maintain an appeal. The secured creditors sought to prosecute the appeal pursuant to the GSA, which had been vetted, verified, approved and not redeemed by the Trustee. The Trustee could not authorize the bringing of the appeal because the Trustee had no interest in assets it covered and no right to any proceeds arising from ITCs. The Trustee could only value the security, accept it (or not), confirm it defeated his own rights, and release and deliver the security to the secured creditors.

The Court further found that the GSA provided sufficient authority to the secured creditors to commence and maintain the appeal under the Rules of Court and relevant legislation. The GSA was a standard GSA that transferred and assigned all of the bankrupt's present and after acquired personal property, which included, among other things, debts, claims, and choses in action. The GSA also included the power to direct the payment of debts to the secured creditors upon default and give the secured creditors the power to take all steps necessary to exercise all incidental powers in the debtor's name.

The Court also concluded that the definition of "receiver" in the Excise Tax Act was broad enough to include a situation like the present where the GSA contained broad powers of appointment for a secured party or agent to take steps to realize upon the property covered by the GSA. Thus, the secured creditor qualifies as an "agent" under the Excise Tax Act and can object to a GST assessment or reassessment and maintain an appeal in respect of the property (book debts) assigned to them and delivered by the Trustee.

While in practice, it may not be practical or beneficial for a secured creditor to pursue an appeal in Tax Court, this decision does provide another avenue for secured creditors to potentially recover any debt owing by a bankrupt.