Court of Appeal of Quebec

Agence du revenu du Québec c. FTI Consulting Canada Inc.

Mainville, Lavallée, Kalichman

Appeal from a judgment of the Superior Court. Dismissed.

The appellants, including the Agence du revenu du Québec (ARQ), are appealing a Superior Court judgment granting a motion for directions and declaring that they cannot set off a debt they owe to the debtor company against the debt the debtor owes them.  

On January 27, 2015, an initial order placed Cliffs Québec Iron Mining ULC (CQIM) under the protection of the Companies' Creditors Arrangement Act (R.S.C. 1985, c. C-36) and appointed FTI Consulting Canada Inc. as monitor.

At that time, CQIM had a tax debt of $13,391,896. Between January 2015 and February 2016, CQIM, invoking s. 32(1) of the CCAA, cancelled agreements with four of its suppliers, each of which subsequently brought a damage claim against CQIM.

On June 29, 2018, a plan of arrangement was sanctioned by the Superior Court.

In August of 2018, the Monitor began making interim distribution payments to unsecured creditors of CQIM. At that time, the Suppliers received partial payment of the Damage Claims.

Payments made to the Suppliers as part of the interim distribution entitled CQIM to claim income tax refunds and input tax credits (ITC) from the ARQ, totalling $7,459,258 (the Damage payment ITCs). In addition, CQIM claimed tax refunds and ITCs in connection with payments made to the Suppliers which totalled $422,940, $234,755 of which were related to services rendered after the initial order.

The ARQ did not dispute the quantum of the Damage payment ITCs but maintained that it was entitled to operate compensation between that claim and its own. This would, in effect, allow the ARQ to recoup $7,459,258 of its claim, thus reducing it from $13,391,896 to $5,932,638.  

The Monitor disagreed with the ARQ’s position and brought a motion for instructions seeking, among other things, a declaration that the Damage payment ITCs could not be set off against the ARQ Claim.

The trial judge did not err in concluding that there could be no set off between the ARQ’s claim and the Damage payment ITCs claimed by the CQIM. Section 182 of the Excise Tax Act (R.S.C. 1985, c. E-15) and s. 318 of the Act respecting the Québec sales tax (CQLR, c. T-0.1), which allow the CQIM to claim the Damage payment ITCs, are clear. When an amount is paid because of the termination of an agreement for the making of a taxable supply, the person is deemed to have paid for the supply and the registrant is deemed to have collected the tax, at the time of payment, which, in this case, was after the initial order.

The trial judge also correctly rejected the ARQ’s argument that these Tax provisions, read in harmony with the Companies' Creditors Arrangement Act, produce a different result. These provisions can be read separately without leading to an absurd or contradictory result. Furthermore, even if they were to be read as part of a single legislative scheme, the judge did not place them in contradiction. The restructuring claims are post-filing claims and are deemed to be provable claims by virtue of s. 32(7) of the Companies’ Creditors Arrangement Act, not by virtue of s. 19(1)(b) of that Act as argued by the ARQ. They do not take on all the characteristics of a provable claim by mere virtue of the fact that they are treated as such for a particular purpose.

Last, the trial judge did not err in failing to exercise his discretion under s. 11 of the Companies’ Creditors Arrangement Act to allow for pre-post filing compensation. That discretion must be exercised “only in exceptional circumstances, given the high disruptive potential of this form of compensation.” Montréal (City) v. Deloitte Restructuring Inc. (S.C. Can., 2021-12-10), 2021 SCC 53 S.C.C. at para. 20, SOQUIJ AZ-51815258, 2021EXP-3009). Since the ARQ has failed to establish that the criterion of appropriateness was met, it is not necessary to consider good faith or due diligence.

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