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Case Comment – Re I. Waxman & Sons Ltd.

Published: 10/14/2010

In the recent Ontario Court of Appeal case of Re I. Waxman & Sons Ltd., the Canada Revenue Agency (“CRA”) was able to collect all taxes owing despite the CRA’s status as an unsecured creditor under section 86(1) of the Bankruptcy and Insolvency Act (“BIA”).

The CRA was able to accomplish this by obtaining a jeopardy collection order under subsection 225.2(2) of the Income Tax Act (“ITA”) promptly following notification that I. Waxman & Sons was seeking to appoint a receiver. After securing the jeopardy collection order from the Federal Court, the CRA collected a large portion of the taxes owing by I. Waxman & Sons, prior to the appointment of the receiver.

As the Ontario Court of Appeal summarized, the CRA’s position on application for the jeopardy collection order was that “because it (the CRA) could take no steps to attempt to collect or to secure its position vis-à-vis other creditors, the collection of the debt would be jeopardized by a delay...The CRA explained that if the receivership order were granted, the CRA's claim in the receivership would be unsecured and the stay of proceedings resulting from the receivership order would preclude the CRA from doing anything to improve its position in the future. As an unsecured claimant, the CRA would only realize its pro rata share of any funds that remained after the secured creditors…” Remarkably, this argument was accepted by the Federal Court and the jeopardy collection order was granted.

Subsequently, I. Waxman & Sons was declared bankrupt and CRA submitted a proof of claim in the bankruptcy for amounts owing after the payments received from the jeopardy collection order. The trustee informed the CRA that it was asserting a right of set-off from the amounts received under the jeopardy collection order, against the dividend amounts to be distributed to the CRA as an unsecured creditor in the estate. The trustee asserted that the effect of the jeopardy collection order was to create a preference for the benefit of the CRA contrary to the order of priorities as set out in the BIA.

The Ontario Court of Appeal ultimately disagreed with the trustee’s position. In making this determination, the Court stated that, in accordance with section 70(1) of the BIA, the payments to CRA were completely executed prior to the bankruptcy. Further, the Court felt that section 86(1) of the BIA, which provides that the CRA is an unsecured creditor, had no application as the debts were completely executed prior to the bankruptcy. The Court concluded that CRA was statutorily entitled to seek the jeopardy collection order, and upon obtaining it, permitted to immediately collect the amounts owing. So long as these amounts are collected prior to a subsequent bankruptcy, the Ontario Court of Appeal appears to have taken the position that they are not subject to attack under the BIA’s priority provisions.

This decision is noteworthy as the CRA found a way to essentially alter the BIA order of priorities and its statutorily provided position as an unsecured creditor. If the precedent established in this case is followed, the CRA will be able to be paid in priority to other creditors, if it is able to secure a jeopardy collection order upon notification of a receivership application, and is able to collect the amounts owing before bankruptcy.