2022 QCCA 250, 2022 QCCA 250

M. Diamond & Associés inc. c. Agence du revenu du Québec 2022 QCCA 250 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-028924-207 (500-80-034041-161) DATE: February 21, 2022 CORAM: THE HONOURABLE MARIE-FRANCE BICH, J.A. STEPHEN W. HAMILTON, J.A. MICHEL BEAUPRÉ, J.A. M. DIAMOND & ASSOCIÉS INC., in its capacity as trustee to the bankruptcy of Rocco Carbone APPELLANT – Plaintiff v.

AGENCE DU REVENU DU QUÉBEC RESPONDENT – Defendant JUDGMENT [ 1 ] The Appellant appeals from the judgment rendered on April 27, 2020 by the Court of Quebec, District of Montreal (the Honourable Daniel Bourgeois), which granted the Respondent’s motion to dismiss and dismissed the proceedings instituted by the bankrupt. [ 2 ] For the reasons of Hamilton, J.A., with which Bich and Beaupré, JJ.A. concur, THE COURT : [ 3 ] GRANTS the appeal; [ 4 ] DISMISSES the Respondent’s motion to dismiss in Court record 500-80-034041-161; [ 5 ] The whole with costs at both levels. MARIE-FRANCE BICH, J.A. STEPHEN W. HAMILTON, J.A.

MICHEL BEAUPRÉ, J.A. Mtre Jean-Philippe Gervais COLAS MOREIRA KAZANDJIAN ZIKOVSKY For the Appellant Mtre Daniel Stock Mtre Vincenzo Carrozza LARIVIÈRE MEUNIER (Revenu Québec) For the Respondent Date of hearing: November 23, 2021 REASONS OF HAMILTON, J.A.

[ 6 ] The issue in this appeal is whether the taxpayer’s contestation before the Court of Quebec of a tax assessment issued under the Taxation Act [1] and governed by the Tax Administration Act [2] is automatically stayed under the Bankruptcy and Insolvency Act [3] when the taxpayer becomes bankrupt, or whether instead the taxpayer’s trustee in bankruptcy is obliged to continue the contestation failing which it will be dismissed. [ 7 ] The Court of Quebec held that the contestation was not stayed and dismissed it when the trustee failed to continue it.

The trustee appealed from that judgment. [ 8 ] In my view, the trustee’s appeal should be allowed. The contestation was automatically stayed such that the trustee was not obliged to continue it. *** [ 9 ] The facts giving rise to this appeal are straightforward and are not contested. [ 10 ] Rocco Carbone, the bankrupt, received a notice of assessment of his income tax for taxation year 2007 from the Agence du revenu du Québec (the “Agency”) on March 11, 2013. He filed an objection. [ 11 ] On July 19, 2016, the Agency issued its revised notice of assessment.

Not satisfied, the bankrupt filed proceedings in the Court of Quebec on October 14, 2016 to contest the notice of assessment. On July 6, 2017, he filed an assignment in bankruptcy and the Appellant was appointed trustee. At that time, his proceedings contesting the notice of assessment were pending before the Court of Quebec. [ 12 ] Nothing happened with the proceedings for a period of more than two years.

During that time, the Agency filed a proof of claim and a modified proof of claim in the bankruptcy, claiming the amounts in the notice of assessment. [ 13 ] On February 15, 2019, the Agency reactivated the file pending before the Court of Quebec by sending a notice pursuant to

Article 200 of the Code of Civil Procedure calling on the trustee to continue the proceedings. The trustee did not respond to the notice. On November 27, 2019, the Agency made a motion to dismiss the proceedings because the trustee failed to continue them. On December 2, 2019, in response to the motion, the trustee sent a notice of stay of proceedings to the Agency and the court office. [ 14 ] The matter came before the judge on January 27, 2020.

He initially suspended the motion to dismiss for 30 days and called upon the trustee to advise him of its position in the matter. [4] The trustee responded by letter on January 31, 2020 wherein it advised the judge that the matter was automatically stayed under

Section 69.3 BIA when the bankrupt filed the assignment in bankruptcy. The trustee invoked the Court’s judgment in Girard [5] in support of its position. [ 15 ] The Agency did not agree. On March 10, 2020, it sent a new notice of presentation of its motion to dismiss the proceedings for failure to continue them.

The motion was heard by default on March 18, 2020 and was granted by the judge on April 27, 2020. [6] [ 16 ] The judge distinguished Girard and held that the stay of proceedings under the BIA only had effect after the tax debt had been confirmed, whether after a hearing in the Court of Quebec, a discontinuance by the trustee or the dismissal of the proceedings for failure to continue them. *** [ 17 ] Professor Jacques Deslauriers aptly summarized the effects of bankruptcy in the following passage: 902.

La faillite dessaisit immédiatement le débiteur de tous ses biens, à l’exception des biens insaisissables et des biens qu’il détient en fiducie pour autrui (art. 67(1)a)

b) L.f.i.). Ce dessaisissement s’effectue entre les mains du syndic qui gérera et liquidera ces biens en faveur des créanciers (art. 67(1) L.f.i.). En prévision de ce dessaisissement, la loi impose plusieurs obligations préliminaires, tant au failli qu’aux différents officiers tels le syndic, le séquestre officiel et le surintendant. Puisqu’à la suite de ce dessaisissement, le débiteur devient inhabile à aliéner ou à disposer de quelque façon que ce soit les biens qu’il possédait au jour de la faillite (art. 71(2) L.f.i.), ceci le rend, notamment, incapable de payer dorénavant ses créanciers à même ses actifs.

Les procédures usuelles des créanciers pour recouvrer leurs créances sont suspendues jusqu’à ce que le syndic soit libéré. Leur seule possibilité est désormais de produire une réclamation dans la faillite, selon le processus prévu par la loi. Le débiteur sera ultérieurement libéré de la plupart de ses dettes, à l’exception de celles qui font l’objet des exceptions énoncées à l’article 178(1) L.f.i. [7] [ 18 ] Essentially, all of the bankrupt’s property is vested in the trustee, who manages and liquidates the property for the benefit of the creditors.

The bankrupt ceases to have any right to deal with his property. Meanwhile, all of the creditors’ recourses against the bankrupt are stayed in favour of a process for liquidating claims before the bankruptcy court. [ 19 ]

Section 71 BIA provides for the vesting of property in the trustee:

71 On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property , which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer. 71 Lorsqu’une ordonnance de faillite est rendue, ou qu’une cession est produite auprès d’un séquestre officiel, le failli cesse d’être habile à céder ou autrement aliéner ses biens qui doivent, sous réserve des autres dispositions de la présente loi et des droits des créanciers garantis, immédiatement passer et être dévolus au syndic nommé dans l’ordonnance de faillite ou dans la cession, et advenant un changement de syndic, les biens passent de syndic à syndic sans cession ni transfert quelconque. [Emphasis added] [ 20 ] Subsection 69.3(1) BIA provides for the stay of proceedings, and

Section 69.4 BIA for the lifting of that stay: 69.3

(1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy. 69.3

(1) Sous réserve des paragraphes (1.1) et (2) et des articles 69.4 et 69.5, à compter de la faillite du débiteur, ses créanciers n’ont aucun recours contre lui ou contre ses biens et ils ne peuvent intenter ou continuer aucune action, mesure d’exécution ou autre procédure en vue du recouvrement de réclamations prouvables en matière de faillite. […] […] 69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of

section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied (

a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or (

b) that it is equitable on other grounds to make such a declaration. 69.4 Tout créancier touché par l’application des articles 69 à 69.31 ou toute personne touchée par celle de l’article 69.31 peut demander au tribunal de déclarer que ces articles ne lui sont plus applicables . Le tribunal peut, avec les réserves qu’il estime indiquées, donner suite à la demande s’il est convaincu que la continuation d’application des articles en question lui causera vraisemblablement un préjudice sérieux ou encore qu’il serait, pour d’autres motifs, équitable de rendre pareille décision. [Emphasis added] [ 21 ] The filing of proofs of claim is provided for in

Section 124 BIA and the procedure for the admission and disallowance of proofs of claim is set out in

Section 135 BIA . It is not necessary to set out those provisions at length. [ 22 ] The tax debt owing by the bankrupt to the Agency under the Taxation Act is subject to the special mode of collection provided in the Tax Administration Act . Essentially, under those rules, a tax assessment is deemed valid and the tax, interest and penalties set out in the assessment are payable unless the taxpayer files a contestation in Court of Quebec.

That contestation typically takes the form of an originating application in which the taxpayer is designated as the plaintiff. *** [ 23 ] The issue in this case is whether a tax debt owing to the Agency is subject to the rules governing other debts of the bankrupt, namely a stay of the usual recourses in favour of a process in bankruptcy court, or whether the tax debt is instead exempted from those rules and is governed by the particular rules set out in the relevant tax legislation. [ 24 ] There is, in a sense, a conflict between the BIA and the Tax Administration Act : the Tax Administration Act provides a mechanism for the Agency to collect tax debts owing to the Minister and the BIA purports to stay all proceedings for the recovery of debts owing to the creditors of the bankrupt in favour of a process in bankruptcy court.

The Agency does not argue that the taxation legislation takes precedence over the BIA . If it did, there would be a constitutional issue, because the BIA is federal legislation and the Tax Administration Act is provincial. [ 25 ] Rather, the Agency argues that

Section 69.3 BIA does not apply to the proceedings in the Court of Quebec contesting a tax assessment. [ 26 ] The Court already answered a very closely related question in Girard . [8]

[ 27 ] In Girard , the tax debtor became bankrupt before the Canada Revenue Agency (“CRA”) had issued a notice of assessment. The issue was whether the CRA’s right to issue a notice of assessment was stayed by the bankruptcy. There were conflicting judgments of the Superior Court on this issue. [9] [ 28 ] Justice Doyon, speaking for a unanimous Court, relied on the notion of the “single proceeding model” developed by the Supreme Court in Century Services [10] and the broad

interpretation of

Section 69.3 BIA by the Supreme Court in Vachon [11] and M & D Farm [12] to state: [44]

Section 69.3 BIA prohibits actions and proceedings "with a view to the recovery of provable claims". The ordinary meaning of the words conflicts with the appellant's position that the notice of assessment is not a recovery measure. While it is true, as stated above, that the notice does not enable recovery on its own, the fact remains that it is issued with a view to recovering this claim, even though the recovery is carried out subsequently, from the bankrupt's assets that are collected by the trustee.

In short, the CRA wishes to recover its debt, and its notice of assessment is part of a series of measures to do so. The fact that the recovery does not target a specific asset but the assets as a whole changes nothing: the notice of assessment is the first step in a longer process and, to paraphrase paragraph 27 of M & D Farm Ltd. , it would be artificial to isolate it from this process and, having isolated it, contend that it is exempt from the

section 69.3 stay. [Underlining in original.] [ 29 ] This reasoning seems confirmed by the subsequent Supreme Court judgment in Moloney : [33] The first purpose of bankruptcy, the equitable distribution of assets, is achieved through a single proceeding model. Under this model, creditors of the bankrupt wishing to enforce a claim provable in bankruptcy must participate in one collective proceeding. This ensures that the assets of the bankrupt are distributed fairly amongst the creditors. […] [34] For this model to be viable, creditors must not be allowed to enforce their provable claims individually, that is, outside the collective proceeding.

Section 69.3 of the BIA thus provides for an automatic stay of proceedings, which is effective as of the first day of bankruptcy […] […] [39] […] The stay not only ensures that creditors are redirected into the collective proceeding described above, it also ensures that creditors are precluded from seizing property that is exempt from distribution to creditors. […] [13] [ 30 ] Justice Doyon went on to conclude that

Section 69.3 BIA did not prevent the CRA from issuing a notice of assessment, but it meant that the notice of assessment would have no legal effect: [68] In conclusion, if the CRA submits a claim to the trustee, it may issue a notice of assessment. Because this notice of assessment constitutes a proceeding with a view to recovering a provable claim, however, it will not have the legal effects conferred upon it by the ITA unless the CRA obtains leave from the Court.

In other words, if the CRA seeks to have the procedure for objection to the notice of assessment in the ITA to be applicable, particularly in regard to the limitation period for objection, it must address the court and obtain its authorization, pursuant to

section 69.4 BIA . [ 31 ] In particular, this meant that the trustee would not be obliged to contest the notice of assessment and his failure to do so would not result in the tax, interest and penalties in the notice being payable. [ 32 ] It is easy to extend this reasoning to the present case. [ 33 ] It is true that the facts in the present case are different from those in Girard in that the notice of assessment was issued by the Agency prior to the bankruptcy and the taxpayer filed a contestation.

However, these remain, to use the language in Girard , steps in the process of collecting a tax claim against the bankrupt taxpayer. The only difference is that we are a little further along in the process. [ 34 ] The Agency, like the judge in first instance, seeks to distinguish Girard on the basis that the notice of assessment in the present case was issued before the bankruptcy. The Agency argues that there are proceedings in the Court of Quebec in which the bankrupt is the plaintiff. It argues that

Section 69.3 BIA does not apply to proceedings in which the bankrupt is the plaintiff. [ 35 ] The Agency reads

Section 69.3 BIA too narrowly.

Section 69.3 BIA stays the right of the “creditor” to commence or continue any action, execution or other proceedings against the “debtor”, for the recovery of a claim that is provable in bankruptcy. The taxpayer is the debtor and the Agency is the creditor. The BIA does not refer to “plaintiff” or “defendant” and those labels should not be relevant. In substance, the contestation is nothing more than the taxpayer’s defense to the claim by the Agency and the steps taken by the Agency in this matter to reactivate the file in the Court of Quebec constitute the continuation by the creditor of that claim. [ 36 ] Moreover, the Agency argues that under

Section 71 BIA , the bankrupt has no capacity to deal with these proceedings and therefore that it is up to the trustee to do so. The first part of that argument is correct: one effect of the bankruptcy is that the bankrupt no longer has the capacity to deal with any proceedings relating to his property. However, that does not mean that the trustee has the obligation to do so. Those proceedings are in principle stayed under

Section 69.3 BIA unless and until the bankruptcy court lifts the stay. [ 37 ] Obviously, the situation would be different if the bankrupt had paid the contested tax and was seeking a reimbursement, which is not the case here. In those circumstances, the bankrupt would be the creditor and the claim would be vested in the trustee under

Section 71 BIA and would not be stayed under

Section 69.3 BIA , with the result that the trustee would have to decide whether to continue the proceedings or not for the benefit of the creditors: [29] En fait, et tel que le Tribunal l’a indiqué lors de l’audition, la situation aurait pu être différente si Lapointe avait payé et acquitté les avis de cotisation en litige, tout en continuant de contester ces derniers devant la Cour du Québec. Dans une telle situation, il est clair que le Syndic aurait eu à évaluer les chances de succès du recours de Lapointe contre Revenu Québec et il est fort à parier que, dans

l’éventualité où des chances raisonnables existaient de faire annuler les avis de cotisation, le Syndic aurait certainement produit un avis en reprise d’instance à

titre de Syndic, es qualité de la faillie. [14] [ 38 ] However, in the present matter, the tax claim was a debt. [ 39 ] For these reasons, I am of the view that the proceedings in the Court of Quebec were stayed by the bankruptcy. As a result, the Agency did not have the right to send the notices to compel the trustee to continue the proceedings and its motion to dismiss the proceedings should have been dismissed. *** [ 40 ] The Agency argues that this conclusion runs counter to the consistent jurisprudence in the Court of Quebec and outside Quebec.

It seeks to use these authorities to limit the scope of Girard . [ 41 ] It is true that there seems to be a consistent pattern of cases in the Court of Quebec where the Agency seeks to compel the trustee to continue contestations by bankrupt taxpayers and, if the trustee fails to do so, makes a motion to dismiss the contestation.

The Agency produces a number of judgments of the Court of Quebec granting such motions [15] and one judgment of our Court confirming a judgment of the Court of Quebec which gave the trustee 30 days to respond to a notice to continue the suit. [16] Many of the judgments dismissing the contestations were rendered by default after the trustee confirmed that it had no interest in the tax proceedings. Those judgments are, in my view, wrongly decided for the same reasons as the judgment in this case.

The fact that there are many such decisions does not change that. [ 42 ] One further word on the Lapointe judgment, which was confirmed by the Court. It follows the same pattern as the present matter: the Agency sent a notice to continue proceedings to the trustee who did nothing, and the Agency made a motion to dismiss the proceedings. The judge gave the trustee 30 days to respond, failing which the proceedings would be dismissed.

The bankrupt taxpayer appealed from that judgment and the Canadian Association of Insolvency and Restructuring Professionals intervened to argue that the trustee had no obligation to continue the proceedings because they were stayed under

Section 69.3 BIA . However, the trustee decided to continue the proceedings [17] . The Court dismissed the appeal as improperly initiated, the bankrupt taxpayer having failed to ask for leave to appeal, and added that the appeal was moot. The Court did not endorse the Agency’s position or consider the intervenor’s argument. [ 43 ] It is also true that Girard has not been followed very often in Quebec on the specific issue of the stay of a tax claim [18] and that it does not seem to have been cited outside Quebec.

However, it is misleading to suggest that the existing jurisprudence in the rest of Canada has rejected the reasoning in Girard . The reasoning of the British Columbia Supreme Court in Alpine Press , a judgment rendered before Girard , is similar.

In that case, the bankruptcy court concluded that it had jurisdiction to decide whether the termination pay owed by the bankrupt employer to its employees as set out in the Director’s determination should be allowed as a claim in the bankruptcy, even though, under the provincial legislation, the Director’s determination was binding and could be filed and enforced as a judgment, subject only to an appeal to the Employment Standards Tribunal. [19] [ 44 ] In Re Norris , the Ontario Court of Appeal held that a trustee in bankruptcy who wishes to challenge a notice of assessment must follow the procedure set out in the relevant tax legislation. [20] This judgment was considered by the Court in Girard , and was set aside on the basis that it was decided before M & D Farm Ltd. and therefore without the benefit of the broad

interpretation given by the Supreme Court to the “single proceeding model”.

The Court also underlined that the argument that Sections 69.3 and 69.4 BIA stay the procedure for objecting to the notice of assessment and that leave from the bankruptcy court is required to continue that procedure was not raised before the Ontario Court of Appeal. [21] [ 45 ] In other tax cases, the courts have focused on the capacity of the bankrupt to continue the proceedings contesting the tax assessment and have consistently held that the bankrupt does not have the capacity to do so without the permission of the trustee. [22] None of these judgments deal with the question of the stay of proceedings. [ 46 ] Finally, the decision of the Ontario Court of Appeal in Schnier is interesting but of limited application in the present matter. [23] It stands for the principle that a tax authority whose debt has not been liquidated cannot oppose the discharge of the bankrupt under

Section 172.1 BIA . In my view, the lesson to be drawn from Schnier is that, if the tax authority intends to contest the discharge of the bankrupt under

Section 172.1 BIA , it must liquidate its claim, either by agreeing with the trustee on the amount of the tax debt or by having it determined by the court.

If the tax authority wishes to have its debt determined by the court, it will generally want to have the stay lifted by the bankruptcy court so that it can proceed before the specialized court (the Tax Court in federal matters or the Court of Quebec in provincial matters in Quebec). [24] The judgment does not suggest that the tax authorities can proceed in the specialized court without the authorization of the bankruptcy court. [25] *** [ 47 ] For all of the foregoing reasons, I propose to grant the appeal and dismiss the motion to dismiss presented by the Agency in Court record 500-80-034041-161, the whole with costs at both levels.

STEPHEN W. HAMILTON, J.A.