Law Times

Law Times • January 10, 2011 Parties positioning for Oct. 6 the Ontario legislature is a high-stakes game of King of the Castle as everyone grapples to seize the higher ground. In the meantime, the only W relief from the monotony may be Finance Minister Dwight Duncan's pre-budget consultation tour that starts Jan. 24 and rolls out from London, Ont., through Windsor, Thun- der Bay, Timmins, and Ottawa before returning to Queen's Park on Jan. 31. There's already the predictable clamour for cash from special inter- est groups, but Duncan's dilemma is palpable. He has already spent more money than he has coming in and has few options other than to cut costs and raise taxes, the latter being the last thing anyone wants to do in an election year. At the same time, he has to figure out how to spend what he has in a smarter fashion and make it go further, something few gov- ernments have accomplished. The Liberals' record so far would sug- gest it's a long shot. You can bet observers around Queen's Park are hoping for some tidbits from Duncan's dog and pony show if only to break from the never-ending repetition of the legislature's version of Groundhog Day that has been playing for the last few months. Here's the reality. There's only one item on the govern- ment agenda: the Liberals have 10 scant months to convince the electorate that the devil they know is better than the threat posed by Tim Hudak. We are being reminded con- stantly of the things Premier Dalton McGuinty's government has accomplished, such as all- day kindergarten and overall ed- ucation improvements, a clean energy strategy and, debatably, the overall impact of the HST on the province's books. At the same time, Hudak and the Conservatives are hammer- ing away at the government's spending record and unpopular policies like the HST, eco fees, and rising hydro rates. While the legislature isn't sit- ting until Feb. 22, the hostili- ties are ongoing. Christine Mc- Millan, the Liberal party's vice president of communications, fired a shot on the official blog over the holiday season suggest- ing right-winger Randy Hillier is increasingly manipulating Hudak's agenda. This follows up on an earlier report and has been the biggest morsel of news so far. "Call it two leaders or co- leaders or puppet and puppet- master," McMillan wrote. "It is the added weight of Randy Hill- ier that is preventing Tim Hudak from emerging from the Plan Free Zone (Day 542 for those of you still bothering to count)." Hillier, who is a key part of the libertarian Ontario Landowners ith seasonal fes- tivities fading, the horizon ahead for Inside Queen's Park By Ian Harvey Association and hails from hard- blue rural eastern Ontario, has long been seen as a loose cannon. The blog posting follows up on news reports about Hillier's involvement in recruiting other right-wingers to run as Tory candidates in the area. Hudak is also mindful that Hillier delivered votes to him at the 2009 leadership convention. His test as leader will be to assuage the right-wing component of caucus while maintaining a strong grip on the centre and avoiding an airing of dirty laundry in public. One of the Liberals' key at- tack points, of course, is to paint Hudak as the latest version of the big boogeyman, Mike Harris. It has proven hard to make it stick, so the next best thing would be fin- gering Hillier as a right-wing nut with his hands on the controls. "It may have seemed like a good idea to him at the time, but that backroom deal Tim struck with Randy to win the PC lead- ership is now his albatross," Mc- Millan wrote. "We imagine Ran- dy will eventually get around to writing Tim's policy — perhaps once he is done making decisions about which caucus members should be turfed." With their backs to the abyss, we'll likely see more of these at- tacks. But as for Hudak's plan, there's the rub. The Liberals need the Tories' plan much more than the Conservatives need to release one. Momentum and, more im- portantly, the polls, are all in the Conservatives' favour. With 10 months to go before the Oct. 6 mandated election date, there's nothing to be gained by releas- ing a platform at this stage of the game. The bigger risk is that the government will simply steal the good ideas and claim credit. The Liberals, on the other hand, can promise the sun, the moon, and the stars, but the elec- torate doesn't seem to be buying in. What they see is a government so busy spin-doctoring its own policies and missteps that it has left them dizzy. There's little wonder, then, that Hudak is sitting back and watching the show. His strategy has been to be visible, repeat the key elements of his message, and count the days to Oct. 6. It's a wise stance since, as has often been pointed out, offering too much complexity too early is politically fatal. Just ask John Tory. LT Ian Harvey has been a journalist for 32 years writing about a diverse range of issues including legal and political affairs. His e-mail address is ianharvey@rogers.com. www.lawtimesnews.com I COMMENT CRA gets ahead of the line BY MARALYNNE MONTEITH For Law Times n a sleight-of-hand move dexterously played by the Canada Revenue Agency, it managed to secure advance collection of a disputed corporate income tax debt by ob- taining an ex parte jeopardy collection order after receiving notification of an application by the taxpayer to appoint a receiver. The CRA used to be a preferred creditor un- der bankruptcy and insolvency statutes so that it could collect tax debts in front of unsecured creditors. However, the government amended the legislation in 1992 to specifically remove that preferred-creditor status and put the CRA on the same footing as other unsecured creditors. But in the decision of the Ontario Court of Appeal in I. Waxman & Sons Ltd., the CRA managed to skate around the Bankruptcy and Insolvency Act to collect the entire amount of a disputed corporate tax debt. The taxpayer in the case had filed a notice of objection to certain corporate income tax as- sessments. The CRA proceeded to collect half of the tax debt through garnishment proceed- ings prior to the application to appoint a re- ceiver. That's no surprise given that, as the tax- payer was a large corporation, the CRA could collect 50 per cent of the taxes in dispute pur- suant to s. 225.1(7) of the Income Tax Act. The government collected the other half, however, under the authority of a jeopardy col- lection order that the CRA obtained ex parte from the Federal Court pursuant to s. 225.2(2) of the tax act after receiving notice from the taxpayer of an application to appoint a receiver. The CRA got the jeopardy order, immediately served the requirement to pay, and collected the remaining disputed tax debt just days be- fore the appointment of the receiver. The basis for the application by the CRA to the Federal Court for the jeopardy collec- tion order, as described by the Ontario Court of Appeal, was that it could otherwise "take no steps to attempt to collect or secure its position vis-a-vis other creditors. . . . If the receivership order were granted, the CRA's claim in the re- ceivership would be unsecured." In other words, the CRA argued that if it didn't get the jeopardy collection order, the provisions of the bankruptcy act would unfold in the ordinary course with it standing as an unsecured creditor. This was a sufficient foun- dation for a jeopardy collection order. The Federal Court apparently agreed with this astonishing argument, thus afford- ing the CRA the ability to slip ahead of all of the other unsecured creditors in a move evoking the actions of a race-car driver. The receiver, when appointed, filed an ap- plication in Federal Court to set aside the jeop- ardy order. But counsel for both parties "agreed to defer the scheduling of the application until other issues in the company's estate were ad- dressed," the appeal court ruling noted. The corporate taxpayer was ultimately de- Speaker's Corner clared bankrupt some six months later, after which the former receiver became the trustee in bankruptcy. The trustee then moved a mo- tion before the Ontario Court of Justice for an order directing that the funds seized by the CRA pursuant to the jeopardy collection or- der be returned in order to distribute them in ac- cordance with the bank- ruptcy act or, alternatively, directing it to set off the distribution due to the CRA from the bankrupt estate against those funds. The trustee's motion was unsuccessful before the motions judge. The trustee was also unsuccessful on this appeal before the Ontario Court of Appeal. Why? Because the motion was a collateral at- tack against the jeopardy collection order, the ap- peal court ruled. In obiter, the court found that the jeopardy order was "completely executed" before the bankruptcy within the meaning of s. 70(1) of the bankruptcy act so that neither the provisions of s. 86(1), which makes the CRA an unsecured creditor, nor those of s. 73(4), which requires seized property to be returned to the trustee, assisted the trustee's position. Was the problem that the trustee failed to pursue its attack on the jeopardy collection order in the Federal Court under s. 225.2(8) and (9) of the income tax legislation? Or has the CRA found a very effective rear window to get itself back into a preferred-creditor position provided that it moves quickly enough to get and execute ex parte jeopardy collection orders whenever there is a pend- ing receivership or bankruptcy? If the only argument the CRA has to make to obtain a jeopardy collection order is that it would otherwise be an unsecured creditor un- der applicable bankruptcy legislation, then for all practical purposes, preferred-creditor privi- leges may once again be relevant in respect of any tax debtor who must give notice of an im- pending receivership or bankruptcy. Given the outcome in the Waxman deci- sion, whether the CRA has successfully cre- ated its own preferred-creditor procedure will be tested only if another similarly obtained jeopardy collection order is challenged in the Federal Court system. LT Maralynne Monteith is a senior tax lawyer at WeirFoulds LLP in Toronto. PAGE 7

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