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Priority Denied: Alberta Court of Appeal Determines Linear Property Tax Arrears Are Not Subject to a Special Lien

February 18, 2019

On February 12, 2019, the Court of Appeal of Alberta (Court) released its long-anticipated decision in Northern Sunrise County v. Virginia Hills Oil Corp. (Virginia Hills). The Court held that the taxation provisions of the Municipal Government Act (MGA) do not grant special lien priority to municipalities for tax arrears related to linear property (property that includes electric power systems, telecommunications systems, railways, wells and pipelines).

Virginia Hills provides some comfort to lenders facing a growing trend of governmental agencies attempting to assert statutory super-priorities for their claims in insolvency proceedings. This trend has challenged the first-priority security that lenders negotiated for at the time funds were advanced to a borrower.


In the receivership proceedings of Virginia Hills, the receiver (Alvarez & Marsal Canada Inc.) brought an application for advice, directions and approval to distribute funds. The Court of Queen's Bench of Alberta granted an order declaring that the pre-receivership linear tax claims owed to three Alberta municipalities (Municipalities) were unsecured claims against the estates of the debtors and were not secured claims against the estate property.

The Municipalities appealed and argued that linear property tax arrears were secured claims pursuant to section 348 of the MGA and the Bankruptcy and Insolvency Act.


The Municipalities argued that "property tax" in section 348(d)(i) of the MGA includes "linear property tax", and that the provision grants municipalities a special lien on "land and any improvements to the land" with respect to linear property tax arrears. The Municipalities claimed that the special lien gives them priority over all creditors, other than the Crown, in a receivership proceeding.

The receiver's position was that section 348(d)(i) is too ambiguous to create a statutory lien in respect of linear property taxes because it is unclear as to whose or what land is caught by the special lien. The receiver pointed out that even the Municipalities themselves did not agree as to what land would be subject to the special lien.

In a unanimous decision, the Court dismissed the Municipalities' appeal and held that when section 348(d)(i) is read in its grammatical and ordinary sense and in harmony with the scheme of the MGA, its reference to "property tax" does not include linear property tax arrears. Accordingly, the MGA does not create a special lien in favour of municipalities for arrears on linear taxes.

In addition, the Court noted that since linear property taxes are imposed on the operator of the linear property and not the owner of the linear property, injustices could arise where a special lien attached to linear property, and the owner of the linear property was not the operator from whom the arrears are due.


This much anticipated decision of the Court of Appeal should be welcome news for secured lenders and court officers. Municipalities have been asserting priority claims in many insolvency proceedings, requiring that significant funds be held in trust until this priority issue has been resolved.

Virginia Hills follows two recent Court of Queen's Bench of Alberta decisions, Re Regent Resources and Alberta Treasury Branches v. Cogi Limited Partnership (Cogi), in which the court held that the special lien provided by section 348 of the MGA is restricted to lands and improvements located within the geographical boundaries of the municipality, and does not extend to all of a municipal tax debtor's property. The court’s decision in Cogi is currently under appeal.

For further information, please contact:

Kelly Bourassa                          403-260-9697
James Reid                              403-260-9731
Matthew Summers                    403-260-9677

or any other member of our Restructuring & Insolvency group.