Record of Crown claims: Crown priority in insolvency

A buyer of a distressed business, or a lender to one, may find unpaid government amounts in the debtor’s books. The BIA sets how those claims rank. Section 86(1) says that in relation to a bankruptcy or proposal, all provable claims, including secured claims, of the federal Crown, a provincial Crown or a workers’ compensation body rank as unsecured claims.

Exceptions to read

• Section 86(2) says subsection (1) does not apply to claims secured by a security or charge of a kind that can be obtained by persons other than the Crown or a workers’ compensation body, or, to the extent provided in s. 87(2), to claims secured by a security referred to in s. 87(1) and registered in accordance with it.
• Section 87(1) makes a security provided for in federal or provincial legislation for the sole or principal purpose of securing a claim of the Crown or a workers’ compensation body valid in a bankruptcy or proposal only if it is registered under a prescribed system of registration before the date of the initial bankruptcy event.
• Section 86(3) says subsection (1) does not affect Income Tax Act s. 224(1.2) and (1.3), related Canada Pension Plan and Employment Insurance Act provisions, or, on the conditions in s. 86(3)(c), provincial provisions with a similar purpose.
• Income Tax Act s. 227(4.1) can treat property equal to unpaid withheld amounts as held in trust for the Crown, despite the BIA except ss. 81.1 and 81.2, subject to exceptions in s. 227. See deemed trust.

Ask which Crown bodies are owed money, whether any Crown security was registered before the initial bankruptcy event, and have a lawyer or licensed insolvency trustee confirm how ss. 86 and 87 apply. See how to check for CRA debts before buying a business.