Saskatchewan will soon be the latest jurisdiction to adopt an enhanced priority for deemed trusts created by its pension benefits legislation.
The Pension Benefits Act establishes a deemed trust for amounts contributed by both employers and employees. Bill 151, which amends the province’s Personal Property Security Act, will create a super-priority for these trusts when the legislation passes.
“Bill 151 would elevate the deemed trusts over all secured interests,” says David Gerecke, a lawyer in Miller Thomson LLP’s Saskatoon office. “That’s going to be a very scary thing for lenders providing operating credit, because there’s a lot of it out there.”
What’s not clear is whether the enhanced priority would apply to unfunded liabilities and solvency deficiencies under defined benefit plans. “That’s the real source of concern, which may rise to the level of alarm,” says Gerecke.
As well, Saskatchewan’s deemed trusts are broader than those found in provinces like Ontario.
“In Ontario, the trusts apply only to a limited class of assets, such as accounts receivable and inventory,” says Andrew Hatnay, a partner at Koskie Minsky LLP in Toronto. “There appear to be no such limitations in the Saskatchewan legislation.”
In the seminal case of Sun Indalex Finance, LLC v. United Steelworkers, the Supreme Court of Canada decided in 2013 that windup deficiencies under a plan were subject to the trust created under Ontario legislation.
“The language in Saskatchewan’s pension legislation differs from that in Ontario, but our interpretation is that there is a significant likelihood that the priority created for deemed trusts in our law will apply to unfunded liabilities and solvency deficiencies,” says Gerecke.
In the 2003 case of WRT Equipment Ltd.’s bankruptcy, the only decision interpreting the applicable pension benefits legislation in Saskatchewan, the Court of Queen’s Bench indicated it was prepared to treat unfunded liabilities as subject to the trust.
The difficulty with WRT, however, is the court ultimately refused to accord an enhanced priority to the deemed trust, ruling that provincially created deemed trusts weren’t recognized under federal bankruptcy legislation.
But Gerecke maintains the proposed amendments in Bill 151 could reverse that result. “Federal bankruptcy legislation defers to priorities in provincial personal property security legislation, and Bill 151 would create exactly that,” he says. “No such priority existed when the court decided WRT.”
According to Gerecke, other provinces have frequently followed Saskatchewan’s lead. “And if the trend to elevating deemed trusts spreads across the country, it could impact seriously on the availability of capital for businesses.”
But Hatnay maintains the doom and gloom is unwarranted.
“Lenders who lend to companies that have defined benefit plans will advance on the basis of what they see in the books, including the books of the pension plan, and will not be caught off-guard,” he says. “All this pessimism is just a pushback against priorities for pensioners.”