Pension priorities in Canada: an update for lenders


Financier Worldwide Magazine

January 2014 Issue

January 2014 Issue

Financiers and lenders to Canadian companies have become increasingly concerned about potential priorities of pension claims in Canada over the past year following the 1 February 2013 decision of the Supreme Court of Canada (SCC) in the Indalex case (Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6). Much of this concern may have been caused by conjecture as to how the SCC’s decision would be applied in future insolvency proceedings, rather than the relatively narrow issue that was actually before the SCC in Indalex. A more recent decision of the Ontario Superior Court (Grant Forest Products Inc. v. GE Canada Leasing Services Company,2013 ONSC 5933)helps to clarify certain issues arising from Indalex in a manner that may be helpful to lenders.

Private employer-sponsored pensions in Canada generally fall into two categories: defined-benefit plans and defined-contribution plans. Under defined-benefit plans, employees are essentially guaranteed a monthly pension amount upon retirement and a periodic valuation is conducted to assess the value of the pension plan assets against the present value of its estimated liabilities. The rules regarding the valuation of such pension plans are governed by provincial law in Canada and require the employer to make-up any deficiencies in the value of the assets against the estimated liabilities with periodic payments amortised over a period of time (e.g., five years in Ontario). Where a defined-benefit pension plan is wound-up, a valuation is conducted to determine the existence of a wind-up surplus or deficiency (i.e., the difference between the value of the assets in the pension plan and the total amount necessary to satisfy the obligations to the pension plan’s members as at the wind-up date). Section 57(4) of the Pension Benefits Act (Ontario) (PBA) provides for the creation of a deemed trust with respect to assets of the debtor in an amount equal to unpaid employer contributions accrued to the date of wind-up. 

The relatively narrow issue before the SCC in Indalex was whether claims for wind-up deficiencies are secured by deemed trusts under the PBA and, if so, the priority of those wind-up deficiencies in defined-benefit pension plans versus court-ordered debtor-in-possession (DIP) financing charges under the Companies’ Creditors Arrangement Act (Canada) (CCAA). Prior to Indalex, it was generally understood, based on prior Ontario case law, that a pension deficiency unrelated to the failure to make scheduled statutorily mandated payments was a regular unsecured claim not covered by the deemed trust. The Ontario Court of Appeal, to the surprise of many insolvency and pension practitioners, had ruled that section 57(4) of the PBA created a deemed trust over the assets of Indalex in favour of the pension plan beneficiaries in respect of the wind-up deficiency in the Indalex pension plan, and that the deemed trust had priority over the court-ordered DIP charge (which otherwise should have had priority over virtually all other existing secured and unsecured obligations pursuant to the Court order) in Indalex’s CCAA proceedings. The SCC overturned the Ontario Court of Appeal’s decision on the issue of the priority of the deemed trust, deciding that the court-ordered DIP charge under the federal CCAA ranks ahead of the deemed trust under the provincial PBA; however four of the seven judges on the SCC panel also agreed with the Court of Appeal’s view that the assets of Indalex were indeed encumbered by the deemed trust under the PBA for the full amount of the pension wind-up deficiency in the case of a defined-benefit plan that has been wound-up. 

In the prolonged low interest rate environment that Canada has faced along with much of the rest of the western world, there are numerous defined-benefit pension plans that may face significant wind-up deficiencies if they were wound up today, so this is an important issue for lenders to Canadian companies. If the entire amount of a pension plan’s wind-up deficiency is secured by a deemed trust under the PBA, there is a risk that such a deemed trust could also potentially rank ahead of the claims of secured lenders, particularly with respect to the accounts and inventory of a borrower in Ontario.  Section 30(7) of the Personal Property Security Act (Ontario), states that “a security interest in an account or inventory and its proceeds is subordinate to the interest of a person who is the beneficiary of a deemed trust arising under theEmployment Standards Act or under the Pension Benefits Act”.  Other provinces in Canada may have similar priority rules. We are seeing anecdotal evidence that the SCC decision in Indalex has already had a negative impact as lenders have become more cautious and reduced the availability of credit to borrowers with significant defined-benefit pension plans. Unfortunately, the issues that may have caused lenders the greatest concern, including priority of pension deemed trusts for wind-up deficiencies versus existing secured lenders’ claims, were not centrally at issue in Indalex and were therefore not fully resolved in that case.

In the more recent decision of the Ontario Superior Court in Grant Forest Products, the Courtclarified some of the worrisome issues left open in the Indalex decision in a manner that appears to be favourable for secured lenders. In Grant Forest Products, the Court considered whether a priority claim by pension beneficiaries following the sale of assets of Grant Forest Products Inc. (GFPI) would be entitled to receive proceeds from the sale of GFPI’s assets over the competing claims of an existing secured creditor of GFPI. Drawing on the SCC’s decision in Indalex, the Ontario Court held that a deemed trust that arises upon wind-up would prevail when the wind-up of the pension plan occurred before the commencement of insolvency proceedings but would not defeat an existing secured lender’s priority where the wind-up occurred after the commencement of the insolvency proceeding. In addition, the Ontario Court confirmed that a secured lender may petition a debtor company into bankruptcy in order to gain greater certainty with respect to the priority of its claim over deemed trust claims.  

The Grant Forest Products decision is helpful in attempting to clarify and introduce greater certainty for financiers in insolvency situations involving defined-benefit pension plans with potentially significant wind-up deficiencies. However it should be noted that the Ontario Superior Court’s decision has been appealed to the Ontario Court of Appeal and, in any event, it is a lower court decision and may be of little help in case of conflict with the SCC’s decision in Indalex. In time, greater clarity will hopefully be given by the Courts on these important issues as Grant Forest Products makes its way through the appeal process but, for the time being, financiers would be wise to continue to exercise appropriate caution in dealing with borrowers with defined-benefit pension plans in Canada and seek advice as to the possible priority of pension claims over the specific assets against which they are lending. 

Raj Sahni is a partner at Bennett Jones LLP. He can be contacted on +1 (416) 777 4804 or by email:

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Raj Sahni

Bennett Jones LLP

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