Executive Summary: Key Legal and Evidentiary Issues

• Glencore Canada Corporation attempted to contractually set off HST obligations against replacement costs owed by an insolvent supplier (TNB) under Offtake Agreements

• Under the Excise Tax Act, HST is a debt owed to CRA, not to the supplier in its personal capacity, and the supplier merely collects it as agent and trustee for CRA

• The set-off clause's reference to "liabilities to the other party" inherently incorporates a mutuality requirement, precluding set-off of amounts owed in different capacities

• TNB could not invoke s. 224 of the ETA to recover unpaid HST from Glencore because it had failed to remit the tax to CRA

• Ordering Glencore to pay HST to the Receiver was a reasonable exercise of the supervising judge's discretion under s. 11 of the CCAA

• Requiring Glencore to also pay interest and penalties assessed against TNB was found unreasonable and unsupported by the record

The mining supply relationship and offtake agreements

Trevali Mining Corporation (TMC) and Trevali Mining (New Brunswick) Ltd. (TNB) were part of the Trevali corporate group, which owned and operated mines around the world. TNB operated a mine in New Brunswick and sold metal from that mine to Glencore Canada Corporation under Offtake Agreements entered into in 2020 and 2021. Under these agreements, TNB rendered provisional invoices to Glencore upon delivery of the metals, with final invoices rendered after the metals were weighed or measured and a final price was determined. In addition to the purchase price, Glencore was liable under s. 165(2) of the Excise Tax Act (ETA) to pay TNB harmonized sales tax (HST) of 15% of the purchase price since New Brunswick is a participating province. The Offtake Agreements contained a broadly worded set-off clause permitting either party, at any time and without notice, to set off any of its liabilities to the other party against any liabilities of the other party to itself, howsoever arising and whether present or future, liquidated or unliquidated and irrespective of the currency of its denomination.

The supplier's default and the set-off notices

During 2021 and 2022, TNB failed to deliver the minimum amounts of metals required under the Offtake Agreements, causing Glencore to incur USD $12.9 million in replacement and shipping costs (the Replacement Costs). TNB subsequently delivered some metals to Glencore and invoiced USD $8.7 million plus CAD $1.5 million in HST. On August 18 and September 8, 2022, Glencore issued notices of set-off to TMC, setting off the USD $12.9 million in Replacement Costs that TNB owed to Glencore against TNB's invoices to Glencore that included the HST. Critically, TNB had failed to report its sales and remit the collectible HST to the Canada Revenue Agency (CRA) prior to becoming insolvent.

The insolvency proceedings and CRA's assessment

On August 19, 2022, just one day after Glencore's first set-off notice, TNB was granted a stay of proceedings under the Companies' Creditors Arrangement Act (CCAA) and FTI Consulting Canada Inc. was appointed as Monitor. Effective January 24, 2023, TNB was placed into receivership and FTI was appointed as Receiver. In audit letters dated January 23 and March 22, 2023, CRA advised TNB that it proposed to assess the company for its net HST liability as a result of unreported sales and unreported GST/HST collectible. On March 29, 2023, CRA assessed TNB for CAD $1,546,331 including interest and penalties in respect of the HST collectible from the sales to Glencore. The Receiver did not dispute Glencore's claim for the Replacement Costs or its contractual right to set off those costs against Glencore's liability to TNB but specifically disputed Glencore's right to set off the HST, arguing that the tax payable is an obligation of Glencore to CRA, not to TNB, who acts as an agent for CRA in collecting the HST. On September 13, 2023, the Receiver demanded payment from Glencore for USD $1,129,129 in HST, roughly equivalent to the CAD $1,546,331 CRA assessed against TNB.

The supervising judge's decision on HST liability and set-off

The supervising judge in the CCAA proceeding undertook a thorough analysis of the ETA's legislative scheme. She concluded that under s. 165, Glencore as recipient owed the HST to CRA, not to TNB. Although the ETA requires the supplier to collect HST from the recipient, the supplier does so as agent for CRA under s. 221 and holds the collected amounts in trust for CRA under s. 222. The judge also examined s. 224, which provides a supplier with a cause of action to recover unpaid tax from a recipient "as though it were a debt due," but only where the supplier has accounted for or remitted the tax to CRA. Since TNB had not used its own funds to pay the HST to CRA, it was unable to bring an action against Glencore under this provision. The judge held that the set-off clause, while expansive in addressing the nature of the claims included, could not negate the usual requirement for mutuality in legal set-off or even the relaxed mutuality requirement in equitable set-off. Because Glencore owed the HST to TNB not in TNB's own right but in its representative capacity under the ETA to collect HST on behalf of CRA, the mutuality condition was not satisfied. She further rejected Glencore's arguments based on estoppel and commercial unreasonableness and ordered Glencore to pay the HST as well as the interest and penalties CRA assessed against TNB.

The interpretation of the ETA and the set-off clause on appeal

On appeal to the British Columbia Court of Appeal, Glencore contended the judge made three errors of law: reading s. 224 out of the ETA by giving TNB the benefit of the provision without satisfying its requirements, bypassing the statutory appeal process that Parliament put in place, and making inconsistent and irreconcilable findings in concluding that TNB can set off HST but Glencore cannot. The Court of Appeal, in reasons written by Justice Fisher with Justices Edelmann and Francis concurring, found no error in the supervising judge's interpretation of the ETA. The Court confirmed that HST is fundamentally a debt owing by the recipient to CRA, and that the supplier's role as agent for CRA never changes. The Court noted that s. 224, while an important part of the statutory scheme, does not change the nature of the recipient's liability to CRA. The Court also affirmed the judge's interpretation of the set-off clause, finding that the express words permitting either party to "set off any of its liabilities to the other party against any liabilities of the other party to itself" support the conclusion that mutuality was required. Because TNB never fulfilled its trust obligation to CRA by remitting the tax owed by Glencore and had no right to recover from Glencore under s. 224 of the ETA, Glencore's HST obligation remained owed to TNB in its trustee capacity, not in its personal capacity, and thus the set-off was not available.

The CCAA discretion and the ruling on interest and penalties

The Court of Appeal held that the supervising judge's order requiring Glencore to pay the unpaid HST to the Receiver was a reasonable exercise of her broad discretion under s. 11 of the CCAA. Once the CCAA proceeding commenced, the deemed trust in favour of CRA ceased under s. 222(1.1) of the ETA, and the order appropriately allowed the Receiver to receive the funds as agent for CRA and distribute them among the creditors in accordance with the CCAA. The Court also rejected Glencore's jurisdictional challenge, confirming that the issue was about Glencore's entitlement to contractual set-off of HST, which raised issues of contractual and statutory interpretation about which the Tax Court does not have exclusive jurisdiction. However, the Court found that requiring Glencore to also pay the interest and penalties CRA assessed against TNB was not reasonable. The Court noted that the problem was created by TNB's failure to account for and remit the HST payable by Glencore to CRA and its subsequent insolvency, and that the judge's finding that these additional charges were a direct result of Glencore not remitting the HST to TNB was not borne out in the record. For all these reasons, the appeal was allowed only to the extent of varying the judge's order to exclude the interest and penalty charges CRA assessed against TNB. The exact amount of principal HST, separated from the interest and penalties within the CAD $1,546,331 assessment, is not specified in the decision.