Priority of Unpaid Property Taxes on Linear Property

In February 2019 the Alberta Court of Appeal released a decision regarding the priority of property taxes on linear property in the decision Northern Sunrise County v. Virginia Hills Oil Corp. (2019 ABCA 61) (the “Virginia Hills Decision”).

The result of that case was that the Court of Appeal determined that unpaid taxes on linear property are not a secured claim against the assets of an insolvent company. This decision was a surprise to many municipalities that had previously considered all unpaid property taxes to be a first-ranking claim against the assessed person and the decision was made despite the specific wording of section 348(d)(i) of the Municipal Government Act (MGA), which states that property taxes constitute a special lien on land and improvements.

While the municipalities that are directly affected by the decision, including the MD of Opportunity, have taken steps to attempt to appeal the decision to the Supreme Court of Canada, even if that appeal is allowed to proceed – which is not certain – it will likely be many months, perhaps years, until the Supreme Court of Canada issues a final decision. In the meantime, many municipalities, including the MD of Opportunity, will be practically unable to recover linear property taxes from insolvent oil and gas companies. The impact of this will be significant. Alberta municipalities stand to lose many millions in unrecoverable property taxes unless the issue is addressed through immediate amendments to the MGA.

In order to rectify the issues created through the Virginia Hills Decision, the MGA should be amended to:

1. Clarify that the reference to “property tax” in section 348 of the MGA includes all property taxes, including property taxes on linear property;
2. Clarify the meaning of the phrase “…land and any improvements to the land…” in section 348 to specify what property is subject to the special lien established in that section;
3. Provide municipalities with improved enforcement powers, or sufficiently reinforce existing powers, to enforce a claim for unpaid linear property taxes against the assets that are subject to a special lien established by section 348;
4. Apply the above amendments retroactively to ensure that existing linear property tax arrears constitute a secured claim.

1. Clarify “property taxes”

In the Virginia Hills Decision, the Court determined that the phrase “property taxes” in section 348(d)(i) of the MGA does not include taxes on linear property. In order to resolve this apparent ambiguity, section 348(d)(i) should be amended to clarify that “property taxes” means all taxes imposed pursuant to a property tax bylaw, including linear property taxes.

2. Clarify property that is subject to the special lien

In the Virginia Hills Decision, the Court specifically rejected the municipalities’ interpretation that the special lien attaches to linear property that is subject to assessment itself.

In order to avoid this issue, the MGA should be amended to:

1. Expand the definition of assessed person in respect to linear property as set out in section 304 to include both the operator and the owner of linear property; and
2. Amend section 348(d)(i) to clarify that a special lien attaches to all of the debtor’s property that is subject to assessment within the municipality.

3.Enforcement Powers

In the Virginia Hills Decision, the Court noted an apparent ambiguity that arises in the MGA due to the fact that the MGA provides a specific enforcement mechanism to sell land that is subject to a special lien for unpaid property taxes in Part 10, Division 8, but that no such enforcement mechanism is established that would allow for a municipality to sell linear property.

To rectify this, the MGA should be amended to create or recognize a specific enforcement mechanism, such as the appointment of a receiver through the courts, that would allow municipalities to sell linear property that is subject to a special lien for unpaid taxes.

4. Retroactive Affect

While the amendments discussed above would resolve the issues that arise from the Virginia Hills decision going forward, they may not allow municipalities to assert a secured claim for existing tax arrears.

In addition to these specific amendments to the MGA, the issue of unfunded abandonment and reclamation costs that are often left unresolved until an oil and gas company becomes insolvent often make it impossible for municipalities to recover unpaid property taxes because a company’s remaining assets are often rendered worthless because of the unfunded abandonment and reclamation costs that attach to them. If the Government of Alberta does not effectively address this issue soon, the problem will continue to grow and Albertans will ultimately bear the burden of both the end of life abandonment and reclamation costs and the burden of increasingly large amounts of unrecoverable property taxes on oil and gas properties.

Because of the significance of these issues to all Alberta municipalities, immediate action by the Government of Alberta is warranted to amend the MGA to confirm the existence, scope and application of a special lien for unpaid linear property taxes. While the process of preparing the necessary amendments is complex, and no doubt deserve further consideration, the amendments proposed above provide an overview of the type of amendments the MD of Opportunity believes should be considered and a starting point for further discussions aimed at resolving the issues that arise from the Virginia Hills Decision.