Kelsey's and Montana's: the trust money now, the bankruptcies after

At 4:15 p.m. on September 14, Albert Gelman Inc. delivered its certificate, and the assets of the Kelsey's and the Montana's at 650 Gardiners Road in Kingston vested in a company that had not signed the stalking horse agreement. That day, with the consent of the companies and the trustee, 7055579 Canada Inc. had assigned the agreement to 15870437 Canada Inc., "a corporation with similar shareholders and directors to the Original Purchaser," and remains liable for the purchaser's obligations. The approval and vesting order allows vesting "as the Purchaser may direct" with the trustee's consent, and in the trustee's view the assignment did not affect the transaction or the price, per the Fifth Report of the Proposal Trustee, Sept. 29, 2026, para. 14; App. "A", the Fourth Report, Sept. 4, 2026, para. 14 and the Approval and Vesting Order, Sept. 9, 2026, para. 2.

The companies no longer carry on business, and their remaining property "consists principally of the net proceeds," per the Fifth Report, para. 4. When the sale was approved, as reported here on September 10, the deemed-trust share of the Canada Revenue Agency's claim had yet to be worked out. The trustee's Fifth Report, filed September 29 for a motion returnable October 5, puts that figure at $133,793.12, all of it owed by the Montana's company, per the Fifth Report, paras. 36, 42.

What CRA is owed, and what ranks

CRA is still the only party to have filed proofs of claim, and they total $3,626,089.20. Against 1622356 Ontario Limited, the Montana's company, CRA claims $2,488,684.96, being $2,272,177.33 unsecured and a further $216,507.63 under s. 60(1.1) of the BIA; against 1382769 Ontario Limited, the Kelsey's company, it claims $1,137,404.24, of which $25.61 is under s. 60(1.1), per the Fifth Report, paras. 5, 31. The HST principal claimed is $926,043.73 from the Kelsey's company, for assessed periods from August 31, 2019 to April 30, 2026, and $1,589,193.89 from the Montana's company, for periods from November 26, 2017 to March 31, 2026, per the CRA proofs of claim in the Fifth Report, App. "B". The Montana's company's source deductions, amounts withheld from employees' pay and not remitted, come to $133,793.12 of principal and $82,714.51 of penalties and interest; the Kelsey's company owes no source-deduction principal. The trustee reviewed the claims with its counsel and "has no reason to dispute the amounts claimed," per the Fifth Report, paras. 31, 33.

The report sorts the claim in two. The source-deduction principal is subject to a deemed trust under s. 227(4) and (4.1) of the Income Tax Act and provisions of the Canada Pension Plan and the Employment Insurance Act. The trustee says the BIA preserves that trust in the NOI proceedings and would keep it effective in a bankruptcy, and that paragraph 3 of the approval and vesting order attaches it to the net proceeds. In its view the $133,793.12 ranks ahead of every other claim on those proceeds except the professionals' fees secured by the administration charge, per the Fifth Report, paras. 34–35.

The trustee treats the rest, $3,492,296.08 in its table, as unsecured, ranking pari passu with any other unsecured claims under s. 136. "The deemed trust for unremitted HST under subsection 222(3) of the Excise Tax Act (Canada) does not apply in proceedings under the BIA," the report says. It adds that the source-deduction trust reaches only amounts "deducted or withheld," not penalties or interest, and notes that CRA filed its claims as unsecured, per the Fifth Report, paras. 31, 37.

Paying the trust before the bankruptcy

The order the trustee will seek on October 5, which it calls the Distribution and Bankruptcy Order, would authorize and direct it to pay CRA the $133,793.12 and allocate the net proceeds evenly between the two companies, the trust payment coming out of the Montana's half, per the Fifth Report, paras. 7, 42, 45. On the report's table, $2,300,000 less $400,000 of priority payables (the $300,000 administration charge and a $100,000 completion amount) leaves $1,900,000, of which $950,000 would go to the Kelsey's estate and, after the trust payment, $816,206.88 to the Montana's. Interest and an estimated $151,475.62 of priority payables the professionals will not need are to be added, per the Fifth Report, paras. 27, 29, 43. The even split rests on the trustee's understanding that the purchaser meant to acquire the two companies as one going concern, and that their employees and back office are shared, "such that they function as one business unit," per the Fifth Report, para. 44.

By the report's own account, the timing does not change the result. Property subject to the trust "is not property of MontanaCo divisible among its creditors," so "the outcome for CRA and for MontanaCo's other creditors would be the same" whether the source deductions are paid now or in the Montana's company's bankruptcy, per the Fifth Report, para. 46. The trustee's reasons for paying now include that CRA has confirmed the amount, that payment halts interest and penalties accruing on it, "which would dilute the recovery for other creditors," and that it reduces the funds held in the bankruptcies and so the cost of administering them. CRA has advised that it does not oppose the motion, per the Fifth Report, para. 47. The draft order would make the payment "final and irreversible," binding on any trustee in bankruptcy and not to be treated as a preference or other reviewable transaction, per the Motion Record of the Proposal Trustee, Sept. 29, 2026, Tab 3 (draft Distribution and Bankruptcy Order), para. 4.