Executive Summary: Key Legal and Evidentiary Issues

• Scope and effect of the BIA proposal stay on a municipality’s statutory “oldest first” tax allocation and tax sale remedies under the MGA.
• Characterization of municipal real property tax arrears, including pre- and post-bankruptcy taxes and interest, as secured claims and whether their lien status is lost with time during an insolvency stay.
• Proper analytical framework for federal–provincial interaction: whether the MGA provisions are constitutionally inoperative under paramountcy or simply stayed as “remedies” under the BIA.
• Application of the Suspension Rule to toll the six-year lien expiry in MGA s. 133(7) while the BIA stay prevents West Hants from enforcing its tax remedies.
• Test for lifting a BIA stay under s. 69.4, including what constitutes “material prejudice” and whether it is “equitable” to permit tax sales to proceed in light of the debtor’s proposal and other creditors’ interests.
• Evidentiary assessment of the Municipality’s financial position, the likely recovery pattern from orderly liquidation versus tax sale, and whether West Hants’ security or operations are objectively at risk.

Facts of the case

Terra Firma Development Corporation Limited (“Terra Firma”) was the developer of an ambitious resort-style residential community known as the Forest Lakes Country Club in Nova Scotia. The project was to be a multimillion-dollar mixed residential and recreational development centred on a Jack Nicklaus-designed golf course, marketed to golf enthusiasts and international investors. The company assembled “huge tracts of land” in the Municipality of West Hants, with a few parcels in East Hants, and financed the project through a combination of foreign loans and extensive off-plan unit sales. The development ultimately collapsed, leaving hundreds of creditors and a partially developed project. Terra Firma’s financial difficulties became acute between 2015 and 2019. Numerous overseas purchasers entered into agreements of purchase and sale for condominium units and paid substantial deposits or full purchase prices, sometimes also buying furniture and appliances. At the same time, Project Forest Lakes Pte. Ltd. (“PFL”), a Singapore-based lender, advanced several loans to Terra Firma, including promissory notes, a financing agreement, and a bridging loan, all later consolidated into a large refinancing mortgage secured by first-ranking mortgages over three parcels and a security interest in all present and after-acquired personal property. Terra Firma laid off most of its staff in mid-2019 and terminated remaining employees by November 2019. Its debt to PFL came due in December 2019, and PFL moved for default judgment and foreclosure in early 2020. Terra Firma has been in bankruptcy or insolvency proceedings since September 22, 2020. The file became procedurally complex, with over 500 creditor claims—many from outside Canada—and multiple contested claims involving layered agreements, amendments, extensions, exchanges, and swaps. Some claims were disallowed or adjusted, and some properties were sold or conveyed with proceeds distributed broadly in line with what the eventual proposal would contemplate.

The proposal proceedings and creditor landscape

On May 6, 2022, MNP Ltd. (“MNP”) filed a proposal on behalf of Terra Firma under the Bankruptcy and Insolvency Act (“BIA”). Terra Firma was described as the developer of the planned Forest Lakes resort-style community, with real property forming nearly all of its approximately $9 million in assets, and over $200 million in creditors’ claims, almost entirely unsecured or unsecured deficiencies, plus nearly $50 million in contingent claims. The proposal’s essence was a realization plan: the real properties would vest in the Proposal Trustee, to be marketed and sold; from each sale the taxes and disposition costs would be paid first, then secured claims (subject to any BIA ss. 95–101 challenges) including municipal real property taxes, and any surplus would flow to the estate. The proposal expressly defined “Secured Claim” to include “the indebtedness of Municipalities in regard to real property taxes,” recognizing municipal tax arrears as secured claims, subject to the value of each property. As of April 2025, the Trustee identified six properties where proven mortgage claims exceeded property value and noted that West Hants would sell those lots through its own processes, with an estimated total outstanding tax balance of about $46,000; those six properties were treated as exceptions to the general Trustee-sale model. A first meeting of creditors in May 2022 was adjourned and only reconvened in April 2025, after intervening litigation resolved which parties could vote on nearly $50 million in disputed debt. That dispute was settled by splitting the debt between competing claimants, both of whom then supported the proposal. At the reconvened meeting, almost all participating unsecured creditors voted in favour or abstained, with only the Canada Revenue Agency voting against. Among secured creditors, all participating creditors either voted for the proposal or abstained. West Hants participated as a secured creditor and abstained. In practice, the parties had already been informally implementing the proposal model on properties that had been realized: where lots were sold or conveyed during the insolvency, taxes and disposition costs were paid, secured creditors were paid to the extent of available equity, and any remaining funds went into the estate.

The municipal tax regime and conflicting statutory frameworks

The case turned on the interaction between the BIA and Nova Scotia’s Municipal Government Act (“MGA”) in the context of Terra Firma’s proposal. Under the MGA, municipal real property taxes are secured by a “super priority lien” that ranks first on the property, ahead of most other secured interests. Taxes remain a first lien for six years after the end of the fiscal year in which they were levied; after that six-year period, the lien expires, though the underlying debt remains collectible as an unsecured claim. The MGA also mandates how partial payments must be applied. When a taxpayer pays less than the total outstanding taxes, the treasurer must apply payments in a prescribed order, which includes a requirement to apply amounts first to accumulated interest and then to “the taxes longest in arrears” with respect to designated real property, and if no property is designated, to the taxes longest in arrears across the board. This “oldest first” allocation rule, combined with the statutory lien expiry after six years, forms part of the municipality’s toolkit for tax enforcement and revenue protection. The MGA further provides a detailed tax sale process for properties in arrears. After prescribed notices and redemption opportunities, the municipality may sell the property at a tax sale, with proceeds first used to pay taxes, interest and costs. The municipality keeps only what it is owed; any surplus is available to other stakeholders. In practice, West Hants’ Director of Finance described tax sales as debt-collection exercises rather than value-maximization processes, with properties often selling for only modest amounts above the tax arrears. In contrast, the BIA proposal regime imposes a broad statutory stay. Upon filing a proposal, no creditor may commence or continue any action, execution or other proceedings “for the recovery of a claim provable in bankruptcy” against the debtor or its property, unless the court grants relief. In a proposal, unlike in a straight bankruptcy, this stay applies to secured creditors’ enforcement remedies, subject to specific statutory carve-outs and court-ordered variations. The proposal itself contemplated that the Trustee would keep post-bankruptcy taxes current while treating pre-bankruptcy taxes as part of the secured claims to be satisfied from sale proceeds, aligning with the BIA’s distribution scheme.

The dispute between the Trustee and the Municipality of West Hants

The core practical dispute between MNP as Proposal Trustee and the Municipality of West Hants concerned how tax payments should be applied during the life of the proposal, and whether the Municipality could proceed with tax sales. The Trustee consistently took the position that, as estate fiduciary under the BIA and the proposal, it must ensure that post-bankruptcy real property taxes are kept current to preserve the value of the estate and avoid new priority encumbrances, while pre-bankruptcy tax arrears are to be addressed as secured claims upon realization of each property. MNP had the funds and was willing to pay ongoing taxes to keep current obligations up to date, except on the six identified negative-equity lots where it proposed to abandon its interest and consent to lifting the stay. West Hants refused to accept targeted post-bankruptcy payments unless they fully cleared the total outstanding tax account on a lot. The Municipality maintained that it was bound by the MGA’s “oldest first” provisions and therefore could not agree to apply payments solely to current-year taxes; instead, any payment had to be allocated first to the taxes longest in arrears. From the Municipality’s perspective, disregarding “oldest first” would risk allowing older tax liens to expire after six years, undermining its secured position and regulatory obligations. The Trustee responded that the BIA proposal stay prevented West Hants from exercising its MGA remedies—including forced allocation of payments and resort to tax sales—because those were remedies “for the recovery of a claim provable in bankruptcy.” To resolve the impasse, the Trustee sought a declaration that the BIA and MGA provisions were in direct and irreconcilable conflict, such that the MGA “oldest first” rules were constitutionally inoperative under the doctrine of federal paramountcy in these circumstances. West Hants opposed that constitutional relief and instead applied to lift the BIA stay of proceedings so it could proceed with tax sales and enforce its MGA regime, arguing it would otherwise suffer material prejudice and that it was equitable to allow it to act, particularly given the size of the outstanding tax arrears and the Province’s scrutiny of its uncollected taxes.

Constitutional framework and the treatment of the MGA provisions

Both parties filed extensive constitutional materials and essentially agreed on the governing legal test for paramountcy. Federal legislation prevails over valid provincial legislation in the event of an irreconcilable operational conflict—where it is impossible to comply with both—or where the provincial law frustrates the purpose of the federal statute. The Supreme Court of Canada has emphasized that courts should, where reasonably possible, interpret federal and provincial legislation so that both operate concurrently, and only invoke paramountcy when true conflict or frustration exists. Rather than directly declaring the MGA provisions constitutionally inoperative, the Registrar focused on the structure of the BIA stay and the concept of “remedy.” Relying heavily on the Supreme Court of Canada’s decision in Vachon v. Canada Employment and Immigration Commission, he adopted a broad interpretation of “remedy” to include all forms of enforcement or recovery mechanisms, whether judicial or administrative, statutory or extra-judicial. Under that approach, legislative tools such as distress, statutory offsets, collection notices, and similar devices can constitute “remedies” whose exercise is stayed once BIA protection is engaged. Through this lens, the MGA’s mandatory “oldest first” allocation and tax sale powers were characterized as part of the Municipality’s remedial apparatus for collecting taxes and protecting its security. In proposal proceedings, the BIA stay in s. 69.1(1)(a) prevents creditors from taking any remedy “for the recovery of a claim provable in bankruptcy,” including statutory remedies. Because municipal real property taxes arising before insolvency are provable claims, West Hants’ tools to compulsorily allocate payments to the oldest arrears and to move to tax sale are caught by the stay. The Registrar therefore held that s. 131’s “oldest first” rule and related enforcement mechanisms are not constitutionally invalid; rather, their exercise is suspended as remedies by operation of the BIA stay. Payments made by the Trustee can, in this proposal context, be applied to post-bankruptcy taxes without triggering the MGA’s forced reallocation to the oldest arrears for as long as the stay applies. This reasoning allowed both statutes to remain valid and operative within their spheres: the MGA continues to structure municipal taxation and liens, while the BIA temporarily suspends enforcement remedies when insolvency protection is engaged.

Tolling of the municipal tax lien and the Suspension Rule

A significant issue was whether West Hants would lose its secured lien status on older tax years because of the six-year expiry in MGA s. 133(7) while the BIA stay prevented it from using its remedies. If older tax years ceased to be liens during the proposal, West Hants would become unsecured for that portion, which would constitute material prejudice. Drawing on a long line of bankruptcy and limitation jurisprudence, the Registrar accepted that limitation and lien-expiry periods do not continue to run against a creditor when the BIA stay has removed the creditor’s ability to pursue its remedies within the insolvency process. This principle, sometimes referred to as the “Suspension Rule,” emerges from both historical English authority and Canadian cases such as Dilollo Re and Business Development Bank of Canada v. Quattro Exploration and Production Ltd. In essence, where a creditor is barred by the BIA from enforcing its claim within the insolvency forum, the running of applicable limitation or expiry periods is suspended until the stay is lifted or the insolvency process concludes, and the clock then resumes. Applying that reasoning, the Registrar held that West Hants’ six-year municipal tax lien period under MGA s. 133(7) is tolled during the lifespan of Terra Firma’s proposal, so long as the Municipality is prevented from enforcing its tax remedies by the BIA stay. As a result, West Hants does not lose its secured status on pre-proposal tax arrears simply because time passes while the proposal is being implemented. Its lien rights remain intact, to be enforced once the stay is lifted or as properties are sold under the Trustee’s realization process, subject only to the value available in each lot. This tolling analysis was central to assessing any prejudice from maintaining the stay and confirmed that the Municipality’s core security was preserved during the insolvency.

Application to lift the BIA stay and assessment of material prejudice

The Municipality applied under s. 69.4 of the BIA for a declaration that the stay no longer operated against it, or that it should be lifted, in order to proceed with tax sales and full enforcement of the MGA regime. Section 69.4 allows the court to lift the stay if a creditor is likely to be materially prejudiced by its continuation or if it is equitable on other grounds. The jurisprudence emphasizes that lifting the stay is not routine; the applicant must demonstrate objective, quantifiable prejudice to its indebtedness or security, or compelling equitable reasons, and the court must also consider the impact on the integrity and purpose of the insolvency process. On the evidence, West Hants had a substantial tax exposure related to Terra Firma, enough to move one provincial financial-health metric—uncollected taxes—into a “moderate” risk category. However, the Municipality as a whole operated on a budget of around $30 million, with expenses in the $27 million range, a consolidated surplus approaching $87 million, and debt of about $14.6 million. On every other provincial metric, it was in a low-risk category, and there was no indication that municipal services had been impaired or that taxpayers were being materially burdened because of Terra Firma’s arrears. Furthermore, the Registrar accepted evidence that municipal tax sales tend not to maximize value: they are largely designed to recover the tax debt and costs, not to optimize sale price, and properties often sell for only slightly above outstanding taxes. By contrast, the proposal’s Trustee-driven liquidation, including active marketing, was likely to generate higher recoveries for the estate, which would benefit all stakeholders including the Municipality. The Trustee had also made clear it was prepared to keep post-bankruptcy taxes current and to pay West Hants as properties sold, with the only real risk to the Municipality being where the total taxes and interest on a specific lot exceeded the lot’s realizable value. Importantly, the tolling of the six-year lien period meant West Hants’ secured status would not silently erode with time while it was barred from enforcing. In these circumstances, the Registrar concluded that West Hants had not shown the type of objective, material prejudice contemplated by s. 69.4. Its financial position remained strong, its security was preserved, and it stood to be paid in full or nearly in full, with interest, as properties were realized under the proposal. Nor were there compelling equitable grounds to prefer its enforcement interests over the collective interests of the broader creditor body. Accordingly, the application to lift the stay was refused, subject to a narrow exception.

Disposition on the six negative-equity lots and court’s approval of the proposal

While rejecting a general lifting of the stay, the Registrar recognized that MNP had expressly indicated its willingness to abandon six specific properties in West Hants where the Trustee believed there was no equity beyond municipal taxes and related costs. For these parcels, the Trustee was content to consent to tax sales, acknowledging that there was nothing of value to the general estate to preserve. The statutory language of s. 69.4 technically speaks in terms of lifting the stay “in respect of that creditor or person,” not specific assets, which introduced a drafting issue. Nonetheless, relying on the provision that allows the court to grant relief “subject to any qualifications that the court considers proper,” the Registrar signalled he would entertain an order structured so that the stay would be lifted only to permit West Hants to pursue its MGA remedies against those six identified lots, and invited the parties to settle appropriate language for that narrow carve-out. On the core insolvency issue, the court approved Terra Firma’s proposal. At this stage, the proposal was, in practical terms, a structured liquidation: the Trustee would continue marketing and selling the properties, pay municipal taxes and other secured claims from each sale, satisfy professional fees (anticipated in the range of $1–2 million, with a caution that those fees be tightly managed and recorded), and distribute any residual funds to the estate for unsecured creditors. The court was satisfied that the proposal was “calculated to benefit the general body of creditors” and noted that, after earlier disputes were resolved, creditors had overwhelmingly supported or not opposed it. On costs of the present applications, the Registrar’s provisional view was that both the Trustee and West Hants should bear their own costs, given the novelty of the issues and the Municipality’s need for judicial clarification of its statutory duties, but he invited brief submissions if the parties wished to argue otherwise.

Overall ruling, successful party and monetary outcome

In the end, the court confirmed that the proposal would proceed, that the BIA stay continued to bind the Municipality of West Hants except for a limited, consensual carve-out for six negative-equity lots, and that the MGA’s “oldest first” allocation and six-year lien-expiry rules are valid but operate as remedies that are stayed during the life of the proposal. West Hants’ tax liens do not expire while the stay is in place, and the Municipality will be paid from sale proceeds as the Trustee liquidates the project’s lands, subject only to the value available in each parcel. The Proposal Trustee (and, through it, Terra Firma’s proposal) emerged as the successful party in the applications, having secured approval of the proposal and the continuation of the stay on its preferred terms, while also obtaining clarity that West Hants’ tools are suspended rather than constitutionally struck down. No specific monetary judgment, damages award, or quantified costs order was made in favour of any party in this decision; the financial outcome depends on future realizations, and the amount ultimately recovered by West Hants or other creditors could not be determined from the decision.