Jun 15, 2020
THE NEW REALITY: PRIVATE MORTGAGE LENDERS’ RIGHTS AND REMEDIES - Part XV of a Series – CRA Liens part 2 of 3
/lawyers/michael-s--myersAs a result of the Federal Court of Appeal’s recent decision in the Canada v TD Bank case discussed in my previous post HERE, if a private mortgagee lends money to a customer who owns and operates a business as a sole proprietorship (as opposed to an incorporated business) and when the mortgage loan is advanced the customer is behind in her or his HST remittances to Canada Revenue Agency (CRA), then the private mortgagee can be forced to pay to CRA some or all of the customer’s unpaid HST remittances - even after the private mortgagee’s mortgage loan is fully repaid and its mortgage security is fully discharged from title.
This quite bizarre outcome is possible because CRA has a statutory lien covering all of the taxpayer’s property and assets and this lien has been given a super-priority over prior registered mortgages in certain circumstances. So let’s unpack CRA statutory liens.
There are basically three liens that CRA can assert against a homeowner. Needless to say, there will be no liens registered against title to the mortgaged property when the private mortgage lender advances its loan, as any prior registered liens would obviously have priority over the new private mortgage. And would have to be repaid (just like an existing mortgage) out of the new funds being advanced.
So, we are really just dealing with CRA liens that are registered AFTER the private mortgage is registered and advanced.
First, there is a lien that can be registered by CRA securing unpaid income taxes owing by the homeowner. This lien does not have priority over a prior registered private mortgage.
Second, there is a lien that can be registered by CRA for unpaid HST or unpaid source deductions owing by the homeowner. This lien does not have priority over a prior registered private mortgage if the homeowner’s debt to CRA (for the unpaid HST or for the unpaid source deductions) came into existence AFTER the private mortgage loan was advanced and the mortgage registered.
Lastly, there is a lien that can be registered by CRA for unpaid HST or unpaid source deductions that were owing by the homeowner prior to the time that the private mortgage loan was advanced and registered. This lien (registered after the mortgage) enjoys a super-priority over the prior registered mortgage because the homeowner’s debt to CRA (for the unpaid HST or for the unpaid source deductions) existed BEFORE the private mortgage loan was advanced and registered. But most policies of title insurance held by the private mortgage lender will insure the lender for losses resulting from this super-priority lien being registered on title after the private mortgage is registered.
But the Canada v TD Bank case was different. There were no liens registered on title by CRA. So there were no warning signs at all – not when TD Bank advanced its loan to the homeowner and not when TD Bank’s debt was fully repaid and it discharged its mortgage. CRA didn’t even contact TD Bank and request reimbursement unto almost 2 years later. And when CRA did enforce its unregistered lien against TD Bank, because TD Bank had already discharged its mortgage, TD Bank’s title insurance policy was at an end and there was no title insurance coverage for TD Bank.
Next blog will look at ways in which a private mortgage lender can protect itself from this super-priority lien – if at all. And as always, this blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and mortgage remedy team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.
Be well and stay healthy.