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Jun 22, 2020

THE NEW REALITY: PRIVATE MORTGAGE LENDERS’ RIGHTS AND REMEDIES - Part XVI of a Series – CRA Liens part 3 of 3

The Federal Court of Appeal’s recent decision in the Canada v TD Bank case has been the subject of my last two posts, see POST XIV and see POST XV.

Canadian Income Tax legislation gives Canada Revenue Agency (CRA) a lien over taxpayers’ property and assets. This lien secures amounts owing by the taxpayer to CRA.

When the taxpayer’s debt relates to HST collected from sales or services provided, and those funds are not remitted to CRA, then CRA’s lien will have a super priority over prior registered mortgages. This reverses the usual priority rules of “first in time – first in line”. The net effect of all of this is that a mortgagee can search title and take a first registered mortgage from a taxpayer – and if the taxpayer operates a sole proprietorship and is behind in her or his HST remittances when the first mortgage is registered and advanced, then CRA’s super priority leapfrog’s CRA’s lien ahead of the prior registered mortgagee’s first mortgage.

And if this was not bad enough, then imagine the shock that TD Bank faced when, 18 months AFTER its mortgage was fully paid out and it discharged its mortgage from title to a taxpayer’s home, CRA was successful in the Canada v TD Bank case and TD Bank was forced to use the mortgage proceeds received 18 months earlier to pay the taxpayer’s CRA indebtedness.

Had TD Bank’s mortgage continued to be registered on title to the taxpayer’s home, the result would have been the same - CRA would have been successful in claiming a super priority over TD Bank’s first mortgage – but TD Bank would have been able to make a claim for indemnity under its Title Insurance Policy and recoup its losses resulting from CRA’s exercise of its super priority.

But in the facts of the Canada v TD Bank case, TD Bank had already seen its mortgage loan fully repaid and had already registered a discharge of its mortgage security. It therefore had to use its own funds to pay CRA and was unable to make a claim on its title insurance policy which had come to an end when TD Bank’s mortgage was discharged.

What, then, can a mortgage lender do to protect itself from CRA’s super priority? From a practical point of view – very little. In a perfect world, the mortgagee could contact CRA and obtain a written statement of the mortgagor’s (taxpayer’s) CRA account. The mortgage advance could be used to repay any CRA debt. While CRA would still have a lien for future unpaid HST, that lien (because it would come into existence after the mortgage was advanced and registered, would not enjoy a super priority). But we all know that dealing with CRA – in fact even contacting CRA – is a essentially a dead end. Of course, privacy prohibits CRA from dealing directly with a mortgagee. And even if the mortgagor/taxpayer was to give written authorization to CRA to communicate with the mortgagee, CRA has no mechanism in place to deal with ‘status’ requests of this nature in a prompt and efficient manner. And of course, if CRA’s lien is claimed while the mortgage remains on title, title insurance covers the CRA claim and so the ‘super priority’ risk really lies with the title insurance companies, not with the mortgagee.

But what about the scenario that TD Bank found itself in? Being called upon to pay the lien AFTER its mortgage was discharged. Is there a way to protect a lender from that eventuality? There just might be.

Until title insurance coverage becomes available (if it ever will), one idea that comes to mind is for private mortgagees to amend their mortgages to include security to cover any lien claim by CRA. But to be effective, these new provisions must also allow the mortgagee to keep its mortgage on title to the mortgagor’s home until the mortgagor is able to satisfy the mortgagee that CRA has no lien claim that can enjoy a super priority. The mortgagor could satisfy this obligation by paying its CRA remittances and getting CRA to acknowledge payment (the mechanics of a CRA confirmation maybe the weakest link here and quite problematic). Of course, a mortgagor would not be able to refinance its property with its old mortgage still on title pending a CRA confirmation. That is where title insurance may (but does not yet) help. And what about a mortgagor’s sale – could this CRA portion of the mortgage be ported to the new property (and subordinated) until CRA confirms no super priority?

Clearly, complicated stuff with no easy or obvious solution. But by now I'm certain you are all ready for me to move on to a new topic. The next post will examine ways in which the mortgagee can invalidate the notice of sale after the mortgagee has issued the notice of sale.  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.

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