Mortgage Broker

Summer 2019

Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.

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private lenders who do not have either the time or resources to perform comprehensive due diligence. e Income Tax Act, Excise Tax Act, Employment Insurance Act and the Canada Pension Plan Act all contain sections related to deemed trusts. Deemed trusts are derived from unpaid income tax, Canada Pension Plan contributions and employment insurance premiums. If an individual does not remit these monies, as governed by the above- mentioned Acts, to the Receiver General, the individual becomes a tax debtor. e Acts mentioned above in this paragraph deem the tax debtor's property, as well as any proceeds therefrom, as held in trust for the Crown up to the value of the tax debt. e proceeds also include proceeds from the sale of real property. e property and/or proceeds under the deemed trust are considered beneficially owned by the Crown regardless of any registered security interests. One of the bigger concerns for lenders is that lenders have no (or limited) ability to perform any due diligence to determine if there is a deemed trust or what the amount of a deemed trust is without authorization from the borrower. Even if authorization is granted by the borrower, it can take weeks (or longer) before obtaining any information from the Canada Revenue Agency (CRA). Considering this delay, I have seen more and more lenders attempt to obtain post-funding confirmation of a nil balance owing, but prior to discharging their mortgage. Lawyers acting for lenders are receiving requests to insert conditional discharge clauses in the mortgage terms. PRACTICAL TAKEAWAY: While I see the intent behind a conditional discharge clause being added to mortgage terms that requires confirmation of no funds owed to CRA, such clauses are often met with serious push back from borrower's counsel. Recently the Federal Court released a decision highlighting the importance of being aware of potential deemed trusts and has created a strong argument for including conditional discharge clauses in mortgage contracts. In Her Majesty e Queen v. e Toronto-Dominion Bank, 2018 FC 538, the Federal Court reaffirmed the priority of unremitted goods and services tax (GST) amounts in the context of paying out a mortgagee. Briefly going over the facts, the taxpayer collected and failed to remit GST to the Receiver General of Canada for the years 2007 and 2008 in the amount of $67,854. In 2010, the Toronto-Dominion Bank (the "Bank") granted a mortgage and a line of credit, which was secured over the taxpayer's house. e next year the house was sold, and the Bank discharged their security aer being fully repaid from the proceeds of the sale. In April 2013, CRA issued a demand letter to the Bank for unremitted GST amounts of $97,327. In February 2015, CRA issued a revised demand letter to the Bank for the correct amount of $67,854. e Federal Court reviewed the history of the sections governing deemed trusts under the Excise Tax Act (the "ETA") and the Income Tax Act (the "ITA"), sections 222 and 227, respectively. Prior to 1997, both the ETA and ITA merely stated that if an employer deducts or withholds income tax amounts, or a person collects GST, the person holds that money in trust for Her Majesty. In 1997, the Supreme Court of Canada in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 SCR 411, held that the deemed trust from both the ETA and ITA do not take priority over pre-existing security interests. Aer this decision, Parliament announced it would grant deemed trusts absolute priority over secured creditors and amended both the ETA and the ITA. Section 222(3) of the ETA was amended to include: [Property of the person] is property beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority of all security interests. [Clarification added] e Federal Court found that the amounts paid to the Bank were "proceeds" as mentioned in section 222(3) of the ETA which established a deemed trust and imposed an obligation on the Bank to repay the unremitted GST amount received by the indebted taxpayer. In Toronto-Dominion Bank, the Bank argued four main arguments. First, it argued that the deemed trust provisions under the ETA only applied when a secured creditor enforced its security and sold the debtor's property. Second, the Bank stated that, as a bona fide purchaser for value of the money received, the Bank was not obligated to pay the unremitted GST. ird, the Bank stated that the deemed trust provisions only occurred aer a crystallization or triggering event, and the triggering event occurred when the Crown sent its first demand letter in April 2013. At that point the Bank was no longer a secured creditor and not liable. Last, the Bank argued that any money remitted to CRA from the proceeds of the sale constituted expropriation of private property and, as a matter of policy and fairness, should not be granted. e Federal Court rejected all of the Bank's arguments. e Federal Court noted that while the definition of proceeds is not included in either the ETA or ITA, past jurisprudence had applied identical reasoning regardless of whether proceeds arose from a forced sale by a secured creditor or a voluntary sale by the borrower. As such, the ETA applied to the proceeds received by the Bank. PRACTICAL TAKEAWAY: Deemed trusts are real and CRA can and will assert them. Deemed trust priority issues are not restricted to when a lender forecloses on a borrower. Even in a voluntary sale, it is imperative to consider the possibility of unremitted GST payments. The bona fide purchaser of value defence cannot be 20 | summer 2019 CMB MAGAZINE newcaselaw Record in writing the facts in situations where you are dealing with a mortgage transaction that has harsh or unusual terms or higher than usual interest rates or fees."

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