Mortgage Broker

Summer 2014

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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Page 15 of 47

16 | summer 2014 MORTGAGEBROKER ALTHOUGH THE EXISTENCE of the Canada Revenue Agency super priority regime is not new and has in fact existed for more than 50 years, changes to the legislation in the late 1990s, and to the way the CRA is approaching the collection of these debts, has brought the issue to the forefront. Imagine this: You are a 66-year-old recently retired former mortgage broker and part time private lender. You have sold your house in Vancouver and purchased a townhouse in Kelowna and a condo in Maui to enjoy retirement. You return from Maui to your townhouse in Kelowna to find a letter from the CRA demanding payment of money from you relating to the mortgage you had funded personally to assist an acquaintance with the completion of construction of their new house five years earlier. e mortgage was funded in three draws and the house was completed. e borrower made all of his payments in a timely manner and your mortgage was paid out four years prior to the date of the letter from CRA. In its demand letter CRA is advising you that you are personally liable to pay funds that you received in repayment of your mortgage loan, to CRA. Unknown to you, your borrower had a pre-existing obligation to remit GST collected from his business to CRA. He also had employees from whom he had deducted source deductions for tax (CPP, EI, Income tax). Unfortunately the borrower did not remit these funds to CRA. In the interest of cost savings and efficiency of funding, when you instructed the loan file to your lawyer you requested that he or she obtain a policy of title insurance in lieu of the searches that may have revealed these outstanding debts. Now you have been made aware by CRA that your borrower had been collecting GST and employee source deductions and not remitting them for some time. Unfortunately your mortgage was discharged four years ago and you no longer have any security from the Borrower to ' fund' your required payment to CRA. To most readers the notion that this retiree could be liable for debts of his borrower to CRA may seem shocking, but in fact this is the reality of the current legislative regime. CRA super priorities are a hot button issue now for all lenders (and as a result all brokers, as you are integrally involved in the fact finding investigation that lenders undertake prior to lending funds). Super priority charges create uncertainty e issue arises from CRA's statutory based deemed trust 'powers.' e collection and remittance of tax (and I use the term generally to include the GST remittances and employee source deductions which are the particular focus of the problem) is a voluntary process where taxpayers who are obligated to remit GST or employee source deductions do so on a 'voluntary' basis. Until the taxpayer is audited the CRA would not necessarily be aware of the obligation to make these remittances. As the remittance of these payments is 'voluntary' the CRA needed powers to allow it to investigate and collect funds, which should have been paid to it. Parliament allowed CRA to do this by providing it with, among other things, the super priority powers that allow certain CRA debts to effectively 'trump' other creditors including secured creditors. Rectification of the problem will probably require legislative change if the type of uncertainty envisaged in the scenario referenced in this article is to be avoided, or at least minimized. As a mortgage lawyer I view this problem as yet another chink in the armour of our Torrens system of Land Titles. As lenders we want to believe that the title search we obtain from the Land Title Office depicts the actual state of a title we may wish to take as security for a loan. Super priority charges, which do not require registration in order to be effective, create uncertainty in our land titles system. e impact of this uncertainty can be minimized somewhat by two things: Firstly, exhaustive investigation of the persons or entities involved in the borrowing transaction; and secondly, the acquisition of title insurance policies to hopefully insure over any unregistered charges which could adversely affect the title holders' security. e CRA's collection of these unregistered debts creates uncertainty in the land titles system for mortgage brokers and lenders Focus on Super Priorities BY RALPH YETMAN EXCLUSI VE

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