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.
Issue link: http://digital.canadawide.com/i/354755
MORTGAGEBROKER mbabc.ca summer 2014 | 19 lendinguncertainty time prior to the discharge of its loan. If in fact this does happen and the mortgage is discharged before CRA debts are paid then the lender is exposed to future claims by CRA. How long does this exposure last? In the case of unremitted GST the limitation period is 10 years. In the case of unremitted employee source deductions the limitation period is currently six years. Hence our unfortunate lender's shock and dismay that four years aer his loan had been paid out and discharged he is now personally liable for the unremitted debts of his borrower. What is worse, if the borrower had withheld the remittances and CRA had no knowledge of the unpaid remittances then, even if the lender obtained a Clearance Certificate from CRA prior to releasing his mortgage charge (his last possible security for his new personal liability to the CRA for the debt) then the CRA claim would still be valid against the lender despite the fact that he or she had a Clearance Letter from the CRA. e reason for this is that the CRA Clearance Letters have significant exculpatory language in them that protects CRA from an incorrect Clearance Certificate. Prescribed security interests ere are some bright spots in the story. First of all, the legislation does create what are referred to as prescribed security interests. In most cases a secured mortgage loan lent prior to the failure to remit by the taxpayer/borrower will have priority to the extent of the principal amount advanced. It is the payments made aer the mortgage was funded and the borrower failed to make his remittances that are in question. e law is still unsettled as to whether all payments made by the borrower on the mortgage aer the date of funding would be included in calculating the quantum of the lenders prescribed security interest or whether only payments towards principal would be allowed. If only principal payments are allowed to offset the lenders security interest then lenders face-value mortgage principal should remain intact. It appears, however, that the current position is that all payments, including principal and interest, would be deducted from the original face value of the mortgage in calculating the actual amount of the mortgage that is 'safe' from the CRA deemed trust priority. Note that the prescribed security interest allowance only applies to cases where the mortgage funds are lent prior to the time when the borrower failed to make remittances to the CRA. is raises a further issue relating to the due diligence required prior to funding a mortgage. If all of the recommended searches were conducted and clearance certificates obtained from CRA prior to funding the mortgage, then the lender would at least appear to be safely within the definition of a prescribed security interest and thus the principal amount lent by it would not be defeated by the CRA priority deemed trust priority. However, if CRA were not aware of unremitted debts of the borrower then the lender would still be exposed once the unremitted debts are discovered despite the fact that the lender made its investigations. is is where title insurance comes in again. e weakness of title insurance is the fact that if the problem remains undiscovered throughout the entire term of the mortgage loan and is not known at the time of discharge then there will be no title insurance to protect the lender. I have had discussions with most of the major title insurers on this subject of late and it is a topic of discussion internally for them as a huge marketing windfall awaits a title insurer who is able to find a resolution to this problem. (And it would appear that the only resolution is to create an exemption that allows the claim to be made under the title insurance policy even aer the mortgage has been discharged from the title.) So what can we do about this problem short of incorporating new 'one off ' corporate entities as lender for each new mortgage loan? As brokers and lenders we are charged with all sorts of 'know your client' fact-finding investigations. e problem revealed by the CRA super priority issue illuminates another area where the homework of the broker and lender prior to funding a mortgage will be critical to avoiding a problem in the future. Sadly the reality of the super priority legislation is that even if your borrower did not have any obligation to make the CRA remittances at the time the mortgage was funded his or her position could change and your borrower could become a person or entity obligated to make remittances aer the date of funding the mortgage (and thus aer the date of all the usual due diligence when funding a mortgage). Fortunately the vast majority of borrowers do not have an obligation to remit GST or employee source deductions but they still do comprise a significant percentage of the overall borrower population. What can be done? 1. If the debt relates to unremitted GST then provisions in the federal legislation allow the bankruptcy of the debtor to extinguish the unremitted GST debt, at least as far as the calculation of priorities Many lenders will insure over the deficiencies that the searches could have revealed by obtaining a title insurance policy.