Mortgage Broker

CMB MAGAZINE cmba-achc.ca winter 2016 | 27 superpriorities mortgages that are not ranking in first position on title. e emergence of CRA's new, more aggressive stance in regards to super priority trust claims means that title insurance may now be recommended for all lending transactions in the hope that these unregistered CRA claims can be insured over. e fast-paced transactions have rendered the notion of obtaining CRA clearance certificates and all the other appropriate searches from government agencies unfeasible in most transactions. As a result, many lenders will insure over the deficiencies that the searches could have revealed by obtaining a title insurance policy. e reality of the problem I am discussing in this article is that title insurance will insure over any deemed trust debts of the borrower as of the date of funding of the mortgage. In the case of a draw mortgage, there could be more than one funding date, but suffice to say that the title insurance coverage will not cover CRA debts that arise aer the date the mortgage was funded and the title insurance policy was purchased. is means that even though a title insurance policy is in place for the lender, it will not protect the lender from debts which arise aer the date of funding. Also complicating this aspect of the issue is the fact that title insurance does not survive the discharge of the mortgage from the land titles system. In many cases, the lender will not be aware of the CRA debts at any time during the currency of the loan and quite oen at any time prior to the discharge of its loan. If in fact this does happen and the mortgage is discharged before the CRA debts are paid, then the lender is exposed to future claims by the 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), 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 which would protect CRA from an incorrect clearance certificate. 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 lender's prescribed security interest or whether only payments towards principal would be allowed. If only principal payments are allowed to offset the lender's security interest, then a lender's 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. However, if CRA is 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 again steps in. 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 of this problem. (And it would appear that the only resolution is to create an exemption which 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 lenders 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. The reality of the problem is that title insurance will insure over any deemed trust debts of the borrower as of the date of funding of the mortgage. In the case of a draw mortgage there could be more than one funding date, but suffice to say that the title insurance coverage will not cover CRA debts that arise after the date the mortgage was funded and the title insurance policy was purchased.

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