Mortgage Broker

CMB MAGAZINE cmba-achc.ca winter 2016 | 25 superpriorities IMAGINE THIS: You are a 66-year- old recently retired mortgage broker and part- time private lender. You have craily sold your house in Vancouver and purchased a townhouse in Kelowna and a condo in Maui to ensure yourself an endless summer in retirement. You return from Maui to your townhouse in Kelowna to find a letter from Canada Revenue Agency (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 in Vancouver five years earlier. e mortgage was funded in three draws and the house completed in satisfactory fashion. 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. Unbeknownst to you, your borrower had a pre-existing obligation to remit GST collected from his business to CRA. He also had three 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 which 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 upon which you could rely 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, since brokers are integrally involved in the fact-finding investigation that lenders undertake prior to lending funds). Although the the CRA super priority regime is not new and has in fact existed for over 50 years, changes to the legislation in the late-'90s and changes to the way in which the CRA is approaching the collection of these debts have brought the issue to the forefront. In this article, I will provide an overview of the problem without becoming overly technical. 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 in that 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. e federal parliament allowed CRA to do this by providing it with, inter alia, 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 above noted scenario 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 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 which 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 effect 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. Our Court of Appeal a few years ago rendered a pair of decisions which created some uncertainty as to the status of mortgages registered in anything other than first position. e result of these decisions was the common policy of obtaining title insurance on all Canada Revenue Agency's super priorities could leave lenders exposed to their borrowers' financial obligations BY RALPH YETMAN, YETMANS LAW CORPORATION DEBTS Undeserved Photo: Ajay Soni

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