Mortgage Broker

CMB MAGAZINE cmba-achc.ca winter 2016 | 29 superpriorities 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 in so far as the calculation of priorities is concerned. us, if the lender has the "luxury" of discovering the existence of the debt to the CRA, then the lender could (assuming it is in a position to petition the borrower into bankruptcy) defeat the trust claim by CRA. If the debt is discovered prior to the discharge of the mortgage, then the lender's title insurance may be able to coordinate the bankruptcy option. 2 What I have done in an attempt to protect lenders from these potential claims aer a release of the mortgage is to include a provision in my mortgage documents that essentially requires the borrower to provide to the lender a clearance certificate of some kind prior to the lender providing a release of the mortgage. Here is the clause: Note also that in the sole discretion of the lender it may be a condition of registering the final discharge of this mortgage that the borrower provide confirmation to the lender from the Canada Revenue Agency that all GST and employee source deduction payments and remittances are current and paid in full as of the date of discharge of the mortgage. is clearance certificate process can be time- consuming and thus the borrower is advised to contact the lender for instruction as soon as they know that a mortgage discharge may be required. is is really the only way the lender can at least attempt to protect itself from claims aer the mortgage is released and paid out. Unfortunately, as noted above, if the clearance certificate that the lender relies on is obtained fraudulently or is obtained from CRA based on inadvertent or erroneous assumptions made by the CRA, then the clearance certificate won't protect the lender from claims which are later revealed by the CRA. e notion of requiring a clearance certificate from the borrower prior to the discharge may also run afoul of our various provincial rules relating to the time in which lenders are required to provide discharges to borrowers. For the time being, I believe that in circumstances where the lender perceives a possible risk, the penalty for delay in providing a discharge until aer receipt of a clearance certificate will be minor compared to the potential exposure to the lender if a claim is made later by the CRA. is whole process will need to be discussed by legislators, lenders and brokers. At this point in time, suffice to say that lenders may wish to amend their commitment letters to include language similar to that which I have imposed on the borrowers in the mortgage documents we are preparing. is way the borrowers will be aware when they enter into the mortgage loan transaction that they may be required to provide confirmation that they are in good standing with CRA prior to obtaining a release of the mortgage. e hoped-for result of this scenario is that borrowers will be put on notice from the beginning of their mortgage loan that they must remain in good standing with respect to remittance of any GST or employee source deductions collected by them. 3 Although the notion is unproven in the courts, it may be advantageous to have all payments on the mortgage for the term of the mortgage collected at the time of funding. e thought here is that, as there will not be payments made by the borrower to the lender during the term of the mortgage (as all payments were prepaid on funding), there are no payments that CRA could claim a super priority over during the currency of the mortgage. In other words, there were no payments made by the borrower to the lender during the term of the mortgage which would be impressed with the CRA trust, as all payments were made prior to the CRA trust debt arising. Of course, this only works for CRA debts that arise aer the date of funding of the mortgage. In summary, this unfortunate problem is one which will probably require political/ legislative action to properly remedy it. As this is a federal issue, I would encourage any of you who have the ear of your member of parliament to raise the issue with them in the hope that the problem can be solved with new legislation which better protects "bona fide lenders for value without notice" (e.g. secured creditors who are unaware of the existence of these unregistered debts). We have the best and most efficient land titles system in the world but issues such as the one I have outlined above create an uncertainty in our land titles system which is unacceptable. EDITOR'S NOTE is article was originally published in the Summer 2014 issue of Mortgage Broker. A ruling in a subsequent case determined that a borrower's bankruptcy does extinguish the super priority deemed trust. In August 2015, the Federal Court of Canada ruled that the Excise Tax Act (ETA) does not entitle the Canada Revenue Agency to a deemed trust once the tax debtor becomes bankrupt. At issue, a real estate investment company owed a lender monies under a credit facility, and sold a property for $790,000 to repay part of the credit facility. Prior to the sale closing, the Crown demanded that the lender remit to it $90,000, representing unpaid GST/HST remittances owed to it by the borrower/real estate investment company under the super priority deemed trust provisions of the ETA. e lender ignored the request, and then was sued by the Crown for the amount of the super priority deemed trust. While the Court found that the bankruptcy of the borrower extinguished the super priorty deemed trust, at any time prior to the bankruptcy, the deemed trust over the sale proceeds of the property would have usurped the lender's entitlement to the sale proceeds up to the amount of the deemed trust. Note: is decision has not been appealed. It may be advantageous to have all payments on the mortgage for the term of the mortgage collected at the time of funding. The thought here is that, as there will not be payments made by the borrower to the lender during the term of the mortgage (as all payments were prepaid on funding), there are no payments that CRA could claim a super priority over during the currency of the mortgage.

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