November 17th 2020
Private Lending Risk / by Malcolm Eccles
IF YOU ARE CONDUCTING PRIVATE LENDING? BEWARE !!
Is a Mortgage Principal Broker, a Mortgage Broker at risk of losing his own Residence? Read the following!
In a recent Court Case the Canada Revenue Agency (CRA) established the strength of the Super Priority! The position and recognition of the Deemed Trust was tested and confirmed in the Courts.
In Toronto-Dominion Bank v. Canada, the Federal Court of Appeal upheld the Federal Court’s decision that the Toronto Dominion Bank was required to pay to the Canada Revenue Agency proceeds of $67,854 for unremitted GST received as repayment from a borrower after the discharge of a TD mortgage.
Case https://www.canlii.org/en/ca/fca/doc/2020/2020fca80/2020fca80.html
Opinion https://www.canliiconnects.org/en/commentaries/70650
The bottom line to this story is that a lender can be held retroactively financially responsible for unpaid HST and employer/employee deductions that were outstanding at the time of funding their mortgage. Even after it was paid off!
What is the Deemed Trust?
This link will provide an overview of information on Deemed Trust by CRA.
This link clarifies the meaning of Super Priority.
https://taxpage.com/articles-and-tips/cra-super-priority-liens/
So the next issue is “What about Deemed Trusts” after the mortgage is funded?
If the borrower is operating a business where HST and/or Income Tax, CPP and EI premiums of the employees is collected it becomes held in the Deemed Trust. If these monies are not remitted to CRA in an orderly and timely manner, then CRA can exercise their Super Priority rights and garnish bank accounts, accounts receivable, and any other income sources; seize and sell assets; and use other legal actions to collect amounts owing.
Which put in plain English is; CRA can claim priority of status on any real estate owned by the borrower or other assets and can move in front of any other lien registrations ie: mortgages or loans.
So where does this put any Private mortgages that you as a Broker or Agent place with this borrower?
First we must clarify who is at risk when placing mortgages with a borrower who has not or does not remit his HST and employee deductions to CRA. As the rulings mentioned above indicate, it can be the mortgage lender. If proven, this places the Mortgage Broker in a very tenuous position. If a claim is made upon the lender, they will probably, through their lawyer make a claim upon the Brokerage and Broker who placed them in the mortgage investment.
The Mortgage Brokerage that conducts their business dealing with Private Investors can be placed in a very precarious position when placing mortgage requests with Private Investors. Would the brokerage be liable if a CRA claim is made upon the Investor for past or current outstanding liabilities? Would the Investor make a claim upon the Brokerage?
Attached we are providing some suggested guidelines that a Brokerage should follow when considering making an offering to a potential Investor and we recommend they should be attached to The Investor Disclosure Document ( Form #1). Reference to your findings should be addressed in Section 2 item #12 (material Risks) and as an added schedule in Part E item #8. That addendum should be initialed by the lender.
Suggested Underwriting Protocols.
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Gather at least the last three months HST returns, verified from the “CRA my account” or the borrowers accountant.
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Gather at least the last three months employer/employee CPP, UI, Income tax statements showing paid from the borrowers accountant or from “CRA my account”.
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Gather at least the last two months bank statements showing deposits and payments.
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Match the bank statements to the payment statements.
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Confirm the company registration, or active business licence.
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Gather the business incorporation docs
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Look for business website(s)
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Get a void copy of a Company Bank Cheque.
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A copy of the last one or two years NOA’s on the borrower.
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In addition, a Letter of Attestation from the borrower stating that he/she or the corporation does not owe any monies to CRA by way of the Deemed Trust.
When taking the application on the borrower(s) insist on the last 10 years employment history. Look for any Business Employment history (including being a Director of a Company) for the applicant and/or their partner or spouse if they are registered on title today or in the past.**
If you uncover any indication of BFS ask for copies of the company’s Articles of Dissolution, or HST Returns and filings, proof of employer/employee deductions being paid from the company’s accountant. With an accompanying letter on their letterhead, with a signature.
It is important to note that Directors of a corporation can and will be held liable for any outstanding CRA remittances to a maximum of two years from the date of their resignation. Unless of course, if they were a party to or otherwise aware of the intentional non-payments. Then there is no time frame limitations.
** It is generally accepted that CRA will go back 7 years in financial returns, but they have been known to go back 10 years.
SUGGESTIONS
It is Important to note that CRA remittances are a monthly ongoing event. Any arrears to the remittances of the Deemed Trust places the monies owed into Super Priority status, establishing CRA in prior position to any and all mortgages/liens on the borrower’s property. Therefore it is recommended that the Administrator or Investor ask for on-going confirmations of the borrower’s remittances to CRA, so as to protect the mortgagees position on title.
In Addition, we recommend that all Private Mortgages include a clause indicating “That arrears to CRA pertaining to HST, UI, CPP and any other employer/employee deductions pertaining to the Deemed Trust will be treated as arrears to this mortgage and formal legal proceedings may be initiated” (sample suggestion)
CAUTION- due to Covid 19 many business’s small and large are suffering financially and may not be making their CRA remittances. Be extra careful.
The two major Title Insurers in Canada (both U.S. owned) are Stewart Title and First Canadian Title. They will insure over this problem with their title Insurance policies to Financial Lending Institutions. ie: Banks, Credit Unions, Trust Co’s and other select lenders. Private Lenders such as MIC’s and Private Individuals cannot get Title Insurance to cover this dilemma.
NOTICE - As at this writing, our Industry E&O insurers may not be providing coverage for this type of a claim.
Malcolm Eccles
Mortgage Broker
M08000263
This is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel. And lastly, this communication is just an opinion. We reserve the right to change our mind. And we reserve the right to be wrong.
***yes the cow is upside down on a beach, you could be too if you're not careful..