Important New Consideration for Private Lenders

Federal Court of Appeal Requires TD to Turn Over Mortgage Payout

Lending decisions by banks and private lenders hinge on knowing what debts a borrower has. If a borrower has significant debts it is likely they will have trouble making their payments. Lenders also want to be sure that the value of the property will cover the loan if the borrower can’t make their payments.
 
In light of these concerns, a new issue has arisen for Lenders with a decision from the Federal Court of Appeal. The Borrower owned a landscaping business and was responsible for collecting and remitting GST (now HST), however, he had fallen into arrears and owed the Canada Revenue Agency (“CRA”) $67,854. TD not knowing these arrears existed loaned the Borrower funds for a mortgage and line of credit. The Borrower then proceeded to sell the property and the mortgage and line of credit were paid out and discharged from the title of the property. Again, when TD discharged the mortgage they had no knowledge of the Borrower’s tax arrears.
 
CRA then several years after the sale of the property asserted against TD the deemed trust provisions under the Excise Tax Act. The deemed trust provisions essentially provide that anyone holding property of the debtor (the Borrower in this case) is holding it in trust for CRA to pay GST arrears. (now HST). TD refused to pay the Borrower's GST arrears and CRA commenced legal action.
 
In the case, CRA won at the Federal Court level and TD appealed the decision to the Federal Court of Appeal. CRA won again when they dismissed TD's appeal.
 
The Court of Appeal noted that Parliament had amended the Excise Tax Act to give a super-priority to the deemed trust provisions overall creditors including secured creditors including lenders such as TD.
 
It's important to note that the super-priority rules for deemed trust provisions do not apply to bankruptcy. The result is that a secured lender such as TD would be better off if the Borrower had gone bankrupt as the TD loan would likely have ranked ahead of CRA regarding the GST arrears.
 
What should lenders do to protect themselves? At a minimum, lenders should request confirmation from CRA that HST remittances are up to date for any self-employed borrowers before approving a mortgage. In addition, lenders would be wise to check for HST arrears annually during the term of loan.
 
See case link: Toronto-Dominion Bank v. Canada, 2020 FCA 80