Author: iunaskgkjhgEc

Critique of “Toronto-Dominion Bank v Canada”

Source: https://www.blg.com/en/insights/2020/05/fca-confirms-cra-super-priority-over-secured-creditors-on-a-gst-hst-debtors-property

 

Summary:

“Toronto-Dominion Bank (TD) was required to pay to the Canada Revenue Agency (CRA) proceeds of $67,854 for unremitted GST that TD received as repayment from a borrower upon the discharge of a TD mortgage”

 

Crux of CRA’s argument:

“when the Borrower collected GST, he was deemed to hold such amounts in trust for the Crown”

aka

Borrower paid money (that should have been sent to the government) to his lender (TD), who in turn shouldn’t have credited it toward the borrower’s debt, but rather should have paid it to the government to be credited towards the borrower’s GST obligation.

 

Quotes (from source):

– “CRA may enforce its super priority interest without prior notice to the secured creditor” 😶

– “Secured creditors’ priority is subordinate to the CRA, even if the security was registered before the GST/HST debt arises and the secured creditor had no knowledge of the GST/HST debt” 🫨

– “Secured creditors may be liable to repay the CRA amounts received from a borrower with an outstanding GST/HST liability” 🙁

– “[Subsection 222(1) of the ETA] therefore imposes an obligation on secured creditors to remit amounts received from the tax debtor to the Crown” 😢

– “mortgages registered before the borrower’s failure to remit GST/HST retain priority over the Crown’s deemed trust”

– “the Crown’s deemed trust rights are eliminated in cases of bankruptcy of the tax debtor …a secured creditor is not liable to repay proceeds received from a borrower prior to the borrower’s bankruptcy…the Borrower in the present case did not become bankrupt, …TD was required to pay to the Crown the sum of $67,854 plus interest”

 

Take-aways / musings:

– Ignorance (in this case, of borrower’s GST balance) is not a defense

– Bankruptcy wipes the CRA slate clean

– Unsecured creditors might have a better case vs secured (re: GST)

– I suspect an affidavit may allow a lender recourse to pursue borrower post-lender being pursued for Borrower’s GST arrears, but lender’s still on the hook in meantime

– TD didn’t get in trouble for giving the money to the borrower, they got in trouble for getting money from them (the latter of which should have been sent to the CRA)

aka

Lend to whoever you want, but discharge with caution (aka, make sure you discharge only once you’re sure Borrower’s GST/CRA debts are extinguished, and make sure your approval/commitment/mortgage has provision allowing you to do this)

NOTE: It’s tempting to conclude that once Borrower’s GST balance is established (ie. at loan origination), a lender no longer needs to concern themselves with it.  But, said article mentions “the deemed trust operates in a continuous manner once GST is collected but not remitted”.  And, since this is a question of TD receiving money that wasn’t meant for them, I am reading this as meaning a lender could be held liable for any GST arrears, at the time of receiving any payment (monthly, or otherwise) from a borrower.

 

Questions

– Sole Prop’s beware (or, maybe, beware of sole prop’s)?!  I wonder, had the GST been collected via a corp (which was owned by TD’s personal borrower), would the verdict have changed? (because the collector of the GST & the borrower, would no longer be one-in-the-same; or, is an owner of a corp liable just the same?)

– Am I correct in surmising that the gravity of tax arrears is as follows (in descending order)?

    1. GST
    2. Employee Source Deductions remittances
    3. Income Tax (corp/pers)

If the immediately-above list is correct, it makes sense when you look at the victim in each scenario, ie.

    1. GST is withholding money that should be the government’s
    2. Payroll deductions is withholding funds that should be an asset of the employee
    3. Income tax is creating a liability for the principal / borrower

 

Improving:

– Is there a way to improve one’s lending so as to turn the borrower’s obligation to repay, into a trust with the lender as the beneficiary? (This may be a vain attempt, as “CRA’s deemed trust rights” likely supersede any other trust; but none-the-less, it’s an idea to explore)

– Is there a way to become both secured and unsecured?

 

Sincerely,

Trevor Hickey, Mortgage Broker/Owner

Veritas Mortgage

 

Disclaimer: Above not meant to be taken as legal advice. Seek qualified legal advice before relying on any of the above. Thoughts, above, shared out of courtesy, but accuracy not guaranteed. Author not attempting to act outside of their qualifications as a mortgage broker, any implication of same is unintentional.

E&OE

What’s the longest-shot approval you’ve ever gotten?

Lenders generally get less in love with a file, as the need for exceptions, to their policies, increases.

 

 

Example #1

Let’s say you have a strong application (good income/credit/job history etc), with a down payment of 30% (from your own resources), but the lender in question will give you a better rate if you have 35% down payment.  You have a family member offering to lend you the remaining 5% (of the purchase price) so you can get the lower rates.

 

Example #2

Let’s say you have no down payment, and have a family member willing to lend you 5% (of the purchase price), so you can have the needed minimum (with the lender in question).  And, you just got out of bankruptcy last week.

 

 

As you probably guessed, example #2 almost-certainly requires more exceptions from the lender’s policies, making it less likely to be approved.  But, that doesn’t mean it isn’t worth asking:

“You miss 100% of the shots you don’t take” – Wayne Gretzky

If someone gifts me a down payment, can I pay it back later?

People sometimes get money gifted to them, to be used as a down payment for the purchase of a property.  (FYI, lenders often require the gifting party to be a family member)

In cases like these, lenders often (if not always) require the gifting party to to sign a gift letter saying the funds aren’t required to be repaid.

If you won the lottery and wanted to pay the gift back, that’s fine.

But, if you promise to pay them back (by way of another secret document – that you don’t give to the lender/broker – or even “just” by way of a verbal agreement), without telling the lender/broker about the alternate arrangement, this would not be fine.

(The latter case, above, would be known as “lying”.  And, on that note, take a quick gander at this short post on the 1st, 2nd and 3rd rules of lending)

As prescribed in the aforelinked post, when in doubt, ask the lender/broker if they’re okay with what you’re proposing (ie. borrowing a down payment from a friend or family member).

The second (and first) golden rule of lending

The second golden rule of lending is Tell the lender everything that could affect their decision.  (The first rule is the one with the gold makes the rules)

Are you pondering whether or not you should mention something to the lender?  

It’s times like this, when it’s nice to be working with a broker.  They can help sift through the minutia of data and determine what is shared and what isn’t.  There are some pieces of info that lenders don’t have a right to ask for (just as there are some pieces of info that you don’t need to volunteer).

If you’re still not sure, (regardless if you are a broker or borrower) generally it’s best to err on the side of caution and disclose it.  You never want to be at risk for being accused of withholding meaningful info.

P.S. A third rule (which is so obvious, it seems silly to even mention it) is “don’t lie”.  While there are some pieces of data that lenders don’t have a right to ask you, you are not at liberty of volunteering / responding with false information (aka lying).