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)?
-
- GST
- Employee Source Deductions remittances
- Income Tax (corp/pers)
If the immediately-above list is correct, it makes sense when you look at the victim in each scenario, ie.
-
- GST is withholding money that should be the government’s
- Payroll deductions is withholding funds that should be an asset of the employee
- 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