CRA Super Priority and the Mortgage Lender

When looking at lending to a self-employed individual, it is no longer enough to see a copy of their tax returns or notices of assessment. Recent court cases have clarified Canada Revenue Agency (CRA) debts, including payroll and GST/HST remittances, are deemed trust debts — and these can have a super priority over the lender’s interest in the property.

How can lenders make positive decisions when considering granting a mortgage or a homeowner is looking for re-financing to deal with CRA debt? What do you need to know?

The four following questions are a good place to start:

Are they a GST registrant? Most self-employed individuals need to register for a GST account if their gross income exceeds $30,000 in a fiscal year.

Do they have a payroll account? Review the tax returns to determine what type of expenses the individual is reporting. Specifically, review the statements of business or professional activities. Look at whether they are reporting any direct wage costs; or salaries, wages, and benefit expenses.

Is the GST paid or is there a GST debt outstanding?

Are the payroll remittances up to date?

Outstanding circumstances require special considerations

When applying for a mortgage, the applicant’s debts do not usually have a security interest in the purchased property. However, a deemed trust debt that exists at the time a mortgage is registered will have super priority over the registered mortgage. It is therefore important to ensure the borrower is paying their applicable GST and Payroll remittances.

We recommend lenders require the borrower provide a comfort letter to ensure the borrower is paying their GST and Payroll remittances (deemed trust obligations. This confirms a business’ CRA program accounts are in good standing, and applies to corporate income tax, payroll deductions and GST/HST accounts.

Further, if a self-employed borrower has equity in their property and is looking to re-finance, lenders may want to ensure the deemed trust obligations are paid from the equity. This reduces the risk of a deemed trust debt taking a super priority over their interest in the property.

Reducing ongoing lender risk

Borrowers who will continue to be self-employed and have a possibility of incurring deemed trust debts may be an ongoing risk for lenders moving forward. Lenders can offset these concerns by requiring self employed borrowers to provide annual proof they are current with the CRA deemed trust obligations. Lenders may also want to include their right to demand payment and sue the borrower for any future deemed trust amounts the lender becomes required to pay to the government in the contract terms.

Refer borrowers to a Licensed Insolvency Trustee

Any lender working with self-employed individuals needs to protect themselves from unexpected CRA claims. If you are working with a borrower who has CRA debt, they may benefit from talking with a Licensed Insolvency Trustee to discuss possible options to deal with it. Referring them to insolvency services can protect lenders from deemed trust obligations and potentially provide the borrower more favourable terms and conditions in the future.