When I started blogging at the onset of the Covid-19 lockdown, I vowed (to myself) that I would not write in legalese but rather, use plain English and avoid technical discussions of legal principals. Essentially, that I would not ‘talk law’. Because, to be perfectly honest, law talk is just plain boring.
However, on April 29/20 a decision was released by the Federal Court of Appeal that can have very grave consequences for private mortgage lenders in Ontario. What happened to The Toronto - Dominion Bank in the Canada v. TD Bank 2020 FCA 80 (Canlii) case can happen to any private mortgage lender, whether or not its mortgage goes into default.
And TD Bank did nothing wrong. Except, perhaps, be in the wrong place at the wrong time. TD Bank lent money to Mr. Weisflock, who owned and operated a landscaping business personally. Mr. Weisflock did not use a corporation to own and operate his business. Rather, he ran the landscaping business as a sole proprietorship.
Unknown to TD Bank, Mr. Weisflock owed money to Canada Revenue Agency (CRA) for HST remittances that he had collected, but failed to remit, in 2007 and 2008. TD Bank lent funds to Mr. Weisflock personally in 2010 (these loans were not business loans) and took a first mortgage of Mr. Weisflock’s house as security.
Mr. Weisflock made all of his payments and in late 2011, when Mr. Weisflock sold his house, he repaid TD Bank in full and TD Bank discharged its mortgage security.
So far, so good! Every mortgage lender is familiar with this Mr. Weisflock’s and TD Bank’s dealings up to this point in time. It happens every day. But something very wrong transpired next.
You will recall the two important facts from this scenario. First, Mr. Weisflock operated his landscaping business as a sole proprietorship and second, Mr. Weisflock failed to make the full HST remittances to CRA back in 2007 and 2008 – years before TD Bank loaned any funds to Mr. Weisflock.
In 2013 (more than a year after TD Bank has discharged its mortgage) and again in 2015, CRA asserted what is called a “deemed trust claim” against TD Bank and demanded that TD Bank pay to CRA almost $68,000 from the home sale proceeds that TD Bank had received from Mr. Weisflock. TD Bank refused, of course, and CRA took TD Bank to the Federal Court and received a judgment against TD Bank for this $68,000. TD Bank appealed. And the Federal Court of Appeal just upheld the lower court decision.
As a result of the Federal Court of Appeal’s interpretation of the laws in Canada, each and every private mortgage lender who lends funds to a homeowner / mortgagor - who is a sole proprietor of her or his own business - is now liable to CRA (to the extent that the private mortgage lender received payments from the homeowner / mortgagor) for unpaid HST remittances that were owing to CRA by the homeowner / mortgagor before the mortgage loan was advanced. This is likely also true for outstanding employee payroll remittances as well. And is true even if the lender had a good and valid mortgage registered on title to the homeowner / mortgagor’s property.
While it is one thing for a mortgage lender to owe outstanding realty taxes that might accumulate during a loan, the amount of realty taxes is rarely a significant percentage of the loan balance. But outstanding CRA remittances can represent a very large percentage of the debt. And the private mortgagee has to pay them to CRA even AFTER its mortgage debt has been repaid and after its mortgage has been fully discharged from title. And once the mortgage has been discharged, title insurance will not assist the lender and will not pay any claim.
Next blog will look various CRA liens and CRA's so-called super-priority. As always, this blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and mortgage remedy team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.
Be well and stay healthy.