As a mortgage professional, you play an important role in helping your clients secure the right mortgage and navigate the financial world. But beyond helping with loan applications, it’s crucial to understand the full financial picture of your clients, especially when it comes to their obligations to the government, like HST and source deductions. These obligations can affect more than just their taxes; they can have a crucial impact on the priority of a registered mortgage, which could create challenges down the road.
When your clients have unpaid property taxes, HST, or source deductions those debts can take precedence over the mortgage on their property.
This is true not only for corporations but also for individuals who are sole proprietors. If a client is self-employed as a sole proprietor and hasn’t paid their HST or source deductions, that debt could affect the distribution of the sale proceeds or refinancing.
The Case of Canada v. Toronto Dominion Bank (TD)
A key case that highlights this comes from Canada v. Toronto Dominion Bank (2018), where the courts ruled that government remittances take priority over mortgages, even after a property has been sold.
In this case, a borrower who worked as a sole proprietor in the landscaping business collected HST but failed to send it to the CRA. The borrower had a mortgage and HELOC with TD secured against their home. When they sold the house, they used the proceeds to pay off the mortgage and HELOC in full. Case closed, right? Wrong!
Years later, the CRA came after TD for the unpaid tax debt. TD refused to pay, and the case went to court. The court found that because the borrower sold the house voluntarily, the sale proceeds should have been used to pay the tax debt first. Since the borrower chose to pay the mortgage instead, TD was required to return that money to the CRA.
Why This Case Matters
As a mortgage professional, here’s why this case and the priority of government debts should matter to you:
- Government Claims Take Priority: If your client has unpaid HST and source deductions (“Deemed Trust Liabilities”), those debts could be prioritized over the mortgage, meaning the government could get paid before the lender. If your client sells their property, the tax debt would have to be paid first, and this could impact the mortgage lender’s investment. This is true for both corporations and self-proprietors.
- Avoid Surprises for Your Clients: Your client might not be aware that Deemed Trust Liabilities can affect the financing of their property or the mortgage repayment process on a sale. By staying informed about their obligations, you can help prevent unexpected financial issues down the line.
- Be Thorough in Assessing Clients’ Financial Health: When you’re assessing a potential borrower, it’s important to consider all aspects of their financial situation; not just their credit score or income. Make sure to understand their status as a self-employed individual and whether they have any outstanding government debts that could interfere with their mortgage or property transactions.
- Help Protect Lenders: Lenders need to know their investment is safe. If a borrower has Deemed Trust Liabilities, those debts could jeopardize the lender’s position. By advising clients to stay on top of their HST and other remittances, you’re helping ensure the lender’s interests are protected.
Your role goes beyond simply helping clients secure loans. Understanding your client’s full financial obligations, including their HST and tax responsibilities, helps you better serve them and the lenders you work with.
By staying informed and helping your clients understand the importance of keeping up with their taxes, you can avoid potential legal headaches and ensure smoother transactions for everyone involved.