When a recycling and scrap shipping company in Redwater, Alberta applied for a loan from a major bank to make improvements to its property, everything seemed fine. The loan officer did their due diligence and registered a $300,000 mortgage.
Five years, numerous missed payments, and several demand letters later, the bank finally had to enforce the mortgage—which still had $271,000 owing—to try and recover its investment. After having to lower the asking price on the property twice, the bank realized the situation was even worse than they’d thought when the CRA came knocking.
It turned out the borrowing company had failed to remit years’ worth of HST from out-of-province transactions to the CRA, and now the government was here to collect. The Alberta lender faced a payout of an $11,632.35 tax lien on top of the lowered sale price on the property—they were looking at a massive loss.
But they were protected with lender title insurance from FCT, on their lawyer’s advice. Alberta’s real estate, both commercial and residential, is heating up, and we have experience managing risk there. Our claims department promptly covered the full $11,632.35. Without that lawyer’s foresight and a small one-time investment, the bank would have lost that full amount because of the CRA’s super priority tax lien.
All companies have to hold money in trust for the CRA to cover payroll taxes, as well as any sales taxes that apply to their goods or services. If those taxes remain unpaid—or “in arrears”—when the company’s property gets sold, the CRA can lay claim to the full amount, even years later. The super priority lien deducts the taxes owed—only the amount from before the first lender on that deal issued their loan—from sales proceeds before the first lender or the rest of the arrears are paid. The CRA claims liens for later owed taxes in priority order. The CRA doesn’t have to make its claim when the property goes to sale—it can go to the first priority lender at any time and take the full amount, since those funds are deemed to be held in trust.
Often, tax arrears are a symptom of other issues with a company, and there is an unfortunate correlation between companies taking out large loans then defaulting, and significant tax arrears before that loan. When the CRA claims a tax lien, it’s often a lose-lose for lenders, who are already trying to recover a loan with few or no payments made on it. Seeing a borrower default and having to enforce a mortgage can become a nightmare for any lender, especially with a large amount of their investment left to recover and less available after the CRA has claimed its due. But it doesn’t have to be that way.
You can protect your lender clients with FCT’s extended super priority lien coverage. It covers a maximum of $500,000 in losses up to 10 years after the date the mortgage is discharged. It costs $175 for a commercial deal, and comes at no cost on residential deals. Lenders can invest with confidence, knowing their investment stays protected for a decade after mortgage discharge.
Learn how to easily add extended super priority lien coverage to your deals and offer your clients more protection for less.
Subject to certain exceptions, commercial title insurance policies equal or below $10M CAD are provided by FCT Insurance Company Ltd. Commercial title insurance policies above $10M CAD are provided by First American Title Insurance Company. Reference should be made to policy documents to confirm the insurer on any individual transaction. Services by First Canadian Title Company Limited. The services company does not provide insurance products. This material is intended to provide general information only. For specific coverage and exclusions, refer to the applicable policy. Copies are available upon request. Some products/services may vary by province. Prices and products/services offered are subject to change without notice.
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