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No safe bet: CRA tax liens and the challenge for lenders


Is a loan secured by collateral a safe investment? If the debtor has tax arrears, it may not be. Super priority liens gives the Canada Revenue Agency (CRA) extraordinary power to recover what is owed to them, even if someone else now holds those assets. A Federal Court of Appeals decision clarified that power even further: the CRA can collect even if taxes were owed before the lender issued the loan.

What is a super priority lien?

A CRA super priority lien is a claim on a debtor’s assets. It takes priority over any other interests in those assets, such as a mortgage. In practice, super priority liens apply to money that businesses owe the CRA for two specific things: GST/HST and payroll taxes (also called source deductions). That’s because businesses collect that money from customers and employees, and remit to the CRA at a later date. Until it’s submitted, the money is considered held in a “deemed trust” with the CRA as the beneficiary.


Deemed trusts

A trust is money, property or some other asset that someone (the trustee) holds onto for someone else (the beneficiary) until a later date. Often, trusts are created by contracts or at least an agreement by everyone involved. Deemed trusts are different. Nobody creates them—they come into existence on their own because they’re implied by statutes or laws. The trustee has no choice.

A deemed trust exists whether or not anyone knows about it. This means the CRA can come for that money after an audit reveals owed source deductions, which can happen years after the mortgage’s discharge.

When businesses fail to remit taxes held in trust, it’s usually because that money has been used for cash flow or investment. So most of the time, the CRA has to come for the business’s assets, which is a problem for lenders who have to enforce their mortgages.

When the lender tries to recover their investment by seizing collateral, they become the new trustee without even knowing. The CRA can then garnish the full amount held in deemed trust from the lender because they’re the current trustee.


Protecting lenders from the invisible

Tax liens makes risk assessment difficult for lenders because they’re so hard to predict. Deemed trusts don’t usually have paper trails, and spotting unremitted GST/HST and source deductions is almost impossible if the CRA hasn’t already taken action against the debtor.

How can lenders operate with this level of uncertainty and risk? By protecting themselves. Most residential or commercial lender title insurance policies from FCT have the option for a super priority lien endorsement.* It offers coverage up to a maximum of $500,000 in losses from CRA super priority liens, if the claim is made within ten years after the discharge of the mortgage. Even though these liens almost always only apply to businesses, it’s not uncommon for business owners to put up a home as collateral, so the endorsement is just as important for residential policies as for commercial.

That protection can mean the difference between investing with confidence and facing unforeseen financial losses. It only costs $175 for a commercial deal, and is included at no cost for residential deals. Lenders can avoid thousands in losses from tax arrears they had nothing to do with.

Get protection against CRA tax claims and a host of title and off-title risks with a title insurance policy with a super priority lien endorsement from FCT.



*The super priority liens coverage endorsement is not available for vendor take-back (“VTB”) mortgages, residential policies or commercial policies insuring private lenders where the lender is not in first or second priority. Any knowledge of existing liens or unpaid remittances must be disclosed for underwriting purposes. The super priority liens coverage endorsement is not available for residential title insurance policies issued for private lenders in Quebec.

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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