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CANADA REVENUE AGENCY FOR INDIVIDUALS: 4 KILLER WAYS TO FULL LOAN RECOVERY

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Stay healthy, well balanced and safe and secure everyone.

Introduction

On July 4, 2018, my Brandon’s Blog MORTGAGE LENDING CRITERIA SELF EMPLOYED: BIGGEST MYTH MAY BE RIGHT, I described the case of Canada v. Toronto-Dominion Bank, 2018 FC 538 (CanLII) which was heard in Federal Court. I described where the Federal Court ruled in favour of the claim of Canada Revenue Agency for individuals running an unincorporated business either as a proprietorship or in partnerships.

The Bank appealed the decision to the Federal Court of Appeal. The case was heard on October 8, 2019, in Toronto. The judgment was released at Ottawa, Ontario, on April 29, 2020. I want to remind you about the facts of the case, what was decided and provide my 4 killer ways that mortgage lenders to people who also run an unincorporated business, but you don’t lend to the business, can protect themselves.

The original Canada v. Toronto-Dominion Bank case

The original case was very simple. A man had a landscape design business he ran as a sole proprietor. In 2007 and 2008, prior to becoming a customer of the Bank, he collected GST that he did not pay over totalling $67,854.

In 2010, the Bank advanced both a mortgage loan and a home equity line of credit (HELOC) loan to the man. Security for both loans was registered against the man’s home. It was the Bank’s standard from mortgage and HELOC security documents. At the time, the Bank had no knowledge of the man’s Canada Revenue Agency for individuals’ liability for unremitted GST. There was no registration by the government against the man’s home for this outstanding tax amount either.

In late 2011, the man sold the home. His real estate lawyer issued two trust cheques to the Bank from the house sale. One paid off the mortgage and the other cheque paid off the HELOC. In return, the Bank discharged its mortgage and HELOC security charges and the house sale was completed.

In 2013 and 2015, the Canada Revenue Agency made deemed trust claims against the Bank under Section 222 of the Excise Tax Act (ETA) for the amount of the man’s collected and unremitted GST. GST or HST under the ETA and employee source deductions (amounts withheld by employers from salaries and wages paid to employees on account of income tax, the Canada Pension Plan and Employment Insurance) under the Income Tax Act, that is collected but not remitted, forms a deemed trust claim against the assets of the business.

If the business is not a company, that is unincorporated, then there is no difference between the proprietor’s or partner’s personal assets and business assets. They are just assets of the person.

Canada Revenue Agency argued that the Bank was in possession of funds from the sale of the man’s property. The Crown also submitted that when the man sold his home, he was obliged to pay his GST obligation out of the sale proceeds. He did not do that. Rather, he used part of the money from the sale to pay the Bank off. Keep in mind the Bank was a secured creditor. The Crown further argued that under this scenario, the Bank had a statutory responsibility to pay the GST tax debt out of the money it received.

The Bank argued on its behalf that the repayment of the money only applied if there was an event that triggered other events leading to the repayment, such as a secured creditor enforcing its security.

The Federal Court disagreed and ruled in favour of the taxman.

The Canada Revenue Agency for individuals claim to appeal to the Federal Court of Appeal

The Bank appealed the lower Court’s decision. The Bank’s appeal rested on three issues where they claimed that the Federal Court judge erred:

  • By finding that the deemed trust does not need an event that creates the crystallization around the assets.
  • In finding that secured creditors cannot avail themselves of the bona fide purchaser for value defence.
  • Ignored the fact that the Bank’s loans to the man had nothing to do with his business.

The Federal Court of Appeal judges went through a detailed analysis of cases and legislation. In the end, the Federal Court of Appeal did not find that the lower court judge erred in any way and dismissed the Bank’s appeal on all three grounds.

Triggering event – The Bank argued that the concept of priority can only be determined when there is an event that triggers competing claims to the priority over the assets. Since the right to a priority is essentially remedial in nature, it develops upon the enforcement action initiated by one or more creditors. When there is a competition between claimants, and it is obvious there will be a shortfall, that is when the Crown is able to assert its priority. Here, the Bank was not a secured lender at the time the Crown asserted its priority.

The appeal court decided that the lower court was correct. The relevant section of the Excise Tax Act creates a trust when there is unremitted GST or HST where the property is beneficially owned by Her Majesty in spite of any security interest in the property or in the sales proceeds thereof.

So the Bank was unsuccessful in this part of its argument.

Bona fide purchaser for value defence – This argument by the Bank is that it is a bona fide buyer for value of the cash paid to it by the debtor. Because the considered trust fund provisions of the Act do not extend to such buyers for the value the Bank submits that it is entitled to keep the funds provided in payment of the borrower’s HELOC and mortgage.

The appeal court ruled against this argument on the basis that if the bona fide purchaser for value defence was available to secured creditors who got paid off, it would render the deemed trust provision useless in probably every situation. The Court stated this was not Parliament’s intention.

The loans to the man had nothing to do with his business – This argument is that the court should distinguish between the taxpayer acting in his capacity as a business distinct from the tax debtor acting in a personal capacity. Further, it was argued that the Bank had no knowledge of the man’s business affairs.

The Court rejected this argument for two reasons. First, the statute that establishes the deemed trust states “…every person…”. It does not differentiate between different types of persons. Second, there was nothing in the evidence before the lower court that indicated what knowledge the Bank had about the man’s business.

4 killer ways to full loan recovery

So how can someone who lends money by way of a property mortgage on a personal residence of a self-employed person who runs an unincorporated business protect themselves? Here are our 4 killer ways:

  1. The mortgagee needs to ask the question on the mortgage application to determine if the person is self-employed.
  2. The proposed mortgagee must get a true copy of a statement from CRA showing that there are no amounts owing by the person on account of either unremitted HST/GST or source deductions as the employer of others. This condition should be in the term sheet for the loan being offered. The statement should be given before the lender advances the funds.
  3. Lenders should add language to their term sheet, loan and security documents and discharge or other documents issued when the loan is repaid. The new language would be an attestation by the borrower that there are no amounts owing to any government authority that would be regarded to be a deemed trust claim.
  4. Even more, the language would have to make it clear that in the event there were any kind of such claims, even if the mortgage loan was totally repaid, the borrower is still responsible to pay that additional amount to the lender. The lender would then pass on the deemed trust amount to Canada Revenue Agency for individuals.

Summary

I hope you found this CRA deemed trust claim case review helpful. It should be of particular interest to contractors, developers and builders in Ontario.

The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Revenue and cash flow shortages are critical issues facing entrepreneurs and their companies and businesses. This is especially true these days.

If anyone needs our assistance, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Team is fully functional and Ira, together with Brandon Smith, is readily available for a telephone or video meeting no-cost strategy session.

Continue to be healthy, well balanced and protected everybody.canada revenue agency for individuals

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Brandon Blog Post

BANK OF CANADA NEW STUDY ON CANADIAN HOUSEHOLD DEBT

Bank of Canada: Introduction

There has been talking for many years now about the Canadian housing market and more particularly about the Toronto and Vancouver markets. The Bank of Canada (BOC) recently published a staff analytical note titled: Reassessing the Growth of HELOCs in Canada Using New Regulatory Data. This Brandon’s Blog discusses this new study which shows Canadians have been tapping into the equity in their homes using them as automated teller machines (ATM).

Recent Bank of Canada Staff Analytical Note

The BOC staff warned that home equity may be concealing financial distress. They go on to warn that Canadian real estate owners may be hiding financial vulnerability using complex debt products.

BOC staff published this analytical note examining new home equity data. The new data gives more insight into home equity borrowing. The home equity line of credit (HELOC) borrowing has now been formally analyzed. HELOCs are usually advertised as a component of combined plans, provided with a mortgage and often, other credit items, such as personal lending and credit cards. Such a mixed plan can generally be broken down into a HELOC element, which is non-amortizing, as well as a home mortgage component, which is amortizing. Additionally, a part of the home mortgage component in such a combined strategy might be readvanceable, even though it is amortized.

The borrowing limit in combined plans is commonly tied to regional house prices. As market value increases, households can borrow much more. In the last few years, integrated mortgage-HELOC plans have actually expanded in importance. The BOC’s new analysis shows that it currently accounts for close to 40 percent of household residential debt owing to the chartered banks. In this way, Canadians are using their homes like debit cards at an ATM, but without having to go to the Bank to take out the money.

New reporting requirement for HELOCs

A new reporting standard has now been developed. A brand-new reporting form has been established to systematize the reporting on HELOCs. This new reporting is the end result of a years-long collective effort between the BOC, the Office of the Superintendent of Financial Institutions (OSFI) and the Canadian financial institutions. It is designed to improve the surveillance of financial stability concerns. The new reporting classifies household secured lending into:

  • stand-alone HELOCs
  • conventional home mortgages
  • integrated mortgage-HELOC plans

Also, it supplies a reporting on the consolidated plans into individual HELOC (non-amortizing) and mortgage (amortizing) parts. This will allow a better understanding of home equity debt.

I am sure that readers of my Brandon’s Blog are already familiar with the traditional segments of personal residential debt; first mortgage, second mortgage and secured line of credit. As the BOC statistics show, the less familiar combined mortgage HELOC product has become increasingly popular. No doubt some of that new popularity has been due to the heavy marketing of this new hybrid product by the chartered banks.

The readvanceable mortgage

I think in the future it will be better known by a name reflecting what it really is, such as readvanceable mortgages. They combine the fixed-rate mortgage with a variable rate HELOC. The amount of HELOC credit extended automatically increases with payments against the mortgage portion. So, borrowers can immediately replace the traditional mortgage debt with a new HELOC debt in exchange for the monthly payment against the mortgage principal.

Canadian homeowners can use the funds advanced by the HELOC portion for basically any use they want, including, home renovations, paying down higher interest rate debt or for investment. Under the readvanceable mortgage, borrowers, of course, will pay more interest on their total residential debt. The reason being that as you pay down the mortgage principal, the HELOC element availability increases.

It will be very tempting for Canadians to use this extra credit to pay down higher interest household debt they may be falling behind on, or at least, now be able to make the monthly payments on that higher interest rate debt, such as credit cards. So, the chartered banks, of course, will love this readvanceable mortgage credit product. More interest will be paid on the debt secured against the home while the higher interest rate payments continue to be made. A win-win for the bank, but not so much for Canadian household debt.

Canadian household debt can now replace higher rate debt with perpetual debt. There will be no incentive for Canadian households to reduce overall debt as long as interest rates stay low. It is great for the banks but not exactly a reason for households to celebrate.

Canadian household debt has a new love of these more complex loans

Let us go over Canada’s new love of these more complex loans. The BOC analysis confirms an increase in consolidated mortgage-HELOC plans, at 6.7 percent year over year. These plans appear to be taking market share from the conventional stand-alone mortgages and also traditional HELOCs; stand-alone home mortgages grew by a modest 2.0 percent,

While stand-alone HELOCs contracted by 7.6 percent during this time period. Furthermore, the new information on elements of combined plans shows that the growth of these plans is driven by the amortizing home mortgage element, which grew by 7.7 percent while the non-amortizing portion grew by 3.3 percent. These are all the same year over year statistics.

The balance of HELOCs (both stand-alone HELOCs and the non-amortizing part of the integrated mortgage-HELOC plans) is $173 billion as at the fourth quarter of 2018, $70 billion less than the previous amount of $243 billion. The overall balance of HELOCs reduced by 1 percent year over year. The overall balance of home mortgages (both stand-alone home loans and the amortizing element of mixed plans) increased by 3.8 percent.

So what does this Bank of Canada study really mean?

Against the background of the fear of climbing interest rates, tighter home mortgage qualification requirements and the stagnation in household spending throughout 2018, the information from existing regulatory filings reveals that HELOC balances expanded much faster than home mortgages. This suggests that families were had not stopped to borrow against the value of their residences even as borrowing tightened.

The convenience of accessibility to rotating credit supplied by standalone HELOCs and the new combined plans might help with the buildup of Canadian household debt. It will come at the cost of building equity in one’s home. Canadians collecting huge amounts of debt secured by their real estate may find themselves with marginal (or even negative) real estate equity if the value of their home falls.

These complex loan products may likewise be hiding emerging financial distress if Canadians are taking equity out of their homes to manage various other financial debt obligations or to fund their everyday expenses because they lack other cash resources. These are all factors to consider when tracking and analyzing both stand-alone HELOCs and the strategies of the combined plan.

Do you have too much debt?

Are you or your business in financial distress? Do you not have adequate funds to pay your debts as they come due?

If so, call the Ira Smith Team today. We have years and generations of experience aiding individuals and companies searching for financial restructuring or a debt settlement arrangement. As a licensed insolvency trustee (previously called a bankruptcy trustee), we are the only experts certified, acknowledged as well as overseen by the federal government to provide bankruptcy and insolvency guidance as well as execute methods to assist you to remain free from bankruptcy and your debts.

Call the Ira Smith Team today so you can reduce the tension, anxiety, and discomfort from your life that your financial problems have triggered. With the unique roadmap, we develop simply for you, we will promptly return you right into a healthy and balanced problem-free life.

You can have a no-cost evaluation so we can assist you to repair your credit and your debt problems. Call the Ira Smith Team today. This will certainly enable you to return to a brand-new healthy and balanced life, Starting Over Starting Now.bank of canada

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