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WHAT IS THE POWERFUL CRA LIEN ON PROPERTY TOOL?

cra lien on property
cra lien on property

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would prefer to listen to the audio version of this CRA lien on property Brandon Blog, please scroll to the very bottom of this page and click play on the podcast.

CRA lien on property: Canada Revenue Agency’s collection powers

The CRA (formerly known as Revenue Canada) assigns “collection officers” to taxpayers who fail to make timely payments or who do not pay in full. For the CRA to agree to a payment arrangement (usually monthly payments), the taxpayer must provide financial disclosure on a monthly basis (details of their expenses, their income, and their assets).

Tax debts that cannot be settled through a payment plan may be registered in Federal Court. Once the debt is certified, the certificate is equivalent to a judgment entered in court. This is called a memorial. If you own property, the CRA can create a lien on your property based on your judgment. A CRA lien on property against your interest in your home is the most common CRA lien on property they register.

This Brandon Blog discusses a recent decision from the British Columbia Supreme Court that confirms that the CRA lien on property becomes secured once they are registered.

CRA lien on property: CRA Super Priority Liens

I previously wrote a Brandon Blog about the legal case of Canada v. Toronto-Dominion Bank. By mentioning this case, I hope that my comments about the recent British Columbia Court decision below will be clearer.

Federal statutes give CRA a creditor powerful tools to collect debts. They can access avenues of collection significantly quicker than other types of creditors. It was not known to Toronto-Dominion Bank (TD) that, as a sole proprietor operating a landscaping business, the borrower had collected GST in the amount of $67,854.

After selling his home, the borrower fully paid off his first mortgage with TD. TD did not lend to or deal with the proprietor’s business. Since there was no CRA lien on property against the house, TD was not aware of the outstanding GST.

The CRA has enhanced security, known as “super-priority”, over most of a tax debtor‘s real property and personal assets, by virtue of deemed trust provisions in the Income Tax Act and Excise Tax Act (ETA). CRA has priority over substantially all secured creditors under the deemed trust concept, which means that the proceeds of the sale from the property subject to the deemed trust will go to CRA. A deemed trust claim is a CRA lien on property and is obtained without any registration.

A demand letter was subsequently sent to TD demanding that a portion of the proceeds be used to satisfy the GST debt. TD refused to pay since they believed their mortgage security ranked higher than CRA’s claim for unremitted GST. Court action was taken against TD by the CRA. The Crown argued that under section 222 of the ETA, the proceeds received by TD on the repayment of the mortgage and line of credit were subject to a deemed trust in favour of the Crown.

The Federal Court held that TD had an obligation to reimburse the CRA for the debt of $67,544, plus interest, owing by the Borrower to the CRA. Super-priority interests can be enforced by the CRA without notifying the secured creditor. TD was responsible for repaying CRA amounts received from a borrower with an outstanding GST/HST bill.

cra lien on property
cra lien on property

FCA confirms CRA super-priority over secured creditors on a GST/HST debtors’ property

TD appealed the decision of the Federal Court to the Federal Court of Appeal (FCA). According to the FCA ruling in Toronto-Dominion Bank v Canada, the FCA agreed with the lower Court that TD must pay the CRA proceeds of $67,854 for unremitted GST that it received from a borrower upon the discharge of its mortgage. CRA is considered to hold in trust amounts paid to a secured creditor from a debtor who owes Goods and Services Tax/Harmonized Sales Tax (GST/HST) liabilities.

FCA affirmed the Federal Court’s finding that no triggering event was required and that the deemed trust operates continuously once GST is collected but not remitted. Further, the FCA noted that case law has distinguished between secured creditors and bona fide purchasers of value, such that the two categories are mutually exclusive.

It is best for secured creditors to review their current risk management practices and revise them both at the time of due diligence when vetting new borrowers as well as throughout the term of any secured credit agreement.

If we were talking about unremitted employee source deductions, the result would be the same.

CRA lien on property: Personal income tax debt collection

CRA is a powerful creditor when it comes to personal income tax debt collection. Above I discussed how they can get a CRA lien on property just by way of the statute for unremitted source deductions or unremitted GST/HST. But what about personal income taxes? CRA does not have an automatic lien for unpaid income taxes.

However, they can go to Federal Court and obtain a memorial and then register that CRA lien on property of the tax debtor who fell behind in their payment of taxes. Once they place that lien, they now turned their unsecured claim for unpaid taxes into a secured claim. As I already mentioned, the most common type of property they register against is real property, like the tax debtor‘s home.

If the CRA lien on property goes on the real property before the person who owes unpaid income taxes files either a consumer proposal or bankruptcy, then the CRA lien on property stays on. CRA will not try to go power of sale or foreclosure to throw the taxpayer out of their home based on this tax lien. Rather, they will just wait until the taxpayer either sells the home or tries to renew or refinance a mortgage.

In the case of a sale, they will get their tax lien paid out of the sale proceeds. In the case of a mortgage renewal or refinancing, mortgage lenders will not do a new mortgage loan or a refinancing with the CRA lien on property. This is how they get their money.

Keep in mind that the lien is only against the taxpayer’s interest in the home. So if the tax debtor is the sole owner, it is against 100% of the home. If the taxpayer owns the home jointly with say, a spouse, then the lien is only against the 50% interest.

cra lien on property
cra lien on property

CRA lien on property: Can Canada Revenue Agency put a lien on my house?

You should now know that the answer to this question is yes. Licensed insolvency trustees know this. Nevertheless, in the British Columbia case I will describe now, the Trustee tried a novel, but an unsuccessful, approach to try to knock out CRA’s lien on property secured claim to collect taxes owed by the tax debtor. I am referring to Gidda (Re), 2021 BCSC 1460 (CanLII).

The licensed insolvency trustee appealed the decision of the Master as Bankruptcy Registrar dated February 3, 2020, reversing the Trustee’s rejection of a secured proof of claim filed by the federal Crown on behalf of the CRA in the bankruptcy. As well, the Trustee appealed the Master’s ruling that he is personally liable for the costs of the proceeding.

The CRA has taken out a memorial to attach a lien in favour of CRA to the taxpayer’s home due to unpaid income taxes. Then he filed for bankruptcy. So the lien against property holds as it came before the bankruptcy. A secured proof of claim for unpaid income tax was filed by the CRA in response to the memorial and registered tax lien. A secured claim was granted to CRA, which was not directly contested by the Trustee.

In my opinion, this claim, however, was handled by the Trustee in a novel way that wasn’t sustainable. It was so novel that the Judge took judicial notice of the submissions that such a case was never litigated before in Canada. There were also a number of judgments against the title of the property in addition to the memorial. There was no priority among the other judgments.

According to section 70(1) of the Bankruptcy and Insolvency Act (Canada) (BIA), bankruptcy takes precedence over judgments, garnishments, and any collection action. Furthermore, no judgment takes precedence over another.

A memorial is a judgment of the Federal Court, and since all judgments are treated equally as unsecured creditors, the Trustee disallowed CRA’s secured claim. Because the memorial and its registration against the title are secured claims under other federal statutes, it has powers not given to other simple money judgments. Therefore, I believe it is a losing argument. So did the Master.

In addition, the Master believed that the Trustee ought to have been aware of this when disallowing CRA’s secured claim and causing it to appeal the Trustee’s decision. Therefore, the Master awarded the Crown costs to be paid by the Trustee personally.

On both counts, the Trustee appealed the Master’s decision. The Judge who reviewed this found that the Master was correct in upholding the CRA secured claim and dismissed this portion of the Trustee’s appeal. The Judge did, however, let the Trustee off the hook by allowing the costs portion of the appeal. According to the Judge, the costs awarded by the Master will be paid by the bankruptcy estate and not by the Trustee personally.

CRA lien on property: Say goodbye to debt stress

I hope that you found this CRA lien on property Brandon Blog informative. Unpaid taxes and a heavy debt load do not mix well. If you have too much debt, you are considered insolvent. There are several insolvency processes available to you. It may not be necessary for you to file for bankruptcy.

If you are concerned because you or your business are dealing with substantial debt challenges, you need debt help and you assume bankruptcy is your only option, call me.

It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties with debt relief options as an alternative to bankruptcy. We can get you the relief you need and so deserve. Our professional advice will create for you a personalized debt-free plan for you or your company during our no-cost initial consultation.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We understand that people with credit cards maxed out and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do as we know the alternatives to bankruptcy. We help many people and companies stay clear of filing an assignment in bankruptcy.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of these seems familiar to you and you are serious about getting the solution you need to become debt-free, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost consultation.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

cra lien on property

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DEEMED TRUST CANADA REVENUE AGENCY CLAIM: CAN THE CANADA REVENUE AGENCY SUPER PRIORITY LIEN BE PRIMED IN A CORPORATE RESTRUCTURING?

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Deemed Trust Canada Revenue Agency claim: Introduction

Section 227 (4) of the Income Tax Act (Canada) (ITA) and the mirrored provisions in the Employment Insurance Act (Canada), create deemed trusts against the property of a tax debtor. When a tax debtor doesn’t remit employee source deductions or HST collections, a deemed trust Canada Revenue Agency claim arises.

Deemed Trust Canada Revenue Agency claim: Parts of the Initial Order

In every Court-supervised restructuring under the Companies’ Creditors Arrangement Act (CCAA), there are several standard provisions in the Initial Order issued by the Court. In addition to the stay of proceedings provision, there’s also the need to make sure that the insolvent company has:

The normal way of achieving this is to give Court-ordered priority charges. Examples are for the borrowing authority, the Directors’ Charge and the Administrative Charge. This is so the lender, the Directors and the Court-appointed Monitor and its legal counsel know that there is a source of (re)payment.

Priority charges are made when certain affected parties may not be represented in Court. Therefore, a standard “comeback clause” is also in the standard Initial Order. This allows any affected party to make a motion before the Court to amend such Court-ordered priority charges.

Deemed Trust Canada Revenue Agency claim: The Canada North Group Inc. decision

A decision was recently released by the Alberta Court of Queen’s Bench in Canada North Group Inc. (Companies’ Creditors Arrangement Act), 2017 ABQB 550. The Court case reviewed several issues, but the one I found most interesting was one specific question. Can Court-ordered priority charges under a CCAA restructuring prime the deemed trust Canada Revenue Agency claim?

The decision goes through a very interesting analysis as to whether a deemed trust Canada Revenue Agency claim provides Her Majesty with the ownership of the property of the company or is merely a secured interest in the property. Section 227 (4) of the Income Tax Act (Canada) and the mirrored provisions in Employment Insurance Act (Canada), create deemed trusts. Section 37(2) of the CCAA explicitly preserves their operation. Specifically, can Court-ordered priority charges under a CCAA restructuring prime the deemed trust Canada Revenue Agency claim.

Deemed Trust Canada Revenue Agency claim: Section 227(4.1) of the ITA

Section 227(4.1) of the ITA states:

“Extension of trust

(4.1) Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, where at any time an amount deemed by subsection 227(4) to be held by a person in trust for Her Majesty is not paid to Her Majesty in the way and when provided under this Act, property of the person and property held by any secured creditor (as defined in subsection 224(1.3)) of that person that but for a security interest (as defined in subsection 224(1.3)) would be property of the person, equal in value to the amount so deemed to be held in trust is deemed

(a) to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

(b) to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest

and is property beneficially owned by Her Majesty despite of any security interest in such property and in their proceeds, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.”

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deemed trust canada revenue agency claim

Deemed Trust Canada Revenue Agency Claim: What is the nature of Canada Revenue Agency’s interest?

The Court raised, amongst other things, the following two questions:

  1. What is the nature of Canada Revenue Agency’s interest?
  2. Does the statutory secured status deemed trust Canada Revenue Agency claim elevate it above a priority charge?

Canada Revenue Agency relied on the trust provisions in the Fiscal Statutes. It argued that it holds a proprietary and not secured interest in the debtor’s property. Key to its position under its deemed trust claim is the concluding phrase in s 227(4.1) described above.

Canada Revenue Agency asserted that these words take it beyond a mere secured creditor. They stated it was so because they do not just consider the Crown to be the owner of the interest. Rather, the statute says that it is the owner. However, previous decisions in Canada have found that the deemed trust is not in truth a real one as the subject of the trust cannot be identified from the date of creation of the trust.

The Court also stated that, in principle, the deemed trust is similar to a floating charge over all the assets of the tax debtor. This is because the tax debtor is free to deal with its property. When it does, the trust releases the disposed-of property and attaches to the proceeds of sale. To find otherwise would freeze the tax debtor’s assets and prevent it from carrying on business. The Court found that this was not a result intended by Parliament.

The Court concluded that Canada Revenue Agency’s interest is a security interest, not a proprietary interest.

Deemed Trust Canada Revenue Agency Claim: Can the statutory deemed trust Canada Revenue Agency claim be raised?

The Court stated that it may seem that certain sections of the CCAA conflict with the deemed trust sections in the Fiscal Statutes on a strict reading of only the above-noted section of the ITA. That is what Canada Revenue Agency did to support its interpretation.

However, the Court went on to say that one must not read these provisions in a vacuüm. The Fiscal Statutes, the BIA, and the CCAA are part of complex legislative schemes that run concurrently. They must be read in their entire context. The aims of the statutes and Parliament’s intention kept in mind.

The Court agreed with earlier cases that the purpose of the CCAA is to let the debtor to continue to carry on business and, where possible, avoid the social and economic costs of liquidating its assets. The Court also stated that the CCAA legislation is remedial in the purest sense. It provides a means whereby the devastating social and economic effects of bankruptcy or creditor initiated termination of business operations can be avoided. It allows for a Court-supervised attempt to reorganize the financial affairs of the company.

Deemed Trust Canada Revenue Agency Claim: The Supreme Court of Canada on the Indalex deemed trust

Following the Supreme Court of Canada decision in the Indalex deemed trust decision, the Court agreed that the securing of the DIP facility is a key aspect of the debtor’s ability to attempt a workout. The harsh reality is that commercial imperatives govern the lending practices of the lenders, not the interests of the policy considerations that lead the government to legislate in its favour.

The Court also found that the priority charges aid in the restructuring process. Certain examples of such priority charges are:

  1. Interim DIP lender’s charge providing both an incentive and guarantee to the lender the recovery of funds advanced during the restructuring.
  2. The priority charge in favour of Directors is important. The charge keeps the captains aboard the sinking ship. Without the benefit of this charge, directors might abandon the ship.
  3. A priority charge for administrative fees is critical to a successful restructuring. It is the only protection the Court-appointed Monitor and its legal counsel have to make sure that their bills are paid.

Further, the Court found that the Section 11.52(2) of the CCAA codifies and elaborates on priority charges. Previously, the Court used its inherent jurisdiction in granting priority charges. The Court found that this shows Parliament’s intention that secured creditors’ interests could be eroded if the Court felt the need.

Deemed Trust Canada Revenue Agency Claim: The Court’s Decision

The Court stated that Canada Revenue Agency’s position that the deemed trust Canada Revenue Agency claim cannot be primed, fails to reconcile that the goal of the Canadian insolvency restructuring regime and Parliament’s continued commitment to facilitating complex corporate CCAA restructurings, even if it requires erosion of security.

For this and the other reasons listed above, the Court determined that the CCAA gives the Court the ability to rank the priority charges ahead of the deemed trust Canada Revenue Agency claim and the resultant security interest.

Deemed Trust Canada Revenue Agency Claim: Is Your Company In Need of Financial Restructuring?

The CCAA’s aim is to help business survival and avoid the multiple traumas caused by business failure. The Ira Smith Team have decades of experience in both complex personal and corporate financial restructurings.

If you or your company cannot survive without a restructuring, contact Ira Smith Trustee & Receiver Inc. NOW for a free consultation. You are just one phone call away from getting back on the road to financial health and reducing your stress levels, Starting Over, Starting Now.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

SEARS CANADA IS CLOSING: THE #1 REASON YOU HAVE TO RUN AND NOT JUST WALK TO REDEEM YOUR GIFT CARDS AND CREDITS

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TORONTO BUSINESS BANKRUPTCY: NDP WANTS PENSION PROTECTION

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Toronto business bankruptcy protection: Introduction

The federal NDP party recently met in Hamilton, just outside of the Greater Toronto Area. There was a rally to argue for federal government regulation changes to safeguard pensioners in business bankruptcy and restructuring administrations.

Toronto business bankruptcy protection: Proposed NDP private member’s bill

Hamilton Mountain MP Scott Duvall, the New Democrats’ pension plan critic, informed a group at the United Steelworkers’ Hall that he will certainly present a private member’s bill to secure employees’ pension plans and benefits, and pressure business to offer termination or severance pay, prior to paying secured lenders.

Toronto business bankruptcy protection: The U.S. Steel Canada saga

The concern has actually been a lengthy simmering one with unions and created significant debate throughout the almost three-year, court-supervised restructuring of U.S. Steel Canada. The company exited from its business bankruptcy protection proceedings with a brand-new owner– Bedrock Industries– as well as an old name, Stelco.

Pensioners were smarting. The court permitted the firm to put on hold health benefit repayments for a year and a half while the business was under bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA).

Generally, these advantages have been maintained by the reorganized business. Pensioners are fretting that a financing system to maintain the pension plan solvent will ultimately fail. It calls for, inter alia, extra Stelco land to be cleaned up, marketed and sold for the net sales proceeds to cover future pension plan commitments.

Toronto business bankruptcy protection: Sears Canada too

Duvall, with NDP leader Tom Mulcair, claimed one more instance of exactly how the regulations are unfair to employees. They cited the Sears Canada situation. Sears Canada remains in business bankruptcy protection. Its employees are encountering a potential decrease in their pension plan benefits.

Toronto business bankruptcy protection: Fairness for employees

They say this should have to do with justness for employees. The NDP wants to see a Canada that benefits every person as well as seeing to it that companies, including multinationals, cannot take the pension plans their employees have earned.

They state that the existing regulation permits funds that ought to go to employees’ pension plans to be given to the secured creditors instead. The NDP is especially concerned when the secured lender is the financially troubled or creditor-protected company’s parent company.

Stelco’s biggest secured lender was U.S. Steel in the United States. The $500 million restructuring saw the American firm get $130 million.

Toronto business bankruptcy protection: Pension plan funding should have first priority

The Duvall proposed private member’s bill would call for pension plans to be 100 percent funded prior to secured lenders being paid. Firms would certainly not be permitted to put on hold retirement benefits in court-supervised restructurings, which occurred with U.S. Steel Canada.

The NDP is calling their proposal “End Pension Theft”. It focuses on altering CCCA legislation as well as the Bankruptcy and Insolvency Act (BIA) to stop companies from placing investors, financial institutions and other lenders ahead of their staff members when they go into bankruptcy protection.

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Toronto business bankruptcy protection: Is there a comparable precedent for such an amendment

Yes there is – the enactment of the Wage Earner Protection Program Act (WEPPA). From 1975, proposals were proactively taken into consideration for the facility of a wage protection plan for when the bankruptcy, liquidation or receivership of a company. The many choices gone over for just how this could be attained consisted of:

  1. very top priority for wages;
  2. acknowledgment of existing provincial/territorial concerns within the BIA structure;
  3. a waiver of the waiting time for EI benefits; and
  4. a wage earner protection fund financed either from basic tax revenue or as a part of the EI coverage regimen.

In November 2003, the Senate Committee on Banking, Trade and Commerce examined the background of these conversations and chose

the alternative for a super priority be taken on. Although the BIA was amended in 2005, these changes did not quickly come into force, as many technical amendments were required to be passed in 2007. The WEPPA came into force on July 7, 2008.

The reason for the timing of creating the WEPPA was a result of NDP pressure put on the minority Liberal government of Prime Minister Paul Martin. The Liberals agreed to the NDP proposal as part of obtaining continued NDP support for the minority government.

So there is precedent for a significant amendment to Canadian insolvency legislation.

Toronto business bankruptcy protection: How likely is such a pension reform in restructuring proceedings to succeed?

At this time, I believe there are certain obstacles from seeing such a significant overhaul being successful. The reasons I say this include:

  1. Today there is a Liberal majority government in power, so the support of the NDP party is not required for the government to pass the legislation it wishes to.
  2. Providing a super priority for all pension shortfalls would dramatically alter the way lending is done in Canada. Banks would be required to include pension plan actuarial shortfall calculations into their borrowing base calculations. It may end up that when there is a pension plan shortfall, there is no borrowing room available at all for a business. This would increase the number of insolvencies.
  3. If the number of business insolvencies increased, that could lead to an increase in job losses. That would hurt employees which would hurt the same group the private member’s bill would be trying the protect.

However, the Liberal government of Prime Minister Justin Trudeau has shown that it does try to play to whichever group the government feels it can gain votes from. So, it is not out of the realm of possibilities that the government would try to enact some legislation to give a limited super priority to a part of an underfunded pension plan liability. Time will tell whether such a proposal has any chance of success at this time.

Toronto business bankruptcy protection: Does your Toronto area business require restructuring proceedings to survive?

If you’re company is struggling with too much debt, give the Ira Smith Team a call. We can help with refinancing and restructuring so that your business can get back on track Starting Over, Starting Now.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

SEARS CANADA IS CLOSING: THE #1 REASON YOU HAVE TO RUN AND NOT JUST WALK TO REDEEM YOUR GIFT CARDS AND CREDITS

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