In Toronto-Dominion Bank v Canada,1 the Federal Court of Appeal (FCA) upheld the Federal Court’s decision2 that the Toronto-Dominion Bank (TD) was required to pay to the Canada Revenue Agency (CRA) proceeds of $67,854 for unremitted GST that TD received as repayment from a borrower upon the discharge of a TD mortgage.
The FCA’s decision confirms that amounts paid to a secured creditor from a debtor with an outstanding Goods and Services Tax/Harmonized Sales Tax (GST/HST) liability are deemed to be held in trust for the CRA. Outside of certain types of insolvency proceedings and prescribed security interests, the CRA’s deemed trust rights rank in priority to secured creditors.
What you need to know
- Secured creditors may be liable to repay the CRA amounts received from a borrower with an outstanding GST/HST liability.
- Secured creditors’ priority is subordinate to the CRA, even if the security was registered before the GST/HST debt arises and the secured creditor had no knowledge of the GST/HST debt.
- The CRA may enforce its super priority interest without prior notice to the secured creditor.
- There are limited exceptions to this super priority, including certain types of insolvency proceedings and prescribed security interest (e.g., conventional mortgages) registered prior to the section 222 deemed trust.
Essentially what this means for borrowers and lenders in Construction Financing world, you will probably be required to have a New Co…New Company, registered for every project. Lenders will want to eliminate risk of any companies or individuals being audited and found guilty of outstanding taxes that were not filed properly. All personal income tax will have priority over mortgages. This puts a chill on private lending unless a “new company” is created for all new projects.
This is from a blog, the link is here to read the full story: https://www.blg.com/en/insights/2020/05/fca-confirms-cra-super-priority-over-secured-creditors-on-a-gst-hst-debtors-property?utm_medium=&utm_source=CRM%20list&utm_campaign=Tax%20bulletin&utm_term=tax&utm_content=cra%20super%20priority%20decision