Understanding CRA Super Priority and Implications for Mortgage Lenders
As a mortgage lender, you’re no stranger to the concepts of risk and trust. But when it comes to lending to a self-employed individual, a new layer of complexity is added to the mix: the CRA Super Priority. This term refers to the legal stipulation that certain debts owed to the Canada Revenue Agency (CRA) take precedence over a lender’s claim on a property. Understanding this concept and its implications can help lenders make informed decisions and mitigate potential risks.
CRA Super Priority: A Closer Look
The notion of CRA Super Priority is rooted in the idea of trust debts. These include payroll and GST/HST remittances that a self-employed individual owes to the CRA. Recent court rulings have established that these trust debts have a super priority over a lender’s interest in the property.
Evaluating Self-Employed Borrowers
When considering offering a mortgage to a self-employed individual or refinancing an existing loan, lenders need to ask four key questions:
- Is the borrower a GST registrant?
In general, self-employed individuals must register for a GST account if they earn more than $30,000 in a fiscal year. - Does the borrower have a payroll account?
By examining the borrower’s tax returns, lenders can identify the type of expenses reported and determine whether any direct wage costs or salaries, wages and benefits are being reported. - Has the GST been paid or is there an outstanding GST debt?
- Are the payroll remittances up-to-date?
Unique Debts, Unique Considerations
Ordinary debts do not typically have a security interest in the property being purchased. But trust debts, such as GST and payroll remittances, that exist at the time a mortgage is registered, have super priority over the mortgage. Consequently, lenders must ensure that these obligations are being paid.
Lenders can protect their interests by requiring borrowers to provide a comfort letter. This document confirms that the borrower’s CRA program accounts, including corporate income tax, payroll deductions, and GST/HST accounts, are in good standing.
Refinancing and Deemed Trust Obligations
For self-employed borrowers looking to refinance their property, lenders might want to insist that the borrowed funds are used to pay off any outstanding deemed trust obligations. By doing this, the lender can reduce the risk of a trust debt gaining super priority over their claim on the property.
Ongoing Risks and Mitigation Strategies
Self-employed borrowers who are likely to incur trust debts can pose ongoing risks for lenders. To offset these risks, lenders can:
- Request borrowers to provide annual proof of their current standing with the CRA.
- Include a clause in the contract that allows them to demand payment and sue the borrower if the lender is required to pay any future trust amounts to the government.
The Role of Licensed Insolvency Trustees
Lenders who work with self-employed individuals should consider referring them to a Licensed Insolvency Trustee. These professionals can provide advice on dealing with CRA debts, thereby protecting lenders from potential trust obligations and possibly enabling borrowers to secure better terms in the future.
In conclusion, understanding and navigating the intricacies of the CRA Super Priority is crucial for mortgage lenders dealing with self-employed individuals. By taking the necessary precautions and making informed decisions, lenders can protect their interests and ensure a favorable outcome for all parties involved.
