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Get your priorities straight

By: Michael Cappabianca

For lending institutions, few things can interfere with the priority of a first-ranking mortgage – construction liens and writs of execution are familiar examples. Typically, though, these can be identified and remedied by conducting a simple title search. Lenders are more vulnerable in circumstances where these obstacles are less obvious, and sometimes deliberately hidden by dishonest borrowers.

A super priority lien is a type of statutory lien that gives governmental bodies priority over registered mortgages. When a particular section of a statute[1] is triggered, a “deemed trust” is created by operation of law. What does this mean? Where the borrower has fully repaid the mortgage loan, the lender essentially holds the proceeds “in trust” for the government. This allows the government to collect from the lender amounts owing by borrowers for such things as unremitted HST and other source deductions.

In Toronto-Dominion Bank v. Canada[2], the Federal Court of Appeal (“FCA”) upheld the Federal Court’s decision requiring TD Bank to account for unremitted HST owing by the borrower to the Canada Revenue Agency at the time of the mortgage payout. TD Bank advanced several arguments to avoid responsibility for the borrower’s unpaid HST, but each was defeated by the FCA: the language in section 222 of the Excise Tax Act creates a deemed trust without notice or a “triggering event”, and settled law has established that the defence of a bona fide purchaser for value is unavailable to secured creditors. TD Bank’s application for leave to appeal from the FCA decision was dismissed with costs on October 14, 2021.

This case underscores the importance of exercising care in a lender’s due diligence and underwriting practices prior to funding and throughout the life of the credit facility. Despite internal safeguards and careful risk assessment, protection against super priority liens can still be difficult. Fortunately, many title insurers offer a super priority lien endorsement to cover a lender’s losses associated with unknown super priority liens that are payable prior to the policy date. Lenders should ensure that their legal advisors adopt the practice of regularly obtaining such endorsements for real estate financing transactions in addition to regular due diligence.

[1] e.g., Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.); Excise Tax Act, R.S.C., 1985, c. E-15

[2] 2020 FCA 80

This article is not intended to serve as a comprehensive treatment of the topic and is not legal advice. All legal matters are dealt with pursuant to their specific facts and circumstance. Nothing replaces retaining a qualified, competent lawyer.