The recent decision of the Federal Court of Appeal in Toronto-Dominion Bank v Canada, 2020 FCA 80 ("TD v Canada"), created a new cause for concern for lenders. The facts of the case are as follows:
In 2007 and 2008 the debtor, before becoming a customer of the Toronto-Dominion Bank ("TD"), failed to remit to the Receiver General of Canada over $67,000 worth of GST in relation to his business. In 2010, TD extended a loan and a line of credit to the debtor, both of which were secured against a property owned by the debtor. In 2011 the debtor sold the property in question and repaid the loan and line of credit. TD then discharged all charges registered against the property. Two years later, the Canada Revenue Agency (the "CRA") commenced a deemed trust claim under Section 222 of the Excise Tax Act, RSC 1985, c E.15 (the "Act") on the basis that the unremitted GST amounts constituted a deemed trust and the proceeds from the sale of the property should have been paid to the Receiver General before they were paid to anyone else.
At trial, the Federal Court (2018 FC 538) held that the unremitted GST amounts were indeed subject to the deemed trust provisions of Section 222 of the Act, and, because the deemed trust existed before TD registered its security interest against the property, the CRA had a super-priority lien on the sale proceeds of the property. TD was therefore obliged to remit the amount of the GST debt to the CRA. The Federal Court of Appeal upheld this decision.
Outcome
This decision is worrisome to lenders for several reasons. First and foremost, amounts covered by the deemed trust provisions in the Act, as well as other amounts that result in a deemed trust, such as pension deductions that an employer fails to remit under Section 227 of the Income Tax Act, RSC 1985, c1, are not registered on title to a property. Therefore, it is often very difficult to determine if a deemed trust exists at the time a lender seeks to register a security interest against a property. Despite this, if a deemed trust is later found to have existed before a security interest was registered against a debtor's property, the amount subject to the deemed trust will form a super-priority overpayment made to the lender. This includes payments made from the proceeds of the sale of the secured property. The amounts in question can be significant, and these claims can be brought forward many years after a property has been sold and the security interests discharged.
Title Insurance
While title insurance has, for some time, offered protection against these types of super-priority claims, there is a caveat. Traditionally, coverage under a lender's title insurance policy ends once the mortgage to which it applies is discharged and therefore, there was no protection for lenders with respect to super-priority claims made following such discharge. In response to TD v Canada, title insurers have begun to introduce new types of coverage for super-priority claims made up to ten years following the discharge of a mortgage. This coverage, with certain exceptions and limitations, gives lenders peace of mind that they are protected from super-priority claims made against them long after they have discharged their security interests against a property. The new coverage is available for both residential and commercial properties.
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