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Monday, 30 May 2016

Why lenders are reluctant to lend if you owe CRA.

by Paradigm May.30.2016.
Sometimes it seems like we’re seeing more collections activities by the Canada Revenue Agency than we did 20 years ago.  Whether it is the registration of a judgment against a title or even taking back a mortgage for security as a part of a repayment agreement, these charges can present challenges for mortgage brokers and lenders.  Why?  Because CRA debt is not like other forms of debt.

Here’s an example:  If a business-for-self borrower has not remitted employee source deductions, CRA has the right, in certain circumstances, to collect those in priority to a registered mortgage.  As a lender, this is pretty scary.  Other items like judgments for credit card or other types of debt don’t enjoy the same priority treatment.

So what does this mean to you the mortgage broker?  Here are several things to be aware of: 
  • If there is a list of debts that are to be paid out in a refinance, the CRA debt will be a top priority for payout at closing.  If the new mortgage funds will be insufficient to pay out all of the creditors, the CRA debt will have to be paid out, even if some others aren’t.
  • CRA will have to be paid out in full. If the borrower is in a dispute with CRA as to the amount, paying CRA only the amount that the borrower thinks they actually owe is not an option.  There still may be ways to close the transaction if funds are held in trust with the lawyer, but this will take additional negotiation between the borrower’s lawyer and CRA.  In other words, if the amount owed to CRA is disputed, the transaction may not close as quickly.
  • The lender may want some assurance that the borrower is current with CRA and has systems in place to ensure that they don’t get behind again.  This may take different forms depending on the lender’s requirements.
When a broker encounters a client seeking to resolve CRA issues with a new mortgage, understanding the issues will help set the client’s expectations with respect to timing and extra requirements.  The experienced mortgage brokers of MortgagePRO Ltd. are happy to help you find solutions for your clients’ mortgage needs.