Why all the fuss about CRA debt?

Whether intentional or unintentional, many of the business-for-self applications that we see list CRA debts in the Liabilities column.  Let’s face it, sometimes people who are amazing at running businesses are lousy at taking care of administration like tax remittances. But not all CRA debts are treated the same by lenders.

GST and Employee Source Deduction amounts are like kryptonite to lenders.  In certain circumstances, CRA can assert a priority over the lender’s mortgage for these.  In other words, even though a lender has a 1st mortgage registered on title, CRA may be able to assert priority for their debt over the mortgage when the property is sold.

Income Tax arrears do not pose the same risk to lenders, so they don’t cause the same level of concern.

So what does this mean to mortgage brokers?

If the borrower mentions CRA arrears or judgments, it’s critical to ask what they relate to.  If it is GST or Employee Source Deductions, you can be sure that the lender will insist that they be paid out in full, either before or as a part of closing.  If the amount of funds available from the mortgage are insufficient to pay these out completely, the lender will likely not fund.

Depending on the facts, the lender may be less strict about the repayment of the CRA debt if it relates to Income Tax.  While it’s still a debt obligation that needs to be dealt with, it doesn’t have the same potential priority over a 1st mortgage, so lenders may be more able to treat it like they would a debt to any other creditor.

The other unintended consequence of CRA obligations is the timing.  It’s a good idea to brace your client for longer than normal time to close as it can sometimes take longer to get confirmation of amounts owing to CRA than it does with other creditors.