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CRA Loses Priority Fight Against Holder of Unregistered Interest

A recent court decision provides important clarification as to the nature and priority ranking of registered liens filed by the Canada Revenue Agency against debtor-taxpayers.

Quoc Dung Tran (“Tran”) owed about $350,000 to his sister Rosaline Trang (“Rosaline”). He also owed about $1.5 million to the Canada Revenue Agency (“CRA”). The main issue before the court was to determine how Rosaline’s security interests ranked as compared to those of the CRA.

Rosaline’s security consisted of an unwritten 2003 agreement giving her an equitable mortgage for $250,000 against property owned jointly by Tran and his wife. She also held an equitable mortgage for $100,000 over certain other land owned by Tran alone. The CRA, on the other hand, had filed registered liens against both of Tran’s properties. Rosaline’s equitable interests arose prior to the registration of the CRA’s liens, but the CRA had no knowledge of her interest at that time.

A dispute arose as to the priority of these competing securities, and the matter was brought to court, with Rosaline claiming that her unregistered, equitable mortgages took priority over the CRA’s certificates of lien.

In examining this scenario, the court observed that under the federal Income Tax Act, the CRA was entitled to issue a certificate setting out any amounts unpaid by a debtor such as Tran. Once registered, such a certificate was equivalent to a court judgment against Tran for the amount he owed, pursuant to the Act’s express language. In other words, the CRA had essentially filed the equivalent of a judgment of the Ontario Superior Court; this being the case, the CRA was merely a judgment creditor, and its registered lien had essentially been transformed into a writ of execution. As such, any writ that the CRA filed would simply cover the proceeds of sale of Tran’s equitable interests in the lands. The court also rejected the argument that the CRA’s liens had priority because they had been converted into “charges” upon the land within the meaning of the Ontario Land Titles Act, or that they were akin to registered “mortgages”. Nor was the CRA considered to be either a bona fide purchaser for value or a mortgagee for value.

In contrast to the CRA, Rosaline was a lender who had “bargained for priority.” Her interest in Tran’s properties therefore had priority over the subsequent legal interests of the CRA.

See: Trang v. Nguyen, 2011 (ONSCJ).