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Secured Lenders Proceed with Caution – Borrowers and HST

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On November 8, 2018, the Supreme Court of Canada removed some of the problems that secured lenders have had to face recently regarding possible liability for HST obligations of their borrowers.  While that is a welcome development, the limits of what it means, and the other problems that remain, are worth bearing in mind.

What did the Supreme Court decide?  The decision held that in effect, a later bankruptcy can retroactively solve the HST liability of a secured lender for money that it collects from the borrower beforehand.

What does this case not do?  A fair bit.  For example:

  • If the borrower cannot be put into bankruptcy, then this decision does not apply.
  • Otherwise, secured lenders who had security before any HST is owing, but receive payments from borrower afterwards, can still be liable for HST that the borrower collects but does not remit.  The Supreme Court went out of its way not to comment on wider issues of lender liability for borrower HST issues.
  • Secured lenders who take security after HST is owing appear to have total exposure to liability for the borrower’s HST, and it is not clear if a bankruptcy under the Callidus decision will help in that case.
  • To top off the foregoing problems, secured lenders have no way of getting independent verification (for example from the Canada Revenue Agency) about whether a borrower owes HST, or is even registered for HST purposes.

The upshot is that some of the more vexing problems arising of CRA’s renewed focus on lender liability for a borrower’s HST will still apply in spite of the assistance that that Callidus decision will offer.

A good example of that is the recent Toronto Dominion Bank case, where that bank was sued by CRA because it had been repaid by a borrower on a run-of-the-mill residential house mortgage, but that borrower had a pre-existing HST liability from an earlier landscaping business that was defunct when the mortgage was granted.  The bank in that case was not lending to a commercial borrower, and had no idea that HST was owing, but was still held liable.

Secured lenders should continue to exercise caution when it comes to HST issues for their borrowers.  There is clearly more to come from CRA, and the courts, on this topic.

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