Navigating Properties with CRA Liens: What Sellers Need to Know
Selling a property already comes with many stresses and complexities, but when the CRA places a lien on the property, those complexities increase. Whether you’re a homeowner or investor, understanding how CRA liens affect real estate transactions is essential to avoiding costly delays or surprises.
A common form of legal action that the Canada Revenue Agency (“CRA”) takes in order to secure payment of Canadian taxpayer’s tax debt is by registering a lien against a property.
Understanding CRA Liens
When a taxpayer has an outstanding tax debt, the CRA has broad collection powers to secure payment. One of the most common enforcement tools is registering a tax debt certificate with the Federal Court. Once registered, this certificate has the same force as a court judgment.
The CRA can then enforce that judgment by registering it against real property, often referred to as a “lien.” In practical terms, this means that the CRA now has a legal claim against the property and the taxpayer’s ability to sell or refinance is restricted.
Typically, the steps that the CRA takes with respect to placing a lien are as follows:
- The CRA will notify the taxpayer of any outstanding tax debt
- The CRA will demand payment of the outstanding tax debt
- The CRA registers a certificate in the Federal court to confirm the tax debt
- The CRA registers a lien against the taxpayer’s property
For more information on the CRA’s authority to place a lien on a taxpayer’s home and protecting your principal residence, check out our blog post here.
How a CRA Lien Impacts a Sale
Although a CRA lien on a taxpayer’s property does not prohibit the sale of the property, it still significantly affects the structure of the transaction, especially for the seller. In most cases, the presence of a lien will preclude the conveyance of title unless and until arrangements are made for the discharge of the lien. A seller can expect the purchasers and lenders to insist on clear and unencumbered title before closing. Effectively, the seller will need to establish that sufficient sale proceeds will be directed to the CRA on closing to obtain a discharge of the lien.
In addition to material consequences for the distribution of the proceeds of disposition, the sale of a property with a CRA lien registered to it could significantly affect the seller’s equity. Once a CRA lien is registered, the Canada Revenue Agency is treated as a secured creditor. However, the priority of its claim is not absolute and depends on timing. Generally, mortgages or charges that were registered before the CRA lien will rank ahead of the CRA’s interest. The CRA’s claim will rank based on when its lien was registered against the property. This priority ranking is critical, as it directly affects how sale proceeds are distributed and ultimately determines how much equity, if any, the seller will receive on closing.
Selling a property with a CRA lien, where the seller needs to negotiate terms for discharge from the CRA and secure written confirmation, can also impose challenging delays to closing dates. It is prudent for sellers, where a sale involves an encumbered property, to introduce appropriate terms and conditions and timelines to allow for lien resolution and CRA correspondence to reduce risk of failed transactions.
Practical Considerations for Sellers
Sellers whose property is encumbered by a CRA lien should adopt a proactive approach from the outset of any contemplated disposition. Several prudent and practical considerations are as follows, but not limited to:
- Obtaining a clear and current understanding of the outstanding tax liability
- Sharing this understanding with legal and real estate advisors
- Full and early disclosure of the lien to the taxpayer’s listing agent and prospective purchasers
- Drafting the agreements of purchase and sale with the lien in mind with realistic closing dates and timelines
- Initiating discussion with the CRA in advance of the marketing of the property
Conclusion
A property that is encumbered by a CRA lien presents challenges from a legal and commercial perspective, but it does not mean that a sale is impossible. With a clear understanding of the CRA’s enforcement framework, careful drafting of the agreement of purchase and sale, and realistic expectations regarding timing and net proceeds, such transactions can often be completed in an orderly manner. Involving experienced real estate and tax counsel is essential to structuring an approach that satisfies the CRA’s requirements and to protect the sellers interests. Engaging with professional advisors early and the CRA is critical to preserving the value of the property and mitigating the potential for more intrusive enforcement action.
**Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
Bhavika Chadha