GTA housing disaster episode 34

Avoiding a tax lien via insolvency

I wanted to demonstrate a situation in which a person finds themselves with home equity but either not enough to use to pay unsecured debts or the inability to sell to do so. I have already seen these scenarios since the housing boom cooled but this is the type of thing we will be seeing much more of. It also illustrates the function a consumer proposal can play in protecting and preserving existing and/or future home equity.

Situation:

- Greater Toronto Area

- Two siblings inherited their Boomer parents’ house c. 2012

- The house had a mortgage of $340,000 when inherited, which they assumed

- He had a business 5+ yrs ago (closed) which did ok but got wiped out by COVID; he got into HST debt as it declined; owes $41,000

- Major renovations were done to the house by the siblings, majority of which she paid for; he used credit for his part; he also used some home equity for funding the business

- He has been on LTD for the last few years due to an accident

- He is starting work now he is recovered – on payroll, but making modest income

- His sister works and makes very good income, as does her husband (they all live there); she pays the bulk of the mortgage payments for now

- CRA have threatened a lien on his property since he uses his sister’s obscure bank and thus CRA can’t easily freeze his accounts anymore

- (Note: a tax lien on a property with multiple owners is indiscriminate; it impacts the entire equity of the property, technically)

- CRA have demanded he pay the $41,000 in 12 months ($3,415 a month – no way); this is their standard ‘offer’ term/period

- She won’t accept a HELOC or a refi on the property (since he already used some to fund the now-failed business) so he can’t pay debts that way

House market value (area values have dropped since 2020): $1,050,000 currently

Mortgages:

1. 1^st ; Big 5 bank $550,000

2. 2^nd; $190,000 with a well-known secondary secured lender

3. Private; $150,000

4. Total $890,000

His % of net equity: $53,750

UNS debt:

$33,000 credit card

$41,000 HST

$74,000 total

Solution?

- His unsecured debt isn’t massive but he can’t pay it on time

- He can’t use his home equity per the above

- He doesn’t have the income/cashflow to pay his unsecured debt as normal

- He can’t sell the house (the sister refuses)

He meets both definitions of insolvency:

- balance sheet (debts exceed assets/net wealth)

- cannot pay debts as they come due (cashflow; he can’t pay CRA)

Consumer proposal filing: offer $63,000 $1,050 /mo X 60 months (this amount exceeds a bankruptcy realization, so the creditors would go for it

Filing a consumer proposal also protects the house against the CRA lien. Once a lien is in place, however, filing a proposal cannot remove the lien. So prevention is key in a situation where there is the possibility of a lien (whether a govt lien or otherwise).

The proposal is also far less expensive per month than paying it himself ($1,050/mo for 60 months vs the CRA arrangement of $3,415 a month for 12 months) – which will also allow him to pay it sooner via open terms, AND the proposal covers his credit card debt, as well.