CITATION: MCAP Service Corporation v. Hunter, 2007 ONCA 83
DATE: 20070208
DOCKET: C44574
COURT OF APPEAL FOR ONTARIO
BORINS, JURIANSZ and LAFORME JJ.A.
B E T W E E N :
MCAP SERVICE CORPORATION
John G. Harding for the appellant
(Plaintiff/Respondent)
- and -
JEFFREY STERLING HUNTER
Simon J. Adler for the respondent
(Defendant/Appellant)
Heard: January 22, 2007
On appeal from the judgment of Justice Donald J. Gordon of the Superior Court of Justice dated October 31, 2005.
BORINS J.A.:
[1] The appellant mortgagor appeals from a summary judgment awarding the respondent mortgagee judgment for approximately $98,000 and possession of the appellant’s residential property.
[2] On December 5, 2002, when the appellant granted a mortgage on his residence to secure a loan of approximately $94,000, he had collected but failed to remit to the Canadian Revenue Agency (“CRA”) approximately $51,000 GST and employee tax deductions in connection with his restaurant business that he operated in premises different than his residence.
[3] Applicable federal legislation deem the monies the appellant had failed to remit to the CRA to be held in trust pending payment to Her Majesty, and give the Crown a beneficial right in all of his property, to the extent of the unremitted amount, with priority over any security interest. There are exceptions for prescribed security interests that are not an issue in this case.
[4] On December 17, 2003, the CRA obtained a writ of execution in respect to amounts of GST he had failed to remit against the appellant’s entire real property. On June 1, 2004 the CRA registered a Notice of Lien against the appellant’s residence.
[5] On March 23, 2005, after the appellant had defaulted in his mortgage payments, the respondent commenced a typical mortgage action based on this default. It was only after the respondent launched power of sale proceedings on April 7, 2005 that it learned the appellant had failed to remit monies to the CRA and the registration of the writ of execution. Shortly thereafter, the respondent communicated with the CRA and was advised that CRA’s lien on the appellant’s property had priority over the respondent’s mortgage.
[6] In May, 2005, pursuant to s. 23 of the Mortgages Act, R.S.O. 1990, c. M. 40, the appellant tendered to the respondent the outstanding amount of principal and interest required to put his residential mortgage in good standing. However, the respondent rejected the tender, claiming that before the mortgage could be “reinstated” the appellant also had to furnish proof that the amounts outstanding to the CRA had been paid in full and “have satisfied CRA’s claim”. Had the respondent accepted the amount outstanding on the mortgage, the mortgage would have been put into good standing and its action against the appellant and its power of sale proceedings would have been terminated under s. 23. See Scarborough Township v. Greater Toronto Investments Corp. Ltd. (1956), 1956 CanLII 148 (ON CA), 4 D.L.R. (2d) 396 at 404‑405 (Ont. C.A.); Re Theodore Daniels Ltd and Income Trust Co. (1982), 1982 CanLII 1757 (ON CA), 135 D.L.R. (3d) 76 (Ont. C.A.).
[7] Subsequently, the respondent moved for summary judgment under Rule 20 of Rules of Civil Procedure. As the ground for its motion, the respondent relied on an alleged default under the mortgage different than the default pleaded in its statement of claim. Rather than relying on the appellant’s default in his mortgage payments, the respondent alleged that the mortgage was in default because of the appellant’s failure to remit monies to the CRA.
[8] In support of its motion for summary judgment, the respondent relied on the provisions of several pieces of federal tax legislation that, in essence, purportedly established CRA’s priority claim against all of the appellant’s real property to the extent of the amount owing to it on December 5, 2002 when the appellant mortgaged his residence. This was referred to before both the motion judge and this court as the CRA’s “super priority”. Consequently, the respondent contended that it did not obtain a first charge on the appellant’s property upon registration of its mortgage because of the appellant’s prior failure to remit monies to the CRA.
[9] Relying on certain provisions of the standard charge terms of the mortgage, the respondent contended that its mortgage was in default at the moment it was registered. In particular, the respondent relied on s. 7(a)(1)(11) and s. 9(a)(1). Under s. 7(a)(1), a borrower promises at all times to have good title to the land “free of all encumbrance and claims”. Under s 7(a)(11), a borrower promises the lender “to pay any money which, if not paid, would result in a default under any charge or encumbrance having priority over this mortgage which might result in the sale of the land if not paid” (emphasis added). Section 9(a)(1) provides that a default occurs under the mortgage if the borrower breaks any of its promises. It was the respondent’s position that CRA’s writ of execution and Notice of Lien were charges or encumbrances within the meaning of s. 7(a)(11) and that by allowing them to be registered on title, the appellant had broken a promise under s. 9(a)(1).
[10] On his interpretation of the tax legislation and ss. 7 and 9 of the standard charge terms, the motion judge held that the appellant’s debt to the CRA in respect to his business resulted in a default of his obligations under his residential mortgage. The default arose because the appellant was in breach of the promises found in s. 7(a)(1) and (11) of the standard charge terms, with the result that the mortgage was in default under s. 9(a)(1) of the standard charge terms. He held that the money collected but not remitted by the appellant to the CRA in respect to his business was an “encumbrance” within the meaning to the standard charge terms contained in his residential mortgage. In addition, the motion judge found that the appellant was in default at the inception of the mortgage. He also found that the Notice of Lien registered on title was a “charge” or “encumbrance” as contemplated by the standard charge terms. Consequently, the motion judge concluded that there was no genuine issue for trial.
[11] The appellant contends that there was a genuine issue for trial as to whether the amounts he failed to remit to the CRA in operating his business constituted a default under his residential mortgage. He contends that the standard charge terms are unclear in this regard. He further contends that it cannot be said with reasonable certainty that the mortgage contract between the parties contemplated that a federal tax lien arising from the mortgagor’s business activity and totally unrelated to the mortgaged property was a “charge” or “encumbrance” within the meaning of the standard charge terms, particularly when the term “taxes”, as defined in the standard charge terms, relates to the usual realty taxes on the mortgaged property.
[12] In my view there is merit in the appellant’s submission that the interpretation of the standard charge terms constitutes a genuine issue for trial. We were told that the issue of whether a mortgagor’s failure to remit GST payments and employee income tax deductions to the CRA in respect to his business operations results in a default of his residential mortgage is one of first instance. In my view, it is an important issue for both borrowers and lenders. A lender can find its security substantially diminished by the “super priority” status accorded to federal tax liens. Should GST arrears or the Notice of Lien be considered as a “charge” or “encumbrance” within the meaning of the standard charge terms contained in a residential mortgage, a borrower will be in default under the mortgage when GST connected with his business is unremitted with the result, under the acceleration clause in the mortgage, that the entire amount of principal and interest will become due and payable. Given the importance and novelty of these issues, and in keeping with a long line of authority from this court, the issue should not have been determined at the pleading stage. Rather, it should have been sent to trial to be decided on the basis of a complete record. See, e.g., Spasic Estate v. Imperial Tobacco Ltd. (2000), 2000 CanLII 17170 (ON CA), 188 D.L.R. (4th) 577 (Ont. C.A.); leave to appeal to S.C.C. refused 196 D.L.R. (4th) vii.
[13] The motion judge also rejected the appellant’s submission that there was a genuine issue for trial in respect to whether he had put the mortgage into good standing pursuant to s. 23 of the Mortgages Act by tendering the amount due for principal and interest under the mortgage. He held that to put the mortgage into good standing the appellant also had to pay the amount owing to the CRA. The appellant points out that under s. 23 default resulting in the service of notice of power of sale can be remedied at any time up to the sale of the property. Given the clear language of s. 23, the appellant submits that it was incorrectly interpreted and applied by the motion judge.
[14] I would also give effect to this ground of appeal. At its highest, the appellant’s position is that the respondent was precluded from moving for summary judgment because it rejected his tender of the amount due under the mortgage. The default pleaded in the respondent’s statement of claim ─ arrears in the monthly payments under the mortgage ─ was rectified by the appellant’s tender. In the alternative, the appellant argued that the interpretation and application of s. 23 of the Mortgages Act in the circumstances of this case raised a genuine issue for trial. If the trial judge agrees with the appellant’s core argument, the respondent’s action would have terminated when the appellant tendered the amount due under the mortgage, with the result that there remained no claim before the court on which the respondent could seek summary judgment. In my view, there was genuine issue for trial respecting the application and effect of s. 23 of the Act in the circumstances of this case.
[15] There is a further issue that troubles me. The appellant sought, and obtained, summary judgment on an issue that was not pleaded. As I have stated, the respondent’s statement of claim is based on the appellant’s failure to make the payments due under the mortgage. The motion judge was alert to this. He indicated that while the respondent’s counsel did not know of the appellant’s outstanding tax payments when the statement of claim was prepared, counsel did not explain why the statement of claim was not amended. After noting that the statement of claim should have been amended, the motion judge held:
In my view, the appropriate disposition on this issue to grant leave to amend the statement of claim, nunc pro tunc, pursuant to Rule 26.01, to avoid delay and further expense to the parties …”
Although he did not refer to the test under s. 26.01, presumably the motion judge was satisfied that the amendment did not prejudice the appellant. In any event, before the case proceeds further, I would give the respondent leave to amend its pleadings. The appellant may deliver an amended statement of defence, if so advised.
[16] There was some discussion before both the motion judge and this court in respect to whether the federal legislation creating the CRA’s “super priority” infringed on the province’s exclusive jurisdiction over property and civil rights. In my view, it is open to the parties to now raise this issue upon notice of a constitutional question being given. As well, serious consideration should be given to adding the CRA as a necessary party.
[17] For the foregoing reasons, I would allow the appeal, set aside the judgment of the motion judge and order that the action proceed to trial. However, rather than proceeding to trial, if the parties agree, the issues in respect to which there is a genuine issue for trial may be resolved under the Rule 22.01 by way of a special case. I would award the appellant his costs of the motion on a partial indemnity basis fixed at $7,500, inclusive of GST. I would fix the costs of the appeal at $6,000, inclusive of GST, and order that they be awarded to the party that is successful at the trial or on the Rule 22.01 motion.
RELEASED: February 8, 2007 (“SB”)
“S. Borins J.A.”
“I agree R. G. Juriansz J.A.”
“I agree H.S. LaForme J.A.”