Realty Tax Liens, WSIB Premiums, And Mortgage Priorities - Real Estate

This paper reviews priorities in three different real property areas: realty tax liens, WSIB premiums, and mortgage priorities. The intent of this paper is to review the priorities that exist in each of theses areas and to consider how the priorities may shift either intentionally or unintentionally. The consideration of priority has been confined to the period of time prior to an event of insolvency; the reversal of priority due to an insolvency event is beyond the scope of this paper. ¹

A.Realty Tax Liens

Real property lawyers are drilled, from our early stages onward, to always obtain a tax bill in any purchase, financing, or land swap transaction, and to do so early on in the due diligence process. Municipal tax liens take priority over most other encumbrances so it is best to know if you are stepping into a situation where one is likely to occur. This section reviews the types of payments that are included as real property taxes, the priority of delinquent real property taxes, and the process by which a municipality may sell lands on which delinquent real property taxes are owing as well as the land owner and other encumbrancers' rights during that process.

Real property taxes are governed by the Municipal Act or the City of Toronto Act, as applicable. This paper refers to the sections in the Municipal Act, but please note that in the event you are dealing with real property taxes in Toronto, you should refer to the City of Toronto Act which is similar conceptually but different in the details (in which, of course, the devil hides).

What is included in the term "real property taxes"?

The term "real property taxes" (hereinafter referred to as "realty taxes") includes taxes levied on real property under the Municipal Act and the Education Act and any amounts owed under the Drainage Act, the Tile Drainage Act and the Shoreline Property Assistance Act with respect to real property. The term also includes any amounts deemed to be taxes by or under any other Act and any amounts given priority lien status by or under any Act.(ss.371 and 1(3)) This also includes school board fees (s.1(2.2)), development charges² any amount that is given priority lien status (s.1(2.1)), and any loans (including interest) provided by a municipality to any person to pay for the whole or any part of the cost of the person complying with a by-law of the municipality (s.443) and other levies or assessment fees set out by the Municipal Act.

Delinquent realty taxes

Due and owing realty taxes form a statutory lien against title to property which lien, pursuant to s.349 (3), is "a special lien on the land in priority to every claim, privilege, lien or encumbrance of every person except the Crown, and the lien and its priority are not lost or impaired by any neglect, omission or error of the municipality or its agents or through taking no action to register a tax arrears certificate." No registration is required in order to perfect the lien.

Generally, with respect to any payment received by the relevant municipality on account of realty taxes, the payment is first applied against late payment charges owing in respect of those taxes, according to the length of time the charges have been owing, with the charges imposed earlier being discharged before charges imposed later. Then the payment is applied against the actual realty taxes owing according to the length of time they have been owing, with the taxes imposed earlier being discharged before taxes imposed later (s.347). So, if for some reason a partial payment is made instead of a full payment, you should ensure it is applied in this manner and that you are aware of the amounts remaining outstanding.

In the event there are any unpaid realty taxes that are due and owing and that will not be paid until closing, you will want to ensure that the payment on closing is redirected from the purchase price or the loan amount so that, as purchaser or lender, you have control over the payment process. You will also want to ensure that any redirected funds include all interest, late-payment penalties, and collection charges are updated with the applicable municipality as of the closing date (with additional funds factored in for the actual day of payment, which may occur after closing for logistical reasons).

Municipal tax sale proceedings

In the event realty taxes remain unpaid, municipal tax sale proceedings can begin once taxes have been in arrears for at least three years. The municipality commences the proceedings by registering a tax arrears certificate against the property. The municipality sends a notice of registration of tax arrears certificate to the property owner and all interested parties, as determined by s.374 (1), which states that within 60 days after the registration of a tax arrears certificate, notice of the registration of the certificate shall be sent to:

1.The assessed owner of the land;

2. Where the land is registered under the Land Titles Act, every person appearing by the parcel register and by the index of executions for the area in which the land is situate to have an interest in the land on the day the tax arrears certificate was registered, other than a person who has an interest referred to in ss. 379 (7.1) (a) or (b). SS.379 (7.1) (a) and (b) are easements and restrictive covenants that run with the land, including those for the benefit of the Crown in right of Ontario, and any estates and interests of the Crown in right of Canada. Any land sold by the municipality remains subject to these interests; and

3. Where the Registry Act applies to the land, every person appearing by the abstract index and by the index of executions for the area in which the land is situate to have an interest in the land on the day the tax arrears certificate was registered, other than a person who has an interest referred to in s. 379 (7.1) (a) or (b) (see 2. above).

In addition, s.374 (2) states that where a notice under s.374 is sent to a person appearing by the records of the land registry office to be the owner of the land, a notice shall also be sent to the spouse of that person.

Cancellation price

A cancellation price is defined in s. 371(1) as an amount equal to all the tax arrears owing at any time in respect of land together with all current real property taxes owing, interest and penalties thereon and all reasonable costs incurred by the municipality after the treasurer becomes entitled to register a tax arrears certificate and may include:

1.legal fees and disbursements;

2.costs of preparing an extension agreement;

3. costs of preparing any survey required to register a document; and

4. reasonable allowance for costs that may be incurred subsequent to advertising under s. 379.

Prior to the expiration of the one year period set out in s. 379 (1) (being one year following the date of the registration of the tax arrears certificate, the "One Year Period"), any person may have the tax arrears certificate cancelled by paying to the municipality the cancellation price as of the date the payment is tendered (s. 375 (1)). S.375 (3) states that if the cancellation price is paid by a person entitled to receive notice under s. 374 (1) or an assignee of that person, other than the owner of the land or the spouse of the owner, the person has a lien on the subject land for the amount paid and this person's lien has priority over the interest in the land of any other person to whom notice was sent under s. 374.

SS. 379(1) and (2) state that if the cancellation price remains unpaid 280 days after the day the tax arrears certificate is registered, the treasurer shall, within 30 days after the expiry of the 280- day period, send a final notice to the persons entitled to receive notice under s. 374 that the land will be advertised for public sale unless the cancellation price is paid before the end of the One Year Period.

Public sale

If, at the end of the One Year Period, the cancellation price remains unpaid and there is no extension agreement, the land can be offered for public sale by public auction or public tender, in the treasurer's discretion, and otherwise in accordance with the Act and Regulation 181/03

S.379 explicitly states that the treasurer is not bound to inquire into or form any opinion of the value of the land before conducting a sale and the treasurer is not under any duty to obtain the highest or best price for the land, so a tax sale is an extremely undesirable occurrence for any land owner.

S.353 (4.1) sets out the order in which the proceeds of the sale of the property are distributed, in the event that on the day before the date of registration of a notice of vesting there are liens or other encumbrances registered against the title to the land in favour of the Crown in right of Ontario or any execution or warrant in favour of the Crown respecting the land appearing in the appropriate index of executions.

In the event there are no such liens or encumbrances, then s.380 governs the order in which the proceeds are distributed - (i) to pay the cancellation price; (ii) to all persons, other than the owner, having an interest in the land according to their priority at law; and (iii) to the land owner.

Provincial Land Tax Act

Note that where land is situated in territory without municipalities, the land is liable for assessment and taxation under the Provincial Land Tax Act and s. 12(3) states that any amount collectible thereunder is "a special lien on the land in priority to every claim, privilege, lien or encumbrance of every person, and the lien and its priority are not lost or impaired by any neglect, omission or error of the Crown or its agents or through taking no action to register a notice".

To view the full article please click here.

Footnotes

1.However there are many excellent papers on this subject, for example: Benchetrit, George and Poliak, Maya. "Priority Reversals and Insolvency Proceedings" (LSUC February 24, 2010).

2. Development Charges Act s. 32

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Canada: Realty Tax Liens, WSIB Premiums, And Mortgage Priorities