How Home Equity Can Be Used to Pay CRA Debts

It’s not unusual to find you owe some money to the Canada Revenue Agency (CRA) after filing your personal tax returns. Especially if you have neglected doing them for a few years. And like any other unexpected expense, you need to tighten your belt buckle, work even harder and try to find ways to eliminate the debt before you run up lots of interest charges and late payment penalties.

You may find other immediate obligations are more pressing, so if you’re not able to settle the tax debt right away, it is best to stay in touch with CRA and let them know your plan to reduce and eliminate the debt. They do have some flexibility. (This is a good way to manage all debt, not just tax debt.)

Occasionally we encounter homeowners whose tax debt is so large it cannot be readily paid through the normal course of life. The end result is a debt that can’t be negotiated away, with a creditor you can’t afford to ignore.

In recent months, we have dealt with several homeowners who found themselves in this predicament. In these instances, the smallest CRA debt was $40,700 and the largest more than $200,000. In each case, the debtor also owed money elsewhere – and had significant credit card balances and other unsecured debt. The size of the problem was way beyond the norm.

This seems to happen more often to small business owners and self-employed individuals. Regular folks are not immune though; we recently met a family with an unexpected $32,000 tax debt incurred as a result of selling an investment property and triggering a taxable capital gain.

You might think all these folks could just tap into their personal line of credit or take out a loan to pay this off, but these solutions were not available to them.

Fortunately, if you own a home and have decent equity, sometimes a creative mortgage financing solution can help clean things up, even if the amounts due are substantial, bank accounts have been garnished or even liens have been placed on your property.

Ways home equity can be used to pay very large CRA arrears

Keep in mind, when there is a large CRA debt, very few traditional lenders want to complete a mortgage refinance before the debt is remedied. In such a predicament, there are several ways home equity can be used to pay off CRA debt:

  1. If you already have a Home Equity Line of Credit (HELOC), and there is sufficient room to pay the tax debt, this can make tons of sense. You basically just write a cheque and be done with it. The interest rate is probably around prime + 0.5%, and that might be as good as it gets in these situations. This will solve the immediate problem; then you need a plan to reduce your HELOC balance by saving aggressively and paying it down. Or, ultimately you may decide it makes sense to refinance and roll the HELOC balance into your mortgage.
  2. Borrow money from a family member or close friend, pay the debt, then consider refinancing your mortgage and repay your benefactor.
  3. Borrow money from a private second mortgage lender, pay the debt, then refinance down the road. The length of time you wait to refinance depends on the strength of the file, which lender currently holds your first mortgage and when that mortgage is set to mature. A few “B lenders” have second-position financing options, which may suit this approach.
  4. Refinance the first mortgage to a “B lender” (alternative lender). The new mortgage amount is ideally large enough to clear CRA completely, and cover all fees and other debts.
  5. When there’s insufficient equity to pay CRA in full, it may be time for a negotiated settlement. My own experiences along these lines involve trustees who will file a consumer proposal on behalf of the debtor. Others report they’ve had success with skilled tax accountants.

The right solution will depend on the circumstances of each situation. It’s also important to note there are circumstances where homeowners will not be good candidates for eventual traditional lending no matter how we solve the immediate problem. This often happens when:

  • Their income doesn’t meet the stress test qualification rules and they may need to work with alternative lenders allowing higher debt service ratios
  • They’re self-employed with income that’s difficult to verify by traditional methods
  • Their personal credit history has shut the door to traditional lenders (e.g., multiple insolvencies or recent late mortgage payments)

So, let’s examine the scenarios where each of these approaches is most appropriate.

Scenario 1. Homeowner’s finances and credit are in good shape. The only issue is a large CRA debt where no traditional lender wants to complete a mortgage refinance before the debt is remedied.

This lack of interest by traditional lenders is common when there’s a large CRA debt. CRA is a very powerful creditor which, in some instances, can take preference over all other creditors. This means we need to fix the CRA problem first, and then find the right loan to get the costs as low as possible.

The cheapest solution is to consider asking a family member or close friend if they’ll lend you the money for a short period of time (option 2 above). Funds may only be required for a month or two. If you go this route, your real estate lawyer should be involved to protect your benefactor’s interests. As soon as you can prove to an institutional lender that there’s no tax debt owing, it’s then possible to refinance the traditional way, and pay back your emergency loan hero.

Scenario 2. If you don’t have someone who can bail you out via a loan, then you would move to the second option, which is working with an experienced mortgage broker who can find a suitable lender willing to grant you a second mortgage. Ideally, that mortgage will be open without prepayment penalty. That’s hard to find with a private mortgage, so if the terms would not allow the loan to be open immediately, then having it open after a few months is also a good option. As with the first option, once you have proof of payment for CRA arrears, you should be in fine shape to refinance your primary mortgage with your current lender. That may save prepayment penalties too, depending on your lender.

Scenario 3.Not only is there CRA debt, but the credit history is weak, resulting in a low score. It will take time to bring the file back to traditional lender status. In this case, your best option is to refinance the mortgage with an alternative lender, or first secure a second mortgage for a year or two. Our goal in this scenario is to determine what kind of lender will take on your deal once the situation is fixed; and we will recommend the lowest cost and least painful overall approach.

Scenario 4. CRA tax arrears and other unsecured debt exceeds the amount of equity that can be extracted. Keep in mind, though, if the CRA has already placed a lien on your home, you are unlikely to be able to negotiate a discounted settlement with them.

In this scenario, the homeowners might work with a trustee to negotiate the terms of a consumer proposal. At that point, all unsecured debts, including the CRA debt, are packaged together, and most proposals agree to repay a certain amount of money (usually $x per month) to all creditors over the next five years. With no further interest costs and late payment penalties.

Once the proposal has been accepted by the creditors, it might be possible that a mortgage broker experienced in this sort of lending can arrange a second mortgage to complete a lump-sum payout of the consumer proposal, or even refinance directly to an alternative lender to pay the reduced debt amount

The takeaway

As you can see, when you own your own home there are many options to address the issue of large CRA tax arrears impacting your borrowing power. Obviously, some real estate markets lend themselves to this approach better than others – the more equity you have in your home, the more likely one of these solutions might work.

The key is to deal with the issue ASAP. This situation will not work itself out and CRA will not give up. Oftentimes indecision and paralysis make the situation worse than it ever needed to be.

During the process, it is best to stay in contact with your CRA case officer, and explain you are looking at different ways to raise capital to settle your debt. The process can be painful, but having the right experts on your side will make all the difference.



Millennial's forced to move to the suburbs for their dream home

A third of Canadian Millennials would rather live in the city than the ‘burbs but for two thirds of those, they are willing to sacrifice that wish to buy the home they want.

A new TD survey finds that 81% of Millennials say they want to own their own home but with affordability (78%) and home size (60%) beating neighbourhood (58%) as the top factors informing homebuying decisions, a move to the suburbs is the right choice for many.

"We're now seeing Millennials looking beyond the city for their housing needs, particularly as they start thinking about their needs for the future, like having more space to raise a family," said Pat Giles, Vice President, Real Estate Secured Lending at TD. "As a result, many are choosing the suburbs to either make the move to a new home or upsize from their current one, a shift from just a few years ago when city living was this generation's preference."

Affordability and space, both inside and outside, are the main reasons for relocation from the city to the suburbs but this may clash with the desire of 45% to live close to work.


Millennials are willing to curb their day-to-day spending to further their homeownership dreams.

Most said they would limit eating out, shopping, and entertainment, to be able to afford a home.

"Although homes in today's housing market cost much more than they used to, the desire to own the right home hasn't wavered, especially for Millennials," said Giles


I’ve always believed that anyone substantially mired in debt has no business fantasizing about retirement. For me, this extends even to a home mortgage, which is why I often say “the foundation of financial independence is a paid-for home.”

Sadly, however, it’s a fact that many Canadian seniors ARE attempting to retire, despite onerous credit-card debt and sometimes even those notorious wealth killers called payday loans. Compared to paying out annual interest approaching 20% (in the case of ordinary credit cards) and much more than that for payday loans, would it not make sense to liquidate some of your RRSP to discharge those high-interest obligations, or at least cut them down to a manageable size?

This question comes up periodically here at For example, financial planner Janet Gray tackled it in March in a Q&A. A recently retired reader wanted to pay off a $96,000 debt in four years by tapping into her $423,000 in RRSPs. Gray replied that this was ambitious and raised multiple questions. For one, withholding taxes of 30% on the $26,400 annual withdrawals meant she’d have to pull out at least $37,700 each year from her RRSP, which in turn could easily push her into a higher tax bracket.

For these and other reasons, veteran bankruptcy trustee Doug Hoyes says flat out that cashing in your RRSP to pay off debt is an all-too-common myth. In fact, it’s Myth #9 of 22 outlined in his new book, Straight Talk on Your Money. Myth #10, by the way, is that payday loans are a short-term fix for a temporary problem. Hoyes says that apart from loan sharks, payday loans are the most expensive form of borrowing. In fact, while payday loan lenders can charge $18 for every $100 borrowed, that is NOT cheap money: annualized, Hoyes calculates it works out to a whopping 468%.

So forget about payday loans, which for seniors and anybody else is typically a desperate last resort. Compared to that, cashing out your RRSP seems a less pernicious option but it’s by no means a slam dunk decision. For one, and as Gray noted, there are tax consequences to withdrawing funds from an RRSP or a Locked-in Retirement Account (LIRA). If the withdrawal moves you into a higher tax bracket (as seemed to be the case in the Gray Q&A), “it’s possible you could lose half your funds to the tax man,” Hoyes says.

If you’re so in debt that you are considering bankruptcy or a consumer proposal, “It often makes no sense to cash in your retirement accounts,” Hoyes says. Besides, while RRSPs have fewer strings attached to them, “cashing out” of a LIRA is more problematic since, as the term suggests, the money is “locked in” for its true purpose: your eventual retirement. Pension regulators don’t want you tapping into them on a whim. For example, in Ontario if you wish to cash in a LIRA before retirement, you have to submit a hardship application to the Pension Commission of Ontario, and you’ll be permitted to withdraw a lump sum only if you can prove hardship. And sadly, Hoyes says that a lot of debt does not meet the definition of hardship.

It’s important to know what assets can and cannot be seized by creditors. Your house can be seized if you don’t pay your mortgage and your car can be seized if you don’t pay your car loan, Hoyes says. But in Canada, it’s almost impossible for a creditor (such as a credit-card company) to force you to liquidate a LIRA. Because a LIRA is locked in, it can’t be seized in a bankruptcy. And even for RRSPs, a trustee can only seize RRSP contributions made in the last 12 months preceding a bankruptcy.

A better source of funds, if you have them, are non-registered investment accounts. This also may have tax consequences (primarily capital gains) but they are likely to be less severe than plundering your RRSP.

One reason Hoyes prefers this route is that in a bankruptcy, unregistered assets are seizable by creditors. By contrast, it’s unlikely that you will lose your RRSP or LIRA in a bankruptcy. In a bankruptcy “you will lose the investments anyway, so it makes sense to cash them in, pay your debts, and avoid bankruptcy,” Hoyes writes in the book.

Even so, for those with more debts than they can ever hope to repay even if you do cash in your assets – and if you have registered assets that you wouldn’t lose in a bankruptcy – Hoyes doesn’t rule out the option of bankruptcy, which he says “may be preferable to cashing in retirement accounts.”

All of which suggests the seemingly easy answer of using your RRSP to jettison pre-retirement debt is fraught with potential pitfalls. As Gray suggested, it’s best to submit your plan to a financial planner or tax expert to determine whether this course of action makes sense in your specific situation.

Source: MoneySense - Jonathan Chevreau-founder of 'Financial Independence Hub' 


For those having trouble qualifying for a traditional mortgage, other solutions are still available, one of which is a private mortgage.

And with increasingly stricter mortgage regulations and qualification requirements being introduced by the government, they’re growing in popularity.

Private lending accounted for approximately 4-5% of Canada’s overall mortgage market in 2015, according to data from Teranet. Anecdotally today’s number is higher and growing fast, and is set to grow even faster if the new B-20 guidelines are implemented as proposed.

“What makes interest only loans appealing is that you are not required to pay down the principal of your mortgage, therefore reducing your monthly payment,” said Maya Schenk, managing broker and owner of Pacific Lending in Vancouver. “Interest-only payments improve the monthly cash flow, but for obvious reasons they are not a viable long term solution.”

This is why private mortgages are meant to be short-term solutions—typically one to three years—to help borrowers achieve their goals while they improve their credit, or for emergency lending situations.

Private mortgages have their place in the market, and are commonly used in some of the following cases:

  • Borrowers with inadequate credit to qualify for a traditional bank mortgage
  • Self-employed borrowers with unverifiable or unsteady income
  • Non-residents
  • Emergency funding for those going through foreclosure, or those with property/income taxes in arrears
  • For mobile homes or micro-condos (less than 600 square feet) that often can’t be financed/refinanced through a bank
  • For second mortgages/investment properties

In terms of the key benefits of a private mortgage, Schenk cites the need for less documentation as part of the approval process, which he says can be useful for self-employed applicants who can have difficulty proving their income.

“Private lenders are also much more flexible when it comes to your credit history,” she said. “As long as you have sufficient down payment or equity in your property, private mortgages are relatively quick and simple to obtain.”

While traditional bank mortgages are qualified primarily on the borrower’s financial standing and his or her ability to service the debt, private lenders place more weight on the quality of the property itself, in addition to the down payment and the client’s ability to repay to loan.

Because properties in more marketable urban areas carry less risk for the lender in the event of foreclosure, they can offer slightly more favourable rates and go up to a higher loan-to-value compared to properties in rural areas or undesirable neighbourhoods.

The higher cost of private mortgages

Schenk notes that in addition to the interest-only payments, private mortgages typically come with higher interest rates to compensate the lender for the increased risk they are taking on.

Interest rates can range anywhere from 10-18%, making them much more costly compared to a traditional prime mortgage starting as low as 2.50% for a 5-year fixed term. For this reason private mortgages are usually considered a last resort.

Additional fees can be involved with private financing, including lender, legal and broker fees.

Whereas broker fees are almost always paid as a commission directly by the lender in the case of traditional mortgages, the borrower must cover this cost when turning to a private mortgage.

Adding in lender fees and legal costs, total fees can amount to anywhere from 1-4% of the loan amount, though this can be rolled into the mortgage.

“It is important to understand the risks before getting a private loan,” Schenk adds. “The first questions to ask yourself are, ‘Will my financial situation change in the near future so that I can switch to a conventional lender soon?’ and ‘Will I need this mortgage only for a short period of time?’ If your answer is ‘no’ to both of these questions, private mortgage might not be a suitable solution.”

For anyone considering a private loan, a mortgage broker can help weigh the benefits against the costs to determine if one is right for you.


The faster you can pay off your mortgage, the more you'll save in interest and the faster you can build wealth. Here are five ways to do it sooner:

  1. Add a bit to your monthly payment. Finding an extra $50 each month could shave years - and thousands of dollars - off your mortgage.
  2. Make a yearly pre-payment. Put a lump sum on your mortgage each year, eg. tax refund or bonus. There is a much greater impact when made early in the mortgage.
  3. Increase your income? Increase your payments. Just pretend your income didn't increase and maintain your usual lifestyle.
  4. Choose bi-weekly payments. Instead of paying monthly 12 times per year, pay every two weeks for 26 payments, giving you one more payment each year.
  5. Stay informed. Don't let your mortgage go on auto pilot. Save money at renewal and take advantage of opportunities.

When the time is right for you to buy a home, make sure you are financially fit and eligible for the best possible mortgage rates.

Here are five tips to boost your 'financial fitness':

  1. Whip it. Whip your credit rating into shape: pay your bills on time... every time. Keep your oldest credit card for its history, and make sure it is always paid on time. Try not to apply for new credit, which includes co-signing for any type of loan.
  2. Follow the 33% rule. Never run up a credit card or line of credit past 33% of its available limit. If you've got a $3,000 limit, then $1,000 is your absolute ceiling.
  3. Cash is king. Gather up the maximum down payment possible. The more money you put down on a home, the better.
  4. Be prepared. Put together a file folder with the following: pay stubs, or proof of self-employment income, list of debts and assets, and current bank statements. We can advise what you'll need.
  5. Start a dialogue. Let's discuss your plan, and get off on the right foot in your home buying journey!

The process of qualifying for a mortgage begins long before you decide to buy a home! But if you make a plan to improve your financial fitness... you'll have no shortage of lenders willing to compete for your business.


Bank of Canada holds key rate at 0.75% despite questions about US weakness

Ottawa - The Bank of Canada is keeping its trendsetting interest rate locked at 0.75 per cent, even as recent weakness in the United States raises questions about the Canadian economy's underlying strength.

The central bank says it's standing pat because inflation has been in line with projections and consumption has held up relatively well - even amid the net negative effects of lower oil prices.

The bank, however, plans to keep an eye on the potential economic implications for Canada if the loonie stays higher than it has been in recent months.

The central bank also says while risks to the country's financial stability remain elevated, they seem to be unfolding as anticipated.

Last week, Bank of Canada governor Stephen Poloz called the weaker-than-expected US economy "slightly puzzling," but expressed optimism it would start accelerating in the second half of 2015.

While Poloz has been counting on a strengthening American economy to provide a major boost for Canada - so far this year the US has stopped short of expectations.


The next scheduled date for announcing the overnight rate target is July 15, 2015. If you would like to read the article Bank of Canada maintains overnight rate target at 3/4 per cent, please visit

Source: Bank of

Categories:   YOUR FINANCES
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