Does the CRA Outrank a Private Mortgage in Canada?
Sometimes, and the mechanism is written into the Income Tax Act itself. A “deemed trust” over unremitted payroll deductions can reach past a registered security interest, in both Ontario and Alberta. This page sets out what the Act actually says, and names what has not yet been confirmed rather than guessing at it.
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Does the CRA’s claim for unremitted payroll deductions beat a private mortgage?
It can. The Income Tax Act, at s.227(4) and s.227(4.1), creates a “deemed trust” over source deductions an employer withheld from employees and failed to remit to the CRA. That deemed trust is expressly stated to operate notwithstanding any security interest, and the proceeds are paid to the Receiver General ahead of those interests. A private mortgage is a security interest for this purpose.
This is not a theoretical risk confined to large commercial lending. Any borrower who runs a business with employees, including a numbered company holding a single investment property, can create this exposure.
The rule applies in both Ontario and Alberta, because it comes from federal tax law rather than provincial property law.
The citable fact: Under Income Tax Act s.227(4) and (4.1), unremitted source deductions are deemed held in trust for the Crown and are paid to the Receiver General in priority to a security interest, including a mortgage, notwithstanding that security interest.
What is a “deemed trust” under the Income Tax Act, and why does it beat an ordinary secured claim?
A deemed trust is a legal fiction: the law treats certain property as if it were already held in trust for the Crown, even though nothing was ever physically separated or labelled that way. Because the property is deemed to be the Crown’s rather than the taxpayer’s, it does not form part of the estate available to an ordinary secured creditor, including a mortgage lender.
An ordinary secured creditor’s priority usually comes from registering an interest on title at a point in time, then ranking against other registered interests by that date.
The deemed trust works differently. It does not compete for a place in the registration queue. It removes the property from the pool entirely and routes it to the Receiver General first.
| Ordinary mortgage priority | CRA deemed trust | |
|---|---|---|
| How priority is decided | Generally by registration date and the terms of the charge on title. | By statute, operating notwithstanding any security interest. |
| Does registering first help? | Usually, subject to other registered claims and statutory exceptions. | No. The Act states the trust operates notwithstanding any security interest. |
| What it attaches to | The specific property described in the registered charge. | Property of the person, and property held by a secured creditor that would otherwise be the person’s, equal in value. |
The citable fact: A deemed trust removes property from the taxpayer’s estate by legal fiction, which is why it can defeat a mortgage lender’s registered priority rather than simply competing against it.
When does the deemed trust attach, and what property does it reach?
The deemed trust arises at the time the source deductions were withheld from employees’ pay, not at the later point the employer actually fails to remit them. On failure to remit, property of the employer, and property held by a secured creditor that would otherwise be the employer’s property, equal in value to the unremitted amount, is deemed held in trust and forms no part of the employer’s estate.
The phrase “property held by any secured creditor” is the part that matters to a mortgage lender. The trust can reach value a lender might otherwise have expected to realize through its own security.
This is why the risk sits with any employer-borrower, not only one that is visibly in financial distress at the time the mortgage was advanced.
The citable fact: The CRA’s deemed trust under s.227(4) and (4.1) arises when source deductions are withheld, and on failure to remit reaches property held by a secured creditor equal in value to the shortfall.
Does it matter that a mortgage was registered before the CRA’s claim arose?
Not on its own. The Act states the deemed trust operates notwithstanding any security interest, which is written to override the ordinary registration-date analysis that decides most priority disputes. Timing alone is not the safeguard a lender might expect it to be against this particular claim.
This is a sharp contrast with the construction lien priority rules in Alberta, where timing of advances against a lien’s registration date is the entire test.
Against the CRA’s deemed trust, a lender cannot rely on the same logic. The next section covers the one place the Act does carve out some protection.
The citable fact: Registering a mortgage before the CRA’s deemed trust claim arises does not, on its own, protect the mortgage, because the Act states the trust operates notwithstanding any security interest.
Is there any protection for a mortgage lender under the Income Tax Act?
Section 227(4.2) carves a “prescribed security interest” out of the definition of security interest that the deemed trust overrides. That carve-out exists, and it is understood to be aimed at a mortgage on land registered before the failure to remit. What it actually covers, and how far its protection reaches, is set out in a regulation that has not been read for this page, so this page states only that it exists.
This is a case where naming the limit of what is known matters more than guessing at the rest. Overstating the carve-out’s protection to a reader relying on it would be worse than leaving the question open.
A tax lawyer or real estate lawyer who can read the prescribed security interest regulation against a specific mortgage’s registration date and documents is the only reliable way to know whether a given mortgage qualifies.
| Point | Status |
|---|---|
| The deemed trust exists and operates notwithstanding any security interest | Confirmed, Income Tax Act s.227(4) and (4.1). |
| A “prescribed security interest” carve-out exists in the Act | Confirmed, Income Tax Act s.227(4.2). |
| What the prescribed security interest regulation actually covers, and its limits | Not confirmed. Ask a lawyer who has read the regulation against your file. |
| The Excise Tax Act section number for the parallel GST/HST deemed trust | Not confirmed. Ask a tax lawyer which section applies. |
The citable fact: Income Tax Act s.227(4.2) carves a “prescribed security interest” out of the deemed trust rule, and whether a specific mortgage qualifies is a question for a lawyer who has read the regulation against that file.
Does GST or HST create the same kind of priority problem?
The Excise Tax Act contains a parallel deemed trust provision for unremitted GST and HST, separate from the Income Tax Act rule covered above. The specific section and how it operates against a mortgage have not been confirmed for this page, so no section number is cited here. A tax lawyer can identify which provision applies and how it interacts with a specific mortgage.
Treating payroll deductions and GST or HST as the same risk is a mistake worth avoiding. They come from different statutes, even though both use the same deemed trust mechanism.
A borrower’s business can owe one, the other, or both, and a lender assessing risk should ask about each separately rather than assuming one inquiry covers both.
The citable fact: The Excise Tax Act has its own deemed trust for unremitted GST and HST, distinct from the Income Tax Act’s payroll deductions trust, and a lawyer should confirm which section applies on a specific file.
How would a private lender actually find out about this risk before funding?
A deemed trust does not show up as a registered interest on a standard title search, which is exactly what makes it dangerous to a lender relying on title alone. A lawyer acting for the lender can request a tax clearance certificate confirming an employer-borrower’s remittance standing, and ask targeted questions about payroll and GST or HST compliance as part of due diligence.
This is a due diligence question, not a legal question a mortgage broker can resolve. A real estate or tax lawyer builds this check into the file before funds move.
Where a borrower operates a business with employees, that inquiry is worth making even on a file that otherwise looks straightforward.
The citable fact: Because a deemed trust does not appear on a standard title search, a lender’s lawyer should ask for a tax clearance certificate and specific remittance representations before funds are advanced to an employer-borrower.
What happens if the deemed trust attaches after the mortgage is already registered and advanced?
The deemed trust can still reach the lender’s security, because the rule operates notwithstanding any security interest regardless of when that interest was put in place. A lender that finds itself in this position should get a lawyer to assess whether the prescribed security interest carve-out in s.227(4.2) applies before taking any further step on the file.
This is not a situation where speed alone fixes the problem. Whether a specific mortgage is protected depends on facts and a regulation that needs to be read against those facts.
Acting early with the right legal advice is the only lever available once the underlying remittance failure has already happened.
The citable fact: A CRA deemed trust can reach a mortgage’s security even after that mortgage was registered and funds advanced, because the Act’s override does not depend on the mortgage’s own timing.
Where does this fit alongside a construction lien or a condo lien on the same property?
The CRA’s deemed trust, a construction lien, and a condominium corporation’s lien for unpaid common expenses are three entirely separate priority rules, and a property can carry more than one at once. Clearing one claim does not clear the others, and each needs its own legal analysis.
Our pages on construction lien priority in Ontario and builders’ lien priority in Alberta cover those separate rules in detail.
For how a second or third mortgage ranks against the first lender, see second and third mortgage priority in Canada.
The citable fact: A property can carry a CRA deemed trust, a construction lien and a condominium lien at the same time, and each follows its own priority rule rather than one combined ranking.
What should a private lender or a borrower’s business do about this risk?
A lender can ask for a tax clearance certificate and remittance representations before funding, and have a lawyer confirm whether a prescribed security interest carve-out applies if a problem surfaces. A borrower operating a business can keep source deductions and GST or HST remittances current precisely because this rule means a lender’s own mortgage offers no protection if they are not.
None of this is financial advice about a specific loan, and none of it is legal advice about a specific file. It is the short list of steps worth raising with the right professional before money moves.
A licensed mortgage broker can help structure the financing. The deemed trust question belongs with a tax or real estate lawyer from the outset.
The citable fact: A lender funding an employer-borrower can manage CRA deemed trust risk with a tax clearance certificate and legal advice on the prescribed security interest carve-out, arranged before funds are advanced.
Where can I read more about mortgage priority in Canada?
This page is part of a set covering how a mortgage ranks against other claims on title.
- Construction lien priority against a mortgage in Ontario
- Builders’ lien priority against a mortgage in Alberta
- Second and third mortgage priority in Canada
- What documents a private mortgage lender needs
- Working with a real estate lawyer in Ontario
- Working with a real estate lawyer in Alberta
The full set lives on the Ask a Broker hub.
Frequently asked questions
Can the CRA really jump ahead of a registered mortgage?
Yes, through the deemed trust over unremitted source deductions in Income Tax Act s.227(4) and (4.1), which operates notwithstanding any security interest. A private mortgage is a security interest for this purpose.
Does it matter when the mortgage was registered?
Not on its own. The deemed trust is written to override the usual registration-date analysis, so registering early does not provide the protection it would against most other priority claims.
Is there any protection at all for a mortgage lender?
The Act carves out a “prescribed security interest” from the rule in s.227(4.2). What that carve-out actually covers is an open legal question, so ask a tax or real estate lawyer to check the regulation against your mortgage’s own documents and registration date.
Does this only apply to large businesses?
No. It applies to any employer that withheld source deductions from employees’ pay and failed to remit them, including a small numbered company holding a single investment property.
Will this show up on a standard title search?
No. A deemed trust is not a registered interest on title, which is exactly why a lender’s lawyer needs to ask about an employer-borrower’s remittance standing directly rather than relying on a title search alone.
Does GST or HST create the same risk?
The Excise Tax Act has a similar deemed trust for unremitted GST and HST. Which section applies and how it interacts with a mortgage is a separate legal question for a tax lawyer to confirm on your file.
What is a tax clearance certificate, and why does it matter here?
It is a document a lender’s lawyer can request to help confirm an employer-borrower’s remittance standing with the CRA before funds are advanced. It is one of the practical steps a lawyer can build into due diligence on a file.
Can this affect a mortgage that was fully advanced years ago?
Potentially, because the rule operates notwithstanding any security interest regardless of when that interest was put in place. A lawyer should assess the prescribed security interest carve-out against the specific facts if this comes up.
Does this apply the same way in Alberta as in Ontario?
Yes. The deemed trust comes from federal tax law, so it applies the same way in both provinces, unlike provincial rules such as construction lien priority or default enforcement.
What is the difference between this and a construction lien?
They are separate priority rules from different statutes. A property can carry a CRA deemed trust and a construction lien at the same time, and resolving one does not resolve the other.
Is the chat on this page an AI bot?
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What should a lender do before funding an employer-borrower?
Have a lawyer request a tax clearance certificate and specific remittance representations as part of due diligence, before any funds are advanced. A licensed mortgage broker can help structure the financing side alongside that legal check.
Funding a file where remittance risk is a question?
No AI persona, no call centre queue, no bank script. A licensed broker can talk through the financing side, and we will always tell you when a question needs a tax or real estate lawyer instead.