The IRS placed a legal mortgage on their home because of her spouse’s unpaid business taxes. Does she owe her debts?
“A legal mortgage, we didn’t even know what that word meant three weeks ago,” Hélène* confided during a telephone conversation.
She had written to La Presse a few days earlier.
“A difficult situation has just arisen in our family,” she wrote. My daughter, in her early thirties and mother of two preschool children, has just learned that there are two legal mortgages on her house. She is a 50% owner with her husband. The legal mortgages are in the name of his spouse and are due to the fact that he has not paid his taxes or his business taxes and they run since 2019 at an interest rate of 10%. »
“It’s a situation that was unexpected,” said Hélène. My daughter has been married since 2017.”
They bought the house for $250,000 in 2019 and made a 5% down payment.
Shortly after, his partner informed him that a legal mortgage of $16,000 had been registered on the house, but that he agreed to repay it at the rate of $3,000 per month.
The man is an entrepreneur.
“He had not paid his taxes, therefore business GST and QST. And he hadn’t filed his tax return either. My daughter didn’t care. She trusted him. »
A trust betrayed.
“The situation has been very tense in recent months due to money concerns,” relates Hélène. In short, they are in the process of separating. We did some research and discovered that there was another legal mortgage on the house. »
This one was filed in 2021, to the tune of $12,000.
“He now owes almost $30,000 to the provincial government for unpaid taxes and business fees. »
Other threats are imminent.
“It is expected that there will be another legal hypothesis this fall. Because he hasn’t done his 2020, 2021 and 2022 taxes either. There really is a sword of Damocles hanging over their heads. »
They will have to sell the house. It’s probably worth $550,000, the mother estimates. The mortgage balance would be around $150,000.
“The house was 50-50 when they bought it. My daughter fears that her equity [real net worth] will be reduced by her partner’s debts. She does not know if she can be held responsible for his debts, even though they are business debts. »
Hélène has another worry.
“I donated $25,000 to my daughter in 2020 to renovate the kitchen and bathroom. »
Will her daughter be able to recover the entire amount when the house is sold?
” It’s very sad. What we want is to ensure that the children have a decent place to live once they are separated. If all the equity in the house goes into his debts, it will be very difficult. »
Governed by the Civil Code, a legal hypothec is a right granted to the creditor over property in the event of default, explains financial planner David Truong, president of National Bank Planning and Benefits.
Article 2724 specifies that only four types of claims can give rise to a legal hypothec: claims of the State for amounts owed under tax laws, claims of persons who participated in the construction or renovation of a building, the debt of the union of co-owners for the payment of common charges, and finally the debts resulting from a judgment.
In the case of a legal hypothec for a tax debt, “the government registered it to say: we are going to take the remedies available to us to get reimbursed. If you sell your house, we are a priority creditor, even before the real estate mortgage from the original lender,” describes David Truong.
What does this mean for Helene’s daughter? Is she partly to blame for her spouse’s poor tax punctuality?
They are married, which implies that they are subject to the division of the family assets, which includes the family residence.
At the dissolution of the union, the value of this heritage must be divided into equal parts, after deduction of “debts contracted for the acquisition, improvement, maintenance or conservation of the property which constitutes it”, according to the Article 416 of the Civil Code.
Is the legal hypothec included in these debts? If it were deducted from the equity of the property, it would follow that Helene’s daughter would assume half of it.
“That’s a very good question,” says David Truong, intrigued by this unusual problem in financial planning. “Are both responsible for the unpaid taxes that were included in the legal mortgage? I asked the question to my notary friends at the Bank, and we looked for some judgments. »
They spotted two.
In a judgment rendered in Superior Court in 2010, the plaintiff (the husband) requested that his spouse assume half of the legal hypothec of $28,475 that the tax authorities had obtained against him for unpaid business taxes. He alleged that the money he had not applied to pay the debts of his companies had been used directly to support his family.
The defendant (his spouse) asked to exclude from the family patrimony the debts related to “the illegal actions of the defendant in the management of his Quebec companies which had caused two legal hypothecs on the family residence”.
The judge agreed with him.
She concluded that legal hypothecs should be excluded from family patrimony debts “since they result from judgments that the tax authorities (Ministry of National Revenue and Ministry of Revenue of Quebec) obtained against the plaintiff personally, as administrator and sole shareholder, due to his abuses in the management of his company”.
She ordered that upon sale of the residence, these debts “shall be paid directly to the tax authorities from the plaintiff’s share.”
Well done.
“It is not an unequal sharing, but it is a sharing which will be made to the exclusion of the debt which was previously owed to the tax authorities,” comments David Truong.
Another judgment rendered in 2012 drew the same conclusions.
“The value of the legal hypothecs, i.e. $28,475.58, attached to the debts of the plaintiff’s companies which currently encumber the family residence, must therefore be paid exclusively from the plaintiff’s share in the family residence,” ruled the Court.
Hélène’s daughter will be able to browse, or even cite, these two judgments, which can be consulted on the website of the Société québécoise d’information legal (SOQUIJ).
David Truong nevertheless advises him to consult a lawyer.
“You can do business with a mediator, but not everyone necessarily knows all these little subtleties,” he notes.
Hélène was also concerned about the $25,000 gift she gave her daughter for the kitchen renovation. Will it be merged into the value of the family heritage, therefore split in two?
David Truong refers to article 418 of the Civil Code, which indicates that when the net value of the family patrimony is established, it is necessary to deduct the net value of the property that a spouse owned at the time of the marriage and which is part of this patrimony .
“We also deduce that of the contribution, made by one of the spouses during the marriage, for the acquisition or improvement of property of this heritage, when this contribution was made from the assets due by inheritance or donation, or their re-employment,” the article specifies.
“The $25,000 donation must be excluded,” concludes David Truong. The problem is that you have to prove it. »
Is there any evidence or clue of this $25,000 donation and its use for the renovation work?
“For a donation, we suggest keeping a record,” he says. And for more substantial donations, it will be necessary to register it with the RPPRM. » Otherwise known as the Register of Personal and Movable Real Rights.
“It doesn’t cost much, and it helps avoid any possible confusion. »
