The short answer
A registered first mortgage is not always first. In Canada, unremitted payroll source deductions can create a federal deemed trust that primes a mortgage, and condominium and municipal tax liens can jump ahead. In the US, property taxes almost always come first, and in a number of states homeowners' association (HOA) liens have a limited super-priority. Lenders who monitor these claims protect their position; those who do not can lose it quietly.
Canada: claims that can prime a mortgage
Source-deduction deemed trusts. Employers must withhold income tax, Canada Pension Plan contributions and Employment Insurance premiums from employees' pay. If they do not remit them, subsection 227(4.1) of the Income Tax Act deems an equivalent amount of the employer's property to be held in trust for the Crown, "notwithstanding any security interest". In First Vancouver Finance v. M.N.R., 2002 SCC 49, the Supreme Court confirmed the deemed trust's broad reach over the debtor's property. Lenders to operating businesses, including owner-occupied commercial real estate, should ask for evidence that source deductions are current.
In insolvency, courts have some flexibility. In Canada v. Canada North Group Inc., 2021 SCC 30, the Supreme Court held that a CCAA court may rank court-ordered priming charges, such as interim financing charges, ahead of the source-deduction deemed trust.
GST/HST. The GST/HST deemed trust under the Excise Tax Act generally does not survive bankruptcy, and in CCAA proceedings it is not given priority (Century Services Inc. v. Canada (Attorney General), 2010 SCC 60). Outside insolvency, unpaid GST/HST can still create collection risk.
Property taxes. Municipal property tax arrears generally rank ahead of mortgages. In Ontario, tax arrears are a special lien on the land under the Municipal Act, 2001, and the municipality can sell the property through a tax sale. Lenders typically reserve the right to pay taxes and add them to the debt, and many monitor tax status annually.
Condominium common expenses. Under Ontario's Condominium Act, 1998, a condominium corporation's lien for unpaid common expenses can rank ahead of a registered mortgage, including one registered earlier, if the corporation registers a certificate of lien within the statutory time. The priority is limited, but it is real; condo arrears should be checked at origination and monitored.
Construction liens and environmental orders. See Article 11 for construction liens. In bankruptcy, the Bankruptcy and Insolvency Act gives a priority charge for certain environmental remediation costs over the affected real property (s. 14.06(7)); see Article 18.
United States: claims that can prime a mortgage
Property taxes and assessments. In nearly every state, real property taxes and many special assessments have priority over existing mortgages. A tax sale can extinguish the mortgage if the lender does not redeem.
HOA super-priority liens. About 20 states, often following the Uniform Common Interest Ownership Act, give HOA or condominium association liens priority over a first mortgage for a limited amount of assessments, typically six to nine months. In SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev. 2014), the Nevada Supreme Court held that a properly conducted HOA foreclosure of the super-priority portion extinguished the first deed of trust. Florida takes a different approach: it limits a first mortgagee's liability for unpaid assessments after it acquires title by foreclosure to the lesser of 12 months of assessments or 1% of the original mortgage debt (Fla. Stat. §§ 718.116 and 720.3085). See Blog 19.
Federal tax liens. Under Internal Revenue Code § 6323(a), a federal tax lien is not valid against a holder of a security interest until notice of the lien is filed. A mortgage recorded before the notice generally has priority, but future advances made after the notice may not, subject to the limited protections in § 6323(c) and (d). Run lien searches before every advance on a line or construction loan.
Mechanics' liens. See Article 11 for relation-back rules.
How lenders protect priority
- Search for tax, condo/HOA and construction liens at origination and before each advance
- Require evidence that payroll source deductions and sales taxes are current for operating borrowers
- Monitor property tax status annually, or collect tax escrows
- Obtain estoppel or status certificates from condo corporations and HOAs
- Reserve the right to pay priority claims and add them to the debt
- Act quickly on HOA foreclosure notices in super-priority states
- Use title insurance endorsements that cover priority over assessments where available
Frequently asked questions
Frequently asked questions
Can a CRA deemed trust rank ahead of my mortgage?
Yes. Unremitted payroll source deductions create a deemed trust under ITA s. 227(4.1) that applies notwithstanding security interests.
Can a condo lien beat a first mortgage in Ontario?
Yes, for limited arrears, if the condominium corporation registers its certificate of lien within the statutory time.
What is an HOA super-priority lien?
In some US states, a portion of unpaid HOA assessments takes priority over a first mortgage, and a foreclosure of that portion can extinguish the mortgage.
Does a federal tax lien beat a prior mortgage?
Generally not if the mortgage was recorded before the IRS filed notice of the lien, but later advances can be at risk.
This content is general information for industry professionals and is not legal, tax or financial advice. Laws change and apply differently to each transaction; obtain advice from qualified counsel in each relevant jurisdiction. Legal counsel to the Cross-Border Private Lenders Association: Jasmine Daya & Co. Questions: info@cbpla.com