The Canadian Mortgage Broker Magazine - Fall 2021

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THE MAGAZINE FOR PROFESSIONAL MORTGAGE BROKERS

I N S I D Eents'

The Presid ves: Perspecti te and da Industry up ahead looking p.8

Exploring the benefits of blockchain p.10 Olympian’s new path as a mortgage broker p.14

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THE DISRUPTIVE POWER OF BLOCKCHAIN FROM A LEGAL PERSPECTIVE: THE ONTARIO LAND REGISTRY SYSTEM

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BY KHALID KARIM AND SIRAAT MUSTAFA

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FINDING THE FIT Mortgage broker Ethel Lariviere customizes financing solutions to fit every client, while building solid relationships along the way

BY LISA GORDON

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departments 8

Editorial Summary

30 Advertisers Index

THE ECONOMIC COST OF TORONTO’S LAND TRANSFER TAX

columns 14 Off the Clock: Olympian Ben Rutledge is carving a new path as a successful mortgage broker

BY BENJAMIN DACHIS, BEV DAHLBY AND JACK MINTZ

BY LISA GORDON

26 Legal Ease: One Less Tool in the Lender’s Toolbox: Increasing mortgage rate on maturity date is not permitted

BY RAY BASI

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VOLUME 6 ISSUE 4 FALL 2021 THE CANADIAN MORTGAGE BROKERS ASSOCIATION DIRECTORS

Sylvain Poirier (CMBA-Quebec) Kimberlee Freeman (CMBA-Ontario) Meg O’Leary (CMBA-Atlantic) Troy Resvick (CMBA-BC) EXECUTIVE DIRECTORS

Keena Hicken-Gaberria Petra Keller CMBA - ATLANTIC Mortgage Brokers Association of Atlantic Canada 12 M - 7095 Chebucto Road, Halifax, NS B3L 0A1

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CANADIAN MORTGAGE BROKER magazine is produced by the Canadian Mortgage Brokers Association (CMBA) EDITOR

Keena Hicken-Gaberria STAFF WRITER

Ray Basi MANAGING EDITOR

Kathleen Freimond ART DIRECTOR

Scott Laing SALES AND COORDINATION

Lalania Dykstra BILLING

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editorialsummary

Homebuyers will continue to look for fast, accurate information in the coming year as housing markets across the country remain tight

MORTGAGE BROKERS EMBRACE TECHNOLOGY

BY TROY RESVICK, CMBA NATIONAL CHAIR

T

he weather may be turning colder as winter approaches, but the Canadian real estate market remains red hot, dispelling earlier fears that the COVID-19 pandemic would see it slump.

For mortgage brokers, high house prices – exacerbated by a severe shortage of inventory, low interest rates and a surge in the number of new buyers – means they are having to work even harder to prepare clients for a market in which many homes are attracting multiple

offers well over asking price and selling as fast as they can be listed.

On top of that, pandemic restrictions have forced mortgage brokers to pivot rapidly in the past 18 months to dealing with clients, lenders and other stakeholders in a virtual world where digital signing, Zoom conferences and sharing of information online have become normal business procedures.

These are the main observations of current market conditions by CMBA’s four regional

presidents, Don MacMillan in Atlantic Canada, Sylvain Poirier in Quebec, Shubha Dasgupta in Ontario and Sachin Varma in British Columbia.

MacMillan says the Atlantic Canada market is strong due to an influx of buyers and low interest rates.

“We are seeing a lot of people relocating to the Atlantic region from other parts of Canada because the cost of living here is much lower,” he says.

Above from left: The CMBA regional presidents: Sachin Varma, British Columbia; Subha Dasgupta, Ontario; Sylvain Poirier, Quebec; Don MacMillan, Atlantic Canada.

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editorialsummary

MacMillan notes that there has also been a surge in first-time buyers who see prices rising and are anxious to get into the market because they are worried that owning their own home may soon become unattainable.

Low inventory has pushed up prices in Quebec as well, says Poirier, and that has increased pressure on mortgage brokers to meet demand and secure commitments from lenders. Buyers, on the other hand, are facing bidding wars in which realtors often advise them to dispense with conditions on offers such as pre-sale inspections.

As in other regions, the pandemic drove the Quebec market rather than depressed it.

“Many Canadians thought the market would go down during the pandemic, but the opposite happened partly due to people needing more space for home offices,” says Poirier.

“However, the pandemic also resulted in fewer houses coming onto the market because people were reluctant to have strangers in their homes [for viewings].”

It’s a similar story in Ontario, where the regional market is very active as prices rise and buyers scramble for what little supply there is, says Dasgupta.

Market drivers include first-time buyers getting financial support from parents whose net wealth has increased in recent years as property prices have rocketed.

“In Toronto specifically, some parents who have built up equity in their home worth millions are giving their younger children an opportunity to get into home ownership a little earlier through gifted down payments and other support. So that's one channel of growth that we're seeing,” says Dasgupta.

“We have a very active mortgage market, which gives us the opportunity to work with homebuyers to ensure they are properly pre-qualified,” he says. “That’s important because quite often they are having to make offers without conditions.

It’s crucial for us to understand what clients can afford and to carefully review and validate all documentation.”

In B.C., the market is robust and flourishing, says Varma, with many brokers reporting a record year.

“There is still pent-up demand driven by new buyers entering the market, the largest net positive migration into the province in 28 years, and people who are working from home and want more space,” he adds.

But the challenge, as in other regions, is a lack of supply, says Varma – and it’s not only in the big cities; mortgage brokers throughout the province have reported a significant up-tick in business due in part to people moving out of the bigger cities to smaller outlying communities where house prices are lower, but inventory is also down.

While most mortgage brokers started adopting internet-based technology several years ago, the pandemic has accelerated the move, according to all four presidents.

“For quite some time there has been a certain demographic that wanted more digital access, but since the pandemic, it’s become widespread,” says MacMillan. “People simply accept that we are now in a digital environment as opposed to face-to-face interactions.”

In fact, there are indications that many mortgage brokers and clients now prefer the convenience of doing business online because of the additional flexibility it offers, he says.

Although the change to a more digitalbased approach to business began several years ago, the pandemic gave it extra impetus and the industry “pivoted on a dime,” says Dasgupta.

“I am proud to be part of an industry that was able to adapt so quickly to a very new environment,” he says. “We saw brokers, lenders, various organizations in our network and in our industry really begin to accelerate their technology implementation, the way we were servicing customers, recreating workflows and processes to meet the new demands and the new needs of the ‘new normal.’ ” Poirier says while brokers started working online 10 years ago, clients were not always comfortable with online transactions. But when the pandemic forced a change in doing business, many people realized it was often preferable to face-to-face interactions because it saved time and was more convenient.

Varma says working in a virtual world was tough for many mortgage brokers as they adapted to a new way of doing business, and the same was true for CMBA. “We've had to pivot from being a high-touch organization with lots of in-person events to almost everything being virtual because of the pandemic,” he says. “We hope to be able to return to some form of in-person events next year, but if not, we will have to adjust by perhaps using online interaction in a more meaningful way than just Zoom.”

MacMillan says in the coming year CMBA Atlantic members can look forward to mentorship opportunities for newer brokers to interact with their more experienced colleagues, and a Zoom-based program in partnership with lenders and other industry stakeholders to help them stay in touch and share business opportunities.

“Our philosophy is to make sure members see the value of what we are offering them. It’s a challenge under current circumstances, but we need to find innovative ways to give value to our members,” he adds.

The coming year in Ontario is likely to see continued lack of supply, says Dasgupta.

As prices continue to rise, it will become even more difficult for younger people to buy houses, and that will accelerate the shift toward condos and high-density housing.

CMBA Ontario members will see the continued roll-out of the “four pillars of focus” in 2022. The program includes helping mortgage brokers with sales and marketing through a range of educational activities aimed at continuous career growth.

There is also a focus on lenders and underwriting to ensure mortgage brokers are aware of all the products and solutions available to their clients, which in turn builds awareness to the benefits of the broker channel, says Dasgupta.

Technology and process, the third pillar, focuses on helping mortgage brokers and the industry at large adopt technology into their businesses. The final pillar is health and wellness.

“We've been through a very difficult period,” says Dasgupta. “Mental and physical health has been affected, and we want to ensure the broker community is focused on that, on their well-being and the well-being of those around them.”

Looking ahead, Poirier believes the Quebec market will slow down slightly in the coming year, but prices will remain high.

Communication will be the big focus for CMBA members in 2022.

“They want to be informed; they want to know what the market is doing in their region and elsewhere; they want accurate, factual information, not sales pitches,” says Poirier.

It’s fair to say that homebuyers too will be looking for fast, accurate information in the coming year as housing markets across the country remain tight, and many of them will be looking to mortgage brokers to provide it.

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blockchainpower

THE DISRUPTIVE POWER OF

BLOCKCHAIN FROM A LEGAL PERSPECTIVE: THE ONTARIO LAND REGISTRY SYSTEM

BY KHALID KARIM AND SIRAAT MUSTAFA

O

utside of the real estate sector, you would be hard pressed to speak to the average person about land registration unless they are buying or selling a property themselves.

However, land registration is an integral part of real estate markets and plays an essential role. The dollar value of all home sales in Ontario in May 2021 reached $24.3 billion, more than double the levels from a year earlier, rocketing up 187.2% from the same month in 2020. It’s no wonder that all aspects of the real estate

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transaction are being evaluated to see if they can be improved or digitized. Enter Blockchain.

WHAT IS BLOCKCHAIN TECHNOLOGY? In short, Blockchains are permanent, unchangeable digital ledgers that are used to record transactions in “blocks” of computer code that are time stamped and linked together. The idea is that at any moment in time, simultaneously, each member of that network holds an identical copy of the blockchain database on their

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blockchainpower

computer. Blockchains function as decentralized networks that transparently reveal the history of transactions for digital assets, making it impossible for recorded digital assets to be pirated, modified, or deleted.

APPLICATION TO THE ONTARIO LAND REGISTRY SYSTEM Recently, the real estate industry has explored the applicability of blockchain technology to improving all of its current processes – we would argue that this should include Ontario’s Land Registry system (the “LRO”).

In Ontario, all private property ownership records (title, deed, mortgage and other land documents) are registered with the government. Historically, land registries were based on paper documents but have since transitioned to largely digital systems (such as Teraview, Ontario’s land records digital database). In theory, land registries simply maintain records of ownership, recording each transfer as they occur. However, this “simple” job can bring a number of challenges.

With the number of parties involved in real estate transactions (owners, tenants, purchasers, sellers, agents, financial institutions, investors, developers, etc.) and the volume of documentation changing hands for proper registration, errors remain frequent and are not always easy to correct.

LawPRO, Ontario’s professional indemnity insurance provider for lawyers, states that its real estate claims made up its largest segment of claims at 27% in 2020, with an average cost of $34,000 per claim. To date, the cost of real estate-related claims submitted to LawPRO per year totals an average of $21.5 million. Corrections involve a request made to OnLand, the Ontario Land Registry Access portal, where a representative in the applicable Land Registry Office reviews and then implements corrective action.

Navigating multiple Land Registry offices (53 offices in Ontario), combined with an inefficient and often costly process can exacerbate the issues encountered on typical real estate transactions, whether commercial or residential. Additionally, if a Land Registry central server or archive is hacked, it can have disastrous consequences for all involved.

ONTARIO’S LAND REGISTRY AND BLOCKCHAIN Blockchain has the potential to provide increased accuracy, transparency and efficiency for all users who must interact, one way or another, with the LRO. As a simple database solution, the blockchain would allow the ownership documents to be recorded and assigned to a specific or registered owner. Subsequent registrations, such as mortgages or other instruments, can be easily added to the blockchain and when the property is sold, the ownership documentation can be transferred to the new owner instantaneously. This would provide each owner with the secure knowledge that any documents created and stored on the blockchain are

may no longer require manual input, with “smart contracts” becoming increasingly sophisticated the more they are used and successfully implemented as well. Together, these benefits may create a “Blockchain Community” within the real estate industry and streamline any deficiencies between the LRO and its counterparts.

LOOKING AHEAD The real estate industry continues to explore the benefits of new technologies, including blockchain, with promising developments forecasting its potential success. For example, the HM Land Registry’s Digital Street Project has created a prototype digital register to improve the Land Registry System in England and Wales, with their

Blockchain has the potential to provide increased accuracy, transparency and efficiency for all users who must interact, one way or another, with the LRO. As a simple database solution, the blockchain would allow the ownership documents to be recorded and assigned to a specific or registered owner. legitimate and tamper-proof. In effect, Blockchain would eliminate the threat of hacking by disaster-proofing the entire land registry system.

Additionally, the entire real estate transfer process which used to take days can now take minutes to complete. For example, according to the Blockchain in Commercial Real Estate report by Deloitte’s U.S. Center for Financial Services in 2017, the distributed and encrypted nature of blockchain can make it difficult for perpetrators to commit fraud related to liens, easements, air and subsurface rights, titles, or transfers. A more digitized and transparent process speeds up title transfer execution, use of title as a collateral, and reduce overall transaction time. Automation on the blockchain would be an additional benefit as transfers

team continuing to explore its findings for how to best implement and scale the system to new heights. The prospect of success for projects such as these may lend some optimism for those ready for change within the real estate industry in Ontario, particularly with respect to the LRO and its processes. Blockchain technology continues to garner attention in the media but particularly with respect to business practices and applicability – marking a great opportunity for the LRO to innovate and help drive Ontario’s real estate market forward. It will be exciting to see how our government and real estate professionals embrace, or resist, the significant potential of blockchain technology.

Republished with permission by Gardiner Roberts LLP. Information: grllp.com CMB MAGAZINE

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brokers-off-the-clock

DIFFERENT STROKES Olympic rowing gold medallist Ben Rutledge is carving a new path as a successful mortgage broker BY LISA GORDON

I

n 2015, Ben Rutledge’s rowing career had run its course. The 2008 Canadian Olympic gold medallist found himself in Russia with a young family, five hours north of Moscow in a cramped apartment. He was there to coach the women’s Russian Olympic rowing team, but he hadn’t been paid in six months.

It was time for a change.

Rowing had been Rutledge’s focus since the time he discovered it in 1999. As a University of British Columbia Sauder School of Business student, he chanced upon a six-week varsity learn-torow program. At 6’5”, Rutledge had played hockey and tried golf, but rowing was the right fit.

“It’s an aerobic sport for tall people,” he told Canadian Mortgage Broker. “I was that tall guy who couldn’t jump, but I could work really hard at 90 per cent capacity and just stay there and not stop. I had endurance and the ability to train long hours. I was up for the hard work.”

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Within three years, Rutledge was senior world champion at the age of 21. He rowed for the 2004 Canadian Olympic men’s team, placing fifth that year, before going on to win gold in the men’s coxed eight at the 2008 Olympics in Beijing.

Coming out of those Games, Rutledge found himself doing a lot of soul searching to determine his next move.

“The only plan I had coming out of the 2008 Olympics was how to give back to the rowing community that helped me,” he said. “There’s not a lot of money in rowing, but there is a lot of passionate volunteers. I volunteer coached at UBC; I was doing public speaking and trying to make some money. But I fell in love with coaching.”

Through his own former Olympic coach, Rutledge was offered a job coaching the Russian women’s rowing team. Originally, the training camp was in Italy – but then Russia invaded Crimea in 2014 and the team was called home.

KEVIN LIGHT PHOTOGRAPHY

brokers-off-the-clock

“It was unplanned, and that was part of the reason not to stay,” he explained.

“I had a young family, a three-month-old daughter. I had been with the team for two years, but it was time to leave.”

Returning to Canada in 2015, Rutledge planned his next move. In university, he’d realized the value of leveraging and growing wealth through a series of “fix and flip” vendor take-back mortgages. He thought mortgage brokering was an area where he could provide real value by helping people with an essential service.

“The industry itself seemed quite safe in that it thrives on volatility. Up or down, there’s always a way for some people to find a better situation,” said Rutledge. “As long as you provide good service, there will always be business.”

Today, the 40-year-old former Olympian is chief operating officer of Designer Capital, a Victoria, B.C.-based brokerage specializing in residential and commercial financing for high-net-worth and selfemployed owners of multiple properties.

When he’s not working on deals, Rutledge hangs out with the Vikings. They’re an informal group of about 10 friends who run up Mount Douglas – twice – Friday mornings year round. Always one to work out and stay fit, Rutledge said exercise helps to clear his mind. But three years ago, he and some friends discovered an icy winter pursuit that really brings things into focus.

“We did a polar bear swim one year at New Year’s – but the next day, we decided to do it again,” he explained. “We just started jumping in the ocean in the mornings before our families were up – so from October to March, we jump in the ocean for 10 minutes a day.

That is what I do to keep my head clear and stay focused.”

Rutledge discovered Wim Hof, the Dutch “Iceman” known for his ability to withstand extremely low temperatures.

“He says the body is more resilient to cold than you think, and exposing yourself to it allows your body to recalibrate and perform at its best level.”

The swimmers started spreading the word. Most people thought they were

crazy to willingly submerge themselves in water ranging from 6C to 10C. But a few more said they’d like to try it. Now, about five to six people pull themselves out of their warm beds and assemble on the beach every wintry Friday morning at 5:30 a.m. Their goal is to achieve a clear mind and a sharp focus.

“When you’re going into the water, that’s the interesting part,” said Rutledge, who said he submerges himself slowly rather than jumping in all at once. “The body is telling you to stop and turn around, but you work your way into it. It depends on the day, but a lot of emotions happen from legs to body in the water.

It’s a release of any major thoughts, anxieties. It’s like, ‘This is pretty damn

hard, so anything else seems easy.’ When you leave, you feel like you’ve gone from stressed to euphoric.”

Rutledge encourages others to take the plunge but has more onlookers than joiners, including his family who will watch but not jump ... yet.

For someone who’s always challenged himself mentally and physically, Rutledge finds similarities between being a mortgage broker and being an elite athlete.

“I think it’s your drive to want to be the best at what you’re doing,” he reflected. “Certain behaviours are learned – in difficult situations, do you back off or step forward and keep trying? They are different arenas, but the mindset of not giving up is very similar.”

“I think it’s your drive to want to be the best at what you’re doing. Certain behaviours are learned – in difficult situations, do you back off or step forward and keep trying? They are different arenas, but the mindset of not giving up is very similar.”

As he comes up on six years in the mortgage business, Rutledge said he’s achieved more than he ever imagined he could. Looking down the road, the future could include spinoff businesses such as property development, insurance or educational seminars. One thing he’s learned is that new possibilities are always just around the corner.

“Every year is sort of a recalibration of what the next year could be.”

This interview with Ben Rutledge continues our series Brokers off the Clock. In every issue, we ask a mortgage broker to tell us what they like to do when they’re not behind a desk. Be it driving fast cars, travelling to exotic places or researching your family roots, we want to know how you unwind. Would you like to be profiled in a future edition – or suggest a fellow mortgage broker?

Contact us at info@cmba-achc.ca CMB MAGAZINE

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brokerprofile

Mortgage Broker Ethel Lariviere customizes financing solutions to fit every client, while building solid relationships along the way BY LISA GORDON

FINDING TH F

or Ethel Lariviere, it’s all about relationships. As a residential and commercial mortgage broker with Dominion Lending Centres – A Better Way, she enjoys helping people buy a home or find their place of business.

With a finance career going back 21 years, Lariviere has cemented solid relationships in the B.C. mortgage industry, from her first days as a commercial account trainee at HSBC to her present home office in Mission, B.C., where she works with customers across the country.

“To me, it’s basically the satisfaction of knowing that you are helping someone,” she told Canadian Mortgage Broker. “All my clients are important to me; it doesn’t matter the amount of the mortgage. I try to find the best product and solution that fits their needs.”

While business relationships are the key to her professional success, Lariviere puts a premium on family ties. In February 2010, while living in Red Deer, Alta., her husband, Randy, became extremely ill and required a liver transplant. Their world turned upside down when they discovered he had unknowingly contracted Hepatitis C through a previous tainted blood transfusion.

“My husband was really sick,” said Lariviere. “We were in and out of the hospital. He required blood transfusions and endoscopies all the time to band what are called varices (or enlarged veins) to stop bleeding in his esophagus.”

Randy struggled with poor health for four years, waiting unsuccessfully for a compatible liver donor. Finally, Lariviere volunteered to donate 70 per cent of her own liver, along with one bile duct, to her

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husband. The transplant, performed on July 7, 2014, was a success.

It’s just one example of how fiercely loyal Lariviere is to her family. She’s a proud and active band member of Alberta’s Bigstone Cree First Nation. Her mother, Rita Alook, was forcibly removed from her home when she was about six years old and sent to live at St. John’s Indian Residential School in Wabasca, Alta.

“It was an Anglican school that opened in 1894,” explained Lariviere. “They took the children by force. They cut off their hair, threw powder on them to de-louse them, took their clothing and made them wear red uniforms. They were not allowed to speak Cree, or they would be punished.

They were only allowed to speak English, even though my mother’s parents only spoke Cree and that was all she knew when they first took her.”

For Alook, it was doubly hard because her parents lived beside the school grounds.

She could literally look out the window at her home, wishing to be back there.

Her father, Lariviere’s grandfather, grew food for the school. Looking back, Lariviere said her mother supposes St. John’s students didn’t go as hungry as children at other schools, thanks to her father’s produce.

Lariviere is working with her mother to document some of her residential school stories, along with other traditions passed down orally from her grandmother. She said it is important to record these memories before they are lost to future generations.

“My mother told me that they went house to house, taking the children in horse-drawn carts to the school. My grandmother said that when they took the

children the house was so quiet, and it was like someone had died. This is one reason why Orange Shirt Day is in September. It’s the month they took the children – the crying month.”

Lariviere’s grandparents ultimately took a stand and refused to send their children back to the school, although her grandfather kept growing food to feed the students.

“My mom can remember her dad saying, ‘Come on, we have to go to the garden. We need to go pick food and take it to the school.’”

Enrollment at St. John’s Indian Residential School dwindled, and it was closed in 1966. The facility was operated as a community centre until it was torn down in 1997.

GIVING BACK TO THE COMMUNITY Because Lariviere is so passionate about family, she is a vocal advocate for missing and murdered Indigenous women.

“On October 4, we wear red to honour missing and murdered women,” she said.

“In 2019, an inquiry was done. We do these inquiries and we know of the Highway of Tears. But what real action has been done and taken to date?”

Lariviere has family members that are missing: her cousin Rose Mary Alook, whose disappearance from Vancouver’s Balmoral Hotel in 1988 is still unsolved; Audrey R. Beaver, missing since August 2020 from Edmonton; and Elaine Frieda Alook, who was last seen in May 2004 outside of Fort McMurray, Alta. Lariviere’s male cousin, Terence Alook, also disappeared from Wabasca, Alta., in 2016.

IMAGE COURTSEY ETHEL LARIVIERE

brokerprofile

HE FIT

Above, Ethel Lariviere puts a premium on family ties. Left, Ethel Lariviere's mother, Rita Alook, outside the St. John's Indian Residential School in Wabasca, Alberta.

Relationships are the foundation of Lariviere’s personal and professional creed, so it’s not surprising that she supports a number of community organizations. She is a Mission Regional Chamber of Commerce member and former Government Affairs and Budget Committee Member, as well as a director on the board. She has sponsored the Mission Candlelight Parade and the Business Excellence Awards for the past two years, and is a voting member of the Canadian Mortgage Brokers Association of B.C. and the Bigstone Cree Nation. In September 2020, she was appointed vice-chair of the Economic Development Select Committee and currently sits on the board of directors for the Mission Friendship Society Centre.

Lariviere has been a member of CMBA-BC since 2017, when she became a mortgage agent. Previously, she worked for HSBC and BMO as a commercial account manager and then a mortgage specialist before moving to Dominion Lending Centres – A Better Way. Currently, all her work is done virtually from her home office. Clients apply, provide documentation and sign mortgage paperwork online using secured apps. Through the DLC Access team, she can be compliant to facilitate deals nationwide.

Today, Lariviere writes both residential and commercial deals, but sees more of the former.

“I find that most people in this day and age still don’t think of calling a broker,” she commented. “The biggest question I get asked is what do they have to pay me? I think the industry needs to educate consumers in the industry, to do a better job. People still don’t really know what our place is in the industry.”

When she’s not working or serving a community group, Lariviere is a marathon runner with six medals to her credit. Previously she enjoyed being a competitive dragon boat racer and playing women’s hockey.

Again, she comes back to the importance of relationships, adding that her true desire to help her clients is what sets her apart.

“It’s about the relationships I build. It’s not about the money,” she concluded. “Do I need to make a living? Absolutely. But to be truly successful in this industry, I have learned it has to be about the client. When you make it about the client, then you both win.”

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taxpolicy The authors provided this input to the Toronto City Council to inform the discussion regarding Land Transfer Tax (LTT) on high-end homes in the city. They argue that the top LTT rate should not be increased, but rather reduced because it is a costly source of revenue to the wider economy.

Indeed, the top LTT rate should be dramatically reduced, they write. Even a one-point cut to the combined provincial-municipal top LTT rate from 5 to 4 per cent would still leave the LTT as perhaps the most economically costly major revenue source in the province.

+5 %

THE ECONOMIC COST OF TORONTO’S LAND TRANSFER TAX

BY BENJAMIN DACHIS, BEV DAHLBY AND JACK MINTZ

T

he City of Toronto, under the authority of Ontario’s City of Toronto Act, 2006, is the only municipality in Ontario that has the authority to impose its own LTT. In 2017, Toronto introduced a new top marginal rate of 2.5 per cent of the value of a house above $2 million. The province also added a top bracket at the same time, and the provincial LTT, which also applies outside of Toronto, now applies the same

rates to the same brackets as Toronto’s. Both the provincial government and Toronto allow a small rebate of LTT paid for first-time home buyers.

In 2019, Toronto collected just under $800 million in LTT, which represented 5.6 per cent of its total revenue that year, 7.3 per cent of ownsource revenue, 18 per cent of total municipal property taxes, and 28 per cent of municipal residential property taxes. The province collected

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taxpolicy

$2.9 billion in 2019/20, representing 2 per cent of total revenues.

Economic studies have generally found that land transfer taxes have a relatively high economic cost because they discourage people from moving to more favourable locations or housing when they can do so.

Instead, owners stay longer in their home, electing perhaps to renovate it. Based on an estimate of the impact of the LTT on land transfers in Toronto, we find that the current combined rate of 5 per cent on homes in excess of $2 million is highly distortionary.

To gain some appreciation of how distortionary the top LTT rate is, we calculate the economic cost of reduced economic activity from the LTT using a method called the marginal cost of funds (MCF). If the combined rate were reduced from 5 per cent to 4 per cent the MCF would still be 10.49, higher than estimates of the MCFs for Ontario’s corporate income tax of 2.62 and personal income taxes of 6.76 based on 2020 tax rates.

If the top rate were 3 per cent, the MCF would still be 3.28. This confirms the widely held view among economists that the LTT is a high-cost source of tax revenues.

The current rate is close to the rate that maximizes total LTT revenues for the city and province combined. With an increase in the top tax rate, the number of land transfers will decline and therefore the government of Ontario’s LTT revenues will decline. In other words, if Toronto increased

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its top tax rates, Toronto’s revenues would increase, but the government of Ontario’s revenues would decline by more than the increase in Toronto’s revenues.

If Toronto wishes to increase its revenues, especially from residential property worth more than $2 million, it should study an increase in the annual property tax rate on

The land transfer tax is also a volatile source of tax revenues that increase rapidly during a housing market boom, but then decline sharply when housing markets crash. This volatility makes them unsuitable for municipal governments with relatively stable expenditures and the need to balance their budgets every year.

... if Toronto increased its top tax rates, Toronto’s revenues would increase, but the government of Ontario’s revenues would decline by more than the increase in Toronto’s revenues. such properties. Although a so-called “mansion tax” would add some complications to the tax assessment process and would no doubt increase the number of appeals around the threshold, it would not reduce the number of property transfers. Such a measure is worth further study ahead of increasing the LTT. It is difficult to justify a land transfer tax. It is unrelated to services provided by governments, unlike the property tax, which is arguably related to municipal services.

As City Council debates the merits of various revenue tools, it should not pursue further an increase in the LTT. This article is republished with permission of the C.D. Howe Institute (cdhowe.org).

Benjamin Dachis is Director of Public Affairs for the C.D. Howe Institute, Bev Dahlby is a Fellow-in-Residence at the C.D. Howe Institute and a Research Fellow at the School of Public Policy, University of Calgary where Jack Mintz, is the President’s Fellow.

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legalease

ONE LESS TOOL IN THE LENDER’S TOOLBOX INCREASING MORTGAGE RATE ON MATURITY DATE IS NOT PERMITTED

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legalease

BY RAY BASI, J.D., LL.B., STAFF EDUCATION AND POLICY REVIEW

THE ISSUE Mortgages often contain a clause that if the borrower does not pay the full outstanding balance on the mortgage maturity date, the lender has the option to unilaterally renew the mortgage at an increased rate (for example, an increased interest rate and perhaps a renewal fee). The renewal clause generally specifies the amount by which the interest will increase, either specifically or by way of a formula (such as the existing rate being increased by 3 per cent per annum).

Consider, for example, you are a mortgage lender, and although the mortgage was due yesterday, the borrower has not paid it out in full. The mortgage agreement provides that if the mortgage is not paid out in full by the maturity date you have the sole discretion to renew the mortgage for six months at a rate of 5 per cent more than the rate for the existing mortgage.

It also gives you discretion to charge a $5,000 renewal fee. You might be happy to renew the mortgage under this clause and receive the increased rate of return, but can you enforce such an increase?

The Ontario Superior Court of Justice (OSCJ) provides guidance in Elle Mortgage Corporation v. Sihota, 2021 ONSC 1593 (Elle Mortgage Corporation).

WHAT HAPPENED? A husband and wife refinanced property to pay out an existing mortgage and obtain funds to repair damage from a grow-op.

They paid fees of $500 to the lender’s agent (a lawyer) to cover the cost of the initial interview, a lender fee of $30,000, a broker fee of $6,000 and legal fees of $2,500. The loan amount was $800,000, the lending rate was 7.5 per cent per annum, and interestonly monthly payments were required.

The borrowers made all of the payments required under the mortgage, other than paying the outstanding balance by the maturity date.

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The mortgage agreement, under the heading “Automatic Renewal,” provided that if the mortgage was not fully paid out by the maturity date, the lender had the option of extending it for six months at a rate of 3 per cent per annum more than the existing rate plus a renewal fee of 5 per cent of the then outstanding balance. Specifically, it stated: Provided that should the mortgage loan not be repaid in full on the maturity date, then and at the sole option of the [lender], the [borrowers] … shall be deemed to have accepted and the mortgage shall be automatically extended for a further period of six (6)

DID THE BORROWERS’ LACK OF KNOWLEDGE OF THE CLAUSE INVALIDATE IT? The OSCJ decided the borrowers could not avoid the application of the extension/ renewal clause simply because they were not aware of its existence. Their lawyer had the document for almost two months before it was signed. The borrowers had borrowing experience and were not unsophisticated.

They had more than enough time to read the documents. They had independent legal advice. They and their lawyer certified they had read and understood all of the

The OSCJ decided the borrowers could not avoid the application of the extension/ renewal clause simply because they were not aware of its existence. Their lawyer had the document for almost two months before it was signed.

months, at a rate of interest, commencing on the first day of the extended term, equal to the rate of interest of the immediately previous term plus 3.0%, per annum, calculated and payable interest only monthly, together with a renewal fee equivalent to 5.0% of the then outstanding balance, …

Note that the clause refers to the mortgage being extended rather than it being renewed.

The lender accordingly exercised the option to extend the mortgage. The borrowers upon learning about the need for a renewal tried to negotiate terms but were unable to reach agreement with the lender.

Off to court went the parties to resolve whether the lender had the right to extend/ renew the mortgage unilaterally.

documents they signed. They knew the documents were of legal significance and had a responsibility to inform themselves of the contents before signing them. The OSCJ concluded, “There is no basis … to invalidate their voluntary agreement … whether or not they took the time to inform themselves of the full extent of their commitments.”

Nevertheless, was the lender’s unilateral renewal of the mortgage at the higher rate enforceable?

WAS THE RENEWAL RATE ENFORCEABLE? The short answer is no, but there is value in knowing the underlying reasoning as it can guide a broker/lender in structuring future transactions.

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legalease

Interest Act, Section 8 Section 8 of the Interest Act prohibits a lender from charging more on arrears than on monies not in arrears. More specifically, section 8 provides: No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

Supreme Court of Canada – General Answer The Supreme Court of Canada (SCC) in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273 reviewed section 8 and in essence concluded: n Section 8 concerns itself with three categories of charges (fines, penalties, and rates of interest), and

The SCC decided that while an increased charge on arrears is not prohibited by section 8 if it is triggered by the passage of time, it is prohibited by section 8 if it is triggered by a default. For example, a mortgage can provide for an increase of the interest rate on a certain date but cannot provide for it to take effect only if there is a default under the mortgage.

What then of the situation where the increased charge is to take effect on the maturity date if the mortgage is not repaid? Would this be a situation where the increased charge is triggered by time (that is, the maturity date) or by default (the outstanding mortgage balance being due but not paid, hence being in arrears). This brings us to the OSCJ decision in Elle Mortgage Corporation.

Ontario Superior Court of Justice Decision – Specific Answer In Elle Mortgage Corporation, the OSCJ noted that even where a mortgage agreement is otherwise binding, borrowers are not

While increasing the borrower’s costs of continuing a mortgage after maturity might provide an incentive for the borrower to pay the mortgage out in a timely manner or result in a more lucrative transaction for the lender, such a clause is likely not enforceable.

automatic renewal and thereby to claim the additional 3% interest plus 5% fee amounts to exacting an increased charge beyond the rate of interest payable on principal money in arrears. The clause creates a penalty – and a significant one at that – payable if and only if the principal amount of the mortgage is not repaid at term.

The OSCJ recognized section 8 of the Interest Act is consumer protection legislation and so it is to be broadly and liberally interpreted to best achieve its goals. The OSCJ considered the substance of the transaction and found that the “mortgage provides that non-payment of principal results in the ability of the mortgagee to choose to exact a penalty in the form of fees and higher interest.”

A lender having the unilateral right to exact such a penalty on such an event (that is, on default) is precisely what section 8 intended to invalidate. The OSCJ decided the extension/renewal clause violated section 8 and was unenforceable.

As the clause was unenforceable, OSCJ concluded the mortgage had not been renewed. Further, as it would be illogical to strike out the fees portion of the mortgage clause but hold the lender to an extension, the result is that the mortgage was due and payable on the maturity date, and thereafter interest continued to accrue at the original contract rate until paid in full.

There was no increased interest rate or renewal fee payable.

TAKEAWAYS n These categories of charges cannot be

stipulated for, taken, reserved, or exacted in a mortgage agreement if the effect of doing so imposes a higher charge on arrears than that imposed on principal not in arrears.

The SCC said the focus is to be on the effect of the charge – that is, on the substance of the charge – rather than on its form. In other words, the focus is to be on whether the charge has the prohibited effect on arrears rather than on what the charge is called in the agreement. For example, a payment called a bonus in the agreement that is triggered by a default would be a charge prohibited by section 8.

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bound by terms that are not enforceable at law. A term that violates section 8 of the Interest Act is not enforceable at law.

The OSCJ found that the fact the mortgage calls the renewal an “extension” does not take away from the fact that the lender’s right to renew the mortgage exists only if there are arrears of principal. The arrears of principal being the money that is not received by the lender to pay out the mortgage by the maturity date. The lender is given the right to renew and could exercise it without the borrower’s agreement or even knowledge. In examining the effect of the increased charge, the OSCJ said: There can be no question that the decision of the mortgagee to exercise the right of

Signing documents without appreciating their contents is not a wise approach. The signing party, at least in circumstances where they had the ability and opportunity to review the documents, might unknowingly bind themselves to the contents.

While increasing the borrower’s costs of continuing a mortgage after maturity might provide an incentive for the borrower to pay the mortgage out in a timely manner or result in a more lucrative transaction for the lender, such a clause is likely not enforceable.

Lenders and their advising mortgage brokers should take this into account in structuring mortgage transactions.

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