Refinancing to Pay Off CRA Tax Debt or Credit Cards in Ontario

If you owe the CRA or are carrying credit card balances, the equity in your home can look like an easy way out. A refinance can replace several high-interest debts with one mortgage payment, but it also changes who has a claim on your home.

This article explains the main limits lenders apply, the risks of turning unsecured debt into secured debt, and the legal steps worth knowing about. It is general information, so speak with a lawyer or accountant about your own numbers.

What refinancing for debt actually does

When you refinance, you take a new, larger mortgage, pay out the old one, and use the extra money to pay other debts. Credit card balances and tax debts are generally unsecured or not yet registered against the home. After the refinance, that same money is owed under a mortgage that the lender can enforce against the property.

That is the core trade-off: the interest rate and monthly payment may be lower, but the consequence of default is more serious. Missing a regular payment is a default under the mortgage and may eventually lead to the forced sale of your home.

Lender limits and costs to expect

Lenders limit how much of your home's value they will lend against, and they look closely at your income, existing debts and credit history. The exact limits depend on the lender and type of mortgage, so ask for them in writing. Insured mortgage rules have changed in recent years and may change again.

If you move to a new lender, the new lender must approve the application, and switching may involve appraisal, discharge, registration and legal fees, plus new mortgage insurance premiums if the loan amount or amortization increases. Breaking your current mortgage may also trigger a prepayment charge: open mortgages allow extra payments without penalty, closed mortgages limit them. FCAC says lender discharge fees typically range from no charge up to $400 where unregulated, and lawyer or notary fees for a discharge are typically $400 to $2,500.

• Appraisal and legal fees
• Prepayment charge on the old mortgage
• Discharge and registration costs
• Mortgage insurance premiums if applicable
• Broker or lender fees, especially on private loans

CRA debt: why timing matters

Before placing a lien on or seizing assets, the CRA must certify the amount owed through a provincial judgment or a Federal Court certificate, after which a lien can be registered against assets and property. Garnishment by requirement to pay does not need a court order for income tax debts. A payment arrangement with the CRA does not stop it applying credits or benefits to the debt.

If a lien has already been registered against your property, how it affects a refinance depends on your situation and the lender. A lawyer can check title and work out how payment to the CRA would be handled at closing.

Private lenders, high fees and the criminal rate

If banks decline you, a private lender may offer a mortgage at a higher cost. Fees matter here. Under the Criminal Code, entering into an arrangement to receive interest at a criminal rate is an offence. A criminal rate is an annual percentage rate above 35 per cent on the credit advanced. For this purpose, interest includes all charges and expenses, such as fees, fines, penalties and commissions, paid or payable for advancing credit. Credit advanced is reduced by fees deducted from the advance, so fees taken off the loan raise the effective rate.

Some commercial loans are exempt from the 35% cap, but only where the borrower is a non-individual borrowing for a business or commercial purpose. Loans to individuals for personal purposes remain under the 35% cap.

Mortgage brokers and agents in Ontario must give written disclosure, and private lenders and investors must receive the prescribed disclosure signed by a licensed broker, with fees paid to the brokerage and disclosed in writing. Read every disclosure before signing.

Alternatives and what to do next

Refinancing is not the only route. A consumer proposal can let you keep assets if payments to secured creditors such as a mortgage lender continue; the term cannot exceed five years, and the home mortgage is excluded from the $250,000 debt eligibility limit. Bankruptcy generally does not affect secured creditors' rights, such as a mortgage lender's. Credit effects differ: a consumer proposal is removed from credit reports 3 years after the debts are paid off or 6 years after signing, whichever comes first, and bankruptcy is usually removed 6 years after discharge.

• List every debt, its interest rate and whether it is secured.
• Get a statement from the CRA of what you owe and whether a lien has been registered.
• Ask the lender for the total of all fees, in writing, before you commit.
• Compare the refinance with options such as a consumer proposal, with a licensed insolvency trustee or lawyer.
• Ask a lawyer to review the mortgage commitment before you sign.

Frequently asked questions