September 5, 2017

Ontario doesn’t have one – but perhaps it should.

It may be long past time for Ontario to contemplate revisions to the Execution Act, which provides exemptions for property seizable by creditor, to include a homestead exemption.  Other provinces do have such exemptions that provide an element of security to families faced with financial difficulty.

The spirit of insolvency legislation, whether filing a bankruptcy, a division one proposal or a consumer proposal is to provide the honest debtor with access to relief from the burden of debt and the opportunity to get a fresh start.

To enable that concept it is necessary that individuals be able to maintain the necessities of life including, clothing household goods, transportation, insurances and certain retirement funds, lest they go on to be a burden to society.

Property in Canada is generally governed by the provinces.  Accordingly in all Canadian provinces a person filing for bankruptcy may retain certain property that is considered to be “exempt” from execution (seizure) by his/her creditors.

In Ontario, Clothing and Personal Effects are exempt up to a (fair market) value of $5,650; Household Goods (furniture) are exempt to a value of $11,300; a Vehicle is exempt up to a value of $5,600. There are some other exemptions under insurance, pension and other statutes but you get the idea.

In Alberta in addition to exemptions for personal items an individual may claim a “Homestead Exemption” which exempts up to $40,000 of the value of his/her residence from seizure or execution by creditors or bankruptcy trustees.

This is why a homestead exemption is important to Ontarians: (note that the figures expressed are hypothetical for discussion purposes)

If Ontario were to adopt a similar regime to that used in Alberta and other provinces and create an exemption for real property (a Homestead Exemption) it would protect a small percentage of the value of a person’s home and facilitate financial rehabilitation without putting the debtor at risk of losing their home to an insolvency proceeding.

Ask anyone who has recently sold a house for $200,000 how much money they got from the transaction, if they said about $180,000, and there was no mortgage, that probably would be pretty close, especially if the house was sold fairly quickly.  Money motivates realtors and 2.5% commission doesn’t get them as excited as 5-6% and that’s just the cost of doing business.  But real estate commissions aren’t the only costs.  On top of realty fees there are legal fees and lawyers’ disbursements, property taxes, mortgage penalties and other adjustments that must be paid from the proceeds of the sale.

A person faced with an insolvency proceeding must, at some level, consider the value of their property at face value less the outstanding mortgage to determine equity. Some trustees will also allow the so called “notional costs” (the costs that would need to be paid if the property were to be abandoned to the interests of the creditors).  The resulting equity, if any, is available to make restitution to creditors and is typically repurchased by the debtors either by regular payments to the estate or a renegotiated financing arrangement.

Keep in mind that trustees are driven by the wishes of the creditors and some creditors resist the allowance of notional costs in adjusting the equitable value of the property.  CRA, as a creditor in insolvency proceedings,is particularly notorious for suggesting that real property is worth its face value less the mortgage with no further allowances being made.  That is an idea that is clearly flawed because all property transfers have costs regardless of when the transfer transpires, now or in the future.

Bringing ourselves back to the example above imagine a debtor owns a house worth $200,000 with a mortgage of 80% (loan to value) so $160,000 they are faced with the possibility of bankruptcy.  The debtor cannot, under bank lending rules, increase their mortgage to more than 80% of the value of the property so for all intents and purposes it is “fully encumbered”.

If the debtor filed for bankruptcy and walked away from the house the trustee would either sell the property or allow it to go to a power of sale by the mortgagee.  In either case the trustee or the mortgagee is motivated to sell and not interested in sitting on the property for a protracted period of time since they will be responsible for maintenance, insurance, utilities, etc.  It is also important to remember that it is highly unlikely that a mortgagee or trustee selling a property would get an offer even close to one offered to the property owner.

A power of sale proceeding will result in very expensive legal fees typically $10-15,000 rarely less but sometimes even more depending on the complexity of the litigation.  On top of that realty fees will likely be at the top end to ensure that the salesperson is motivated so at 6% commission with a sale price of $200,000 the realtor would be paid $13,560 (including HST).  Mortgage penalties could range anywhere from three months interest (assuming a mortgage at 3% interest) $2,100 all the way up to tens of thousands of dollars depending on the mortgage terms.   Even without a power of sale proceeding the trustee’s legal fees would be higher than an ordinary property transfer because of the need to transfer the property from the vendor to the trustee and then on to the purchaser.

At bottom the costs of transferring the property by the trustee or the mortgagee could be anywhere from close to $20,000+/- up to a value exceeding the total value of the property, which would most likely include an insured mortgage.  The result can also be the displacement of the debtor who has been paying about $760 per month for accommodations and would then be required to pay rent in the range of $1,200-1,800 for a comparable living arrangement.  Such an outcome flies in the face of the spirit of the Bankruptcy & Insolvency Act of “rehabilitating the honest debtor” by forcing them into a more difficult financial position.

An amendment to the Execution Act including a reasonable homestead exemption would serve to benefit not only the unfortunate debtor who would be able to keep his/her home but also the mortgage lender who would benefit from the retention of a paying client.  After all if the property sells the new purchaser may look elsewhere for mortgage financing.  The immediate losers would be the realtor and lawyer handling the sale, but with the average Canadian selling their home every four years or so they would soon recover.