CRA, ex-wife get paid before man's creditor after matrimonial home is sold

Many separated couples assume they are equal owners of their home, no matter whether both are on the title, but who actually owns the house matters if there is a separation, especially if one of the spouses has unpaid debt.

Under Canada’s constitution, property and civil rights are under provincial jurisdiction, meaning that joint tenants’ rights differ by province. A recent Ontario Court of Appeal ruling in Senthillmohan vs. Senthillmohan is a good reminder to third-party creditors about how tricky it can be to enforce a judgment against a jointly-held property.

After the Senthillmohans separated, the wife obtained a court order to sell the jointly-owned home. The net proceeds were to remain in trust after its sale. Meanwhile, one of the husband’s creditors, a numbered company, sued the husband over a debt.

The husband did not defend the lawsuit against him, and the company obtained a default judgment in September 2021 and put a lien against the home. This was not the husband’s only debt. He also owed a large tax bill to the Canada Revenue Agency.

A month after the default judgment was granted, the parties entered into an agreement of purchase and sale for the house. The ex-spouses then consented to a family court order to sever the joint tenancy. A few months later, the wife asked that her one-half share of the net proceeds be paid out to her.

The net proceeds of the sale were about $1.2 million. As the CRA has priority over other unsecured creditors when taxes are owed by a taxpayer, there was not enough to pay both the husband’s CRA bill and the $1.7-million debt owed to the numbered company.

Unsurprisingly, the company objected to the wife getting her one-half share of the net proceeds, since if the net proceeds were released to the wife, the company would be repaid even less of the $1.7 million it was owed.

The company based its argument on the way property law defines a joint tenancy, which means there is “unity of title, unity of interest, unity of possession, and unity of time.”

In short, joint tenancy means that each joint tenant holds an undivided interest in the entirety of the property. The company argued that joint tenants are essentially one owner, which is why when a joint tenant dies, the survivor keeps the jointly-held property and becomes the sole owner.

The ownership of the property actually changes when a joint tenancy is severed. Each owner then owns an undivided one-half interest in the property as “tenants in common.”

As tenants in common, each party can then direct in their will that their undivided one-half share goes to whomever they might choose. After the death of one of the tenants in common, the original co-tenant will not be the sole owner; they will continue to own only that undivided one-half of the property, and will then own it together with whomever the deceased named in their will.

Depending on the province, property held in joint tenancy can be severed by the parties’ actions, such as getting a court order to sever, or, in Ontario, by transferring one’s own interest in the home to oneself.

In the Senthillmohan case, the company claimed it had the right to enforce its debt against all of the house proceeds because the spouses were still joint tenants when the husband became indebted to the company.

The company relied on a Manitoba case that said proceeds of a property held by joint tenants are to be paid in the following order: expenses relating to the sale; anything owed to a secured party (such as a mortgage); any subsequent encumbrances or liens, in order of their registration; and only then will the remaining net proceeds be paid to the owners.

By contrast, the Executions Act of Ontario is clear that a sheriff may enforce a judgment with a “writ of execution,” which allows the sheriff to seize lands of the debtor, including “any interest of the debtor in property held in joint tenancy.”

However, the Court of Appeal went on to find that when a sheriff seizes property in joint tenancy, the joint tenancy is severed. Once it is severed, the debtor joint tenant has no further claim to the whole of the property. Because of that, the creditor is limited to claiming against the debtor’s share of the tenancy in common.

In Senthillmohan, the court decided it did not have to parse the timing of the joint tenancy severance, as the enforcement by the sheriff was enough to sever the joint tenancy.

As a result, the wife received her one-half of the net proceeds, about $600,000. The husband’s CRA debt was deducted from his share of the net proceeds, leaving about $323,000 to satisfy the $1.7 million owing to the judgment creditor, an amount significantly less than what it hoped it would collect.

This article was originally published in the Financial Post.