Can a buyer pay off a vendor take-back early?

Start with the note itself. A vendor take-back is a contract between buyer and seller, so whether the buyer may repay early, on what notice and at what cost depends first on what the two signed. Section 10 of the federal Interest Act deals with certain mortgages on real property, and the seller’s tax position and the buyer’s bank may both be affected by the timing. Ask a lawyer to read the actual documents. For how the note’s due date and final payment are set, see the due date and balloon payment answer.

What the note says

Check whether the note allows early payment at all, whether it requires notice, and whether it charges anything for paying early. If the note is silent, do not assume either way; have a lawyer say how the wording and the governing law apply. Ask your lawyer to settle the point before closing.

Interest Act section 10

Section 10(1) of the federal Interest Act applies where principal or interest secured by a mortgage on real property, or a hypothec on immovables, is not payable until more than five years after the date of the mortgage. After those five years, a person liable to pay who tenders or pays the principal and interest due to the time of payment, as calculated under sections 6 to 9, together with three months’ further interest in lieu of notice, ends any further interest on the principal or interest due under the mortgage. Section 10(1) also covers a person entitled to pay in order to redeem the mortgage. Section 10(2) says this does not apply to a mortgage given by a joint stock company or any other corporation, or to certain prescribed mortgages given by a prescribed entity. It matters only if the take-back is secured that way.

The seller’s tax timing

The CRA’s page for individuals on claiming a capital gains reserve says a reserve usually lets a seller report a portion of a capital gain based on the portion of the proceeds not yet received, and that a reserve claimed in the previous year is brought into the next year’s calculation. An early payoff could therefore change when the gain is reported. The seller should ask an accountant how it applies to them.

The senior lender

BDC says vendor financing is in almost all cases junior debt, subordinate to bank loans. If the bank’s loan documents limit payments on junior debt, ask the bank whether the buyer may pay the take-back off early, and in what circumstances.