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The Toronto office of Romspen Investment Corp. has been searched by Quebec’s tax agency during an investigation into one of the private mortgage lender’s borrowers.

Revenu Québec collects taxes in its home province and serves as a watchdog for taxation matters to make sure people and companies pay what they owe. Romspen is a private mortgage lender that raises cash from individual investors, then lends it out to real estate companies, often in the form of short-term construction loans.

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Romspen Investment Corporation signage outside the company's office in Toronto on Oct. 8.Yader Guzman/The Globe and Mail

On Tuesday morning, Revenu Québec entered Romspen’s office in Toronto’s Yorkville neighbourhood and sent employees home. Multiple investigators wearing black jackets searched the headquarters, and two Toronto Police officers prevented anyone from entering the office – including Romspen co-founder Arthur Resnick, who showed up midday.

Revenu Québec confirmed the investigation to The Globe and Mail, but declined to comment and said it would not disclose the nature of its probe. In response to questions from The Globe, Romspen said it was served with a search warrant in connection to an investigation into unpaid Quebec sales tax by one of its insolvent borrowers.

It is not immediately clear how much money was borrowed from Romspen, which is not the target of the Revenu Québec probe. Still, the mortgage lender has faced challenges over the past two years, when the market for real estate development froze as interest rates rose and many companies filed for creditor protection.

Through it all, Romspen has dealt with some significant business disruptions, including battling its largest borrower in court after alleging defaults of $333-million in April, 2023. As the troubles mounted, Romspen halted all investor redemptions in November, 2022, citing some trouble with loan repayments. At the time, the lender had $3.2-billion in assets under management.

In the years since, Romspen has cut its monthly distribution multiple times, meaning investors remain trapped in the fund and now earn much less yield. The lender’s portfolio is largely comprised of construction and predevelopment loans, and it lends to borrowers across the United States and Canada.

While Revenu Québec could not comment on specifics, it has been probing a set of real estate development companies set up by the Basal family in Montreal for a few years – and the family had borrowed money from Romspen.

Based in Côte St. Luc, the Basal family operated BSR Group, which started out buying homes and then pivoted to developing townhouses and rental apartment buildings. Quebecor Media’s Journal de Montréal reported in January, 2023, on the financial troubles of real estate developer Ronen Basal, who was behind a dozen major apartment rental complexes in the greater Montreal area. The newspaper said his businesses owed Revenu Québec more than $30-million in unpaid taxes.

Mr. Basal did not immediately respond to questions from The Globe.

Revenu Québec is investigating what it alleges was a deliberate scheme involving Basal companies, the Journal said. According to documents filed in court and cited by the newspaper, the agency has alleged several Basal businesses have outstanding taxes that should have been paid when certain real estate projects were completed but weren’t, the newspaper said.

The Journal reported that it interviewed Mr. Basal, who said he had done nothing wrong. He told the newspaper that his main lender, Romspen, had for all practical purposes seized control of his businesses after his problems began.

Romspen has been in business for decades, but its primary product, the Romspen Mortgage Investment Fund, grew particularly popular in the aftermath of the 2008 global financial crisis because retail investors were hungry for sizable yields in an era of ultra-low interest rates. However, since interest rates started rising in 2022, the fund has cut its quarterly distribution by roughly two-thirds.

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