CRA Cracks Down on Tax Cheating by Real Estate Flippers

With the recent announcement of more than $100-million in new tax reassessments it’s clear the federal government remains intensely interested in catching real estate flippers in Toronto and Vancouver. And some tax professionals and real estate insiders believe this is merely the beginning as the Canada Revenue Agency targets players in the property market who may have been cheating on their taxes for years.

“I know lots of guys – some of the things they’ve done I can’t believe,” says Jamie Johnston, broker of record for Re/Max Condos Plus Corp. in Toronto. “They measure risk and reward, and that’s why they cheat.”

It is extremely rare for Canadians to be convicted or sent to jail in tax evasion: for example there are about 29 million tax filings annually in Canada and there were 37 convictions between April, 2016 and March, 2017; that’s about 0.0001 per cent. It’s a little less rare in the United States, where the Internal Revenue Service that sees about 151 million filings a year and had 2,672 convictions in 2016 (0.001 per cent). “In Canada you never go to jail, so the rewards are high and the risks are small. I think there’s a systemic problem, a whole bunch of people are not paying,” Mr. Johnston says.

But in the past two years the CRA has been sending a different signal: We are paying attention and the monetary risks are real.

Last week, CRA issued a release that summarized its recent enforcement efforts. Since 2015, $592-million in additional taxes related to real estate have been discovered, in the most recent year alone another $102.6-million was reassessed and $19.2-million in penalties for false claims have been levied (since 2015 it has levied $43.7-million in penalties). The government is now reviewing about 10,000 real estate-related cases a year and it can take its time to find cheaters: it can review a filing for up to four years after it is submitted.

“While the Canada Revenue Agency has always had a presence in the real estate sector, we have increased the focus on the sector to address growing concerns of non-compliance,” says Jeremy Ghio, press secretary for the office of Minister of National Revenue, Diane Lebouthillier. “Over the last few years, the economic factors in the Greater Toronto Area and the Lower Mainland of British Columbia, such as high-valued markets combined with rapid price increases, have further increased the risk of tax non-compliance in the real estate sector. ”

In a previous era of lax enforcement, some condo and detached home flippers have been able to own multiple properties and sell them off without declaring all the eligible taxes. Now, many are discovering the CRA has some very powerful tools in its enforcement box. The CRA can follow land registry and other data sources, locate suspicious looking transactions that went unrecorded or under-reported on tax filings and then file a reassessment. If disputed, the CRA can compel developers, utilities, banks and telecom providers to hand over data about a home that is under suspicion.

“You’re guilty till your proven innocent; that’s how the CRA’s model works,” says Justin Kutyan, a partner and tax litigator with KPMG Law LLP, an arm of accountancy giant KPMG in Canada. “ Even in tax court, the onus is on taxpayers to disprove the Minister’s assumption of fact. Our tax system is based on a self-reporting system – it’s based upon honesty and integrity – and they have a lot of tools to double-check that you’re honest. It becomes difficult, especially when they have the objective evidence: you barely showed up to the condo ever, you never swiped your card, you don’t buy hydro, your mail’s not forwarded there, Rogers has you listed at another house.”

One area the CRA has turned its attention to is filers who improperly claimed a GST rebate for a new or substantially renovated home. Even though the maximum rebate is $24,000 it’s only eligible for a primary residence and falsifying this can be a clue of other activity.

“On GST, they are just crazy at CRA. They are going after it hard,” says Mr. Kutyan, who is a long-time tax litigator and who previously argued cases for the CRA before switching to the defence team with white-shoe law firm Osler, Hoskin and Harcourt LLP, and now KPMG. “I think those are creating leads on the income tax side.”

Take the example of Gideon Margolin, a real estate broker who recently lost an appeal on a GST case involving the 2012 purchase (and 2014 sale) of a new-construction house at 116 Riding Mountain Dr. in Richmond Hill, Ont. Mr. Margolin declined to comment on his case when reached by The Globe and Mail, but the court documents fill in some of the details. Justice Randall Bocock’s ruling at the Tax Court of Canada found Mr. Margolin and his spouse, “did not intend to occupy it as their primary residence … [and] neither of them actually used the … property as their primary place of residence.”

The Crown introduced into evidence readings from the gas and electricity meters that effectively showed little consumption of those utilities in the five months between when the house was completed by the builder and when Mr. Margolin sold it. Mr. Margolin had several properties that he shuttled between, but movers and his cleaning lady testified that he essentially used Mountain Drive as a storage locker.

He also did not disclose that he bought and sold another new-construction house in Vaughan, Ont. referred to as “Lynvest” in the ruling, until asked by the Crown lawyers during the trial. “The Lynvest property was closed only 45 days before the acquisition of [116 Riding Mountain] and Lynvest was sold mere days before [116 Riding Mountain] was acquired, all escaping Mr. Margolin’s initial recall,” Justice Bocock wrote. The ruling notes that those other houses are not part of this case, even though Mr. Margolin told the court he was seeking to avoid “trouble” on them.

During all this time, and to this day, it appears Mr. Margolin primarily lived in a $2-million house on an 11-acre lot in King City, Ont.

These $24,000 GST rebates seem like small potatoes for the government, but once proved, they become the thin edge of the wedge to pry open and reassess the tax status of those flipped properties.

Most homeowners are aware that if they sell a newly purchased primary residence within one year they might be subject to capital gains taxes on 50 per cent of any profit they make on the sale. But if the CRA finds that the owner to be a habitual flipper, who doesn’t live in the homes and that they are bought and sold as an occupation, they will assess those proceeds as business income and apply a tax rate to 100 per cent of the profits on any property. Not to mention, if tax filings are incorrect, the government can assign penalties – with interest compounded monthly – that back-date to the time of the original incorrect filing.

That’s why Mr. Kutyan is seeing a lot more home flippers coming to him for legal advice and representation.

“We’ve been successful for some of these flippers to somehow at least get the penalties dropped and at least get a capital gains treatment,” he says. His advice for flippers is to plan ahead and budget to pay your taxes. “What’s that saying? ‘Pigs get fat and hogs get slaughtered?’”

For more information, please contact: Gino Pezzani.

Sources

Commercial Leading Indicator Points to Slower Activity on the Horizon

Vancouver, BC – June, 2018. The BCREA Commercial Leading Indicator (CLI) declined for the first time in three years, falling 1.5 points in the first quarter of 2018 to an index level of 134.2. That decrease represents a 1.1 per cent dip over the fourth quarter of 2017. The index is still 3.4 per cent higher than this time one year ago.

“The BC economy appears to be slowing following four years of remarkable growth,” says BCREA Deputy Chief Economist Brendon Ogmundson. “That slowdown likely means a slight drop-off in commercial real estate activity on the horizon.”

The underlying CLI trend, which smooths often noisy economic data, remains positive, reflecting several quarters of strong economic activity and employment growth. A still moderately rising trend signals continued, albeit slower, growth in commercial real estate activity.

To view the full BCREA Commercial Leading Indicator index, click here.

For more information, please contact:  Gino Pezanni.

Do You Know The Costs of Selling Your Home

If you’ve decided to sell your home, it’s important you understand the costs involved.

Here’s an overview.

REALTORS® fees

You and your REALTOR® will agree to this beforehand. There is no set fee or commission rate in the real estate profession. A fees or commission depends on the services your REALTOR® provides, which can vary significantly depending on your needs as a client or the business model used by the REALTOR®.

When is a commission or fee payable?

The Standard Multiple Listing Contract states the fee or commission is payable on the earlier of the following:

  • completion date under the Contract of Purchase and Sale; or
  • the actual date that the sale completes.

Contractors

Home owners typically want to spruce up their home to get it ready for sale. This can involve hiring landscapers, home stagers and even Feng Shui experts.

Home inspection fee

A seller may want to hire a home inspector to report on the condition of the home, including structural and moisture problems, and the electrical, plumbing, roofing and insulation. The fee ranges from $500 – $900 depending on the size of the home and the complexity of the inspection. Some inspectors also charge an additional fee for an older home or a home with secondary suite, a crawlspace or a laneway home.

Goods and Services Tax (GST)

The GST applies to REALTOR® fees, and the fees of various contractors and home inspectors.

Adjustments (see details in the contract of purchase and sale)

  • Property taxes – depending on the Contract of Purchase and Sale, you may be required to reimburse the buyer for prepaid property taxes if all parties agree to extend the time you remain in the home.
  • Rent and security deposits: if there is a secondary suite or a laneway home rental and the tenancy continues, you will have to transfer the security deposit with accrued interest to the buyer because the buyer is responsible for reimbursement when the tenant leaves.

Legal or Notary Public fees

Buyers typically hire a lawyer or Notary Public to assist with drafting documents and ensuring the title of the home is properly transferred.

Final utility payments

Sellers are responsible for utility payments until the date of possession,

Moving fees

Moving fees vary depending on the distance moved and whether professional movers do all of the packing. Rates vary.

Costs of clearing the property title

  • Discharge fees charged by encumbrance holders; and
  • Pre-payment penalties.

If you have questions about selling costs, contact Gino Pezanni.

How to defer your property taxes

Property taxes are due early in July. If you’re a property owner unable to pay your property taxes on your principal residence, you may be eligible for the BC Property Tax Deferment Program.

This is a low-interest loan program that lets qualifying property owners defer part, or all, of their property taxes on their principal residence.

There are two programs

1.  Regular deferment for property owners age 55 and older, surviving spouses, or persons with a disability.

2.  Families with children deferment program.

Visit the BC Ministry of Finance Defer Your Taxes website for details.

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Stats Centre Reports May 2018 for Housing in Great Vancouver

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Canadian Employment – June, 2018

Canadian employment declined by 7,500 jobs on a monthly basis in May, but was up 1.3 per cent compared to 1 year ago. The national unemployment rate remained unchanged for a second consecutive month at 5.8 per cent while total hours worked across the economy grew by 2 per cent.

In BC, employment fell by 12,000 jobs. For the first time since May 2015, employment in BC has recorded virtually zero growth on a year-over-year basis. Despite the loss of jobs, the provincial unemployment rate moved 0.2 points lower in May to 4.8 per cent due to a decline in the overall number of people actively searching for work.

For more information, please contact:  Gino Pezzani.

Work-Life Balance or Integration

Recently, Amazon CEO Jeff Bezos spoke to a group of Amazon interns. Rather than offering sage advice about seeking balance between work and life, he encouraged them to look at work and life as an integrated whole, or a circle.

Balance, he said, assumes there’s a trade-off between work and life, a kind of either-or relationship. But in reality, work and life are integrated. Bezos said he strives to be happy at work, because that makes him happier at home, and visa versa.

It may just be a matter of semantics, but the point seems to be this: Work-life balance means separating the two, while a work-life circle means mixing the two.

It’s an admirable idea, but what about people who are happy to have a job, but don’t necessarily love their job? They might want balance without integration, keeping their work and home life separate.

Perhaps Bezos is saying to his interns that he hopes they’ll love their work so much that they’ll want to integrate it with their lives. That is a wonderful goal for anyone!

What about you and your work? Do you have the kind of work that invites integration with your home life? Or do you have the kind of work you like to keep completely away from your home life?

Please feel comfortable sharing your thoughts with Gino Pezzani.

Think that Former Grow-Op is a Deal? Think Again.

Whenever I get a call from a Real Estate Agent or client asking me about obtaining mortgage financing for a former grow-op the first thought that comes to my head is, “Why would anyone want to buy a former grow-op?”. This blog post was written not only to explain the process of obtaining a mortgage for a former grow-op, but also to present some opinions on why you shouldn’t.

How will I know the property I’m buying is a former grow-op?

In British Columbia, the property disclosure and/or MLS® listing will indicate the property has been a former grow-op. Not all provinces in Canada require a property disclosure. Use a Real Estate Agent who can research the property and help find out if it was a former grow-op.

Where can I get a mortgage for a former grow-op?

The truth is, not very many places. This is part of the reason I always encourage clients to avoid buying a former grow-op.

Over the past few years the majority of lenders in Canada no longer finance former grow-ops. There’s a good chance that if you walk into your local bank branch they’ll turn you away. There is only a handful of lenders left that will even consider lending on a former grow-op and for the most part are made up of local Credit Unions.

Since there are fewer mortgage financing options for a former grow-op, be prepared to potentially pay higher rates at origination and renewal. Make sure you thoroughly review the terms & conditions of the mortgage and make sure they fit with your current and long-term goals for the property.

While you might be getting a “deal” on the purchase price of a former grow-op, you may find it ends up costing you more in the long run since you are pigeon-holed into one lender.

When will a lender loan on a former grow-op?

Lenders will only provide financing to a former grow-op if it has been fully remediated. In British Columbia whenever a property disclosure and/or MLS® listing indicates that a home has been declared a grow-op, lenders will require a satisfactory Phase 1 Environmental Assessment and a re-issued occupancy permit by the applicable municipality.

If you are thinking of purchasing a former grow-op, the listing Real Estate Agent should have both on hand. Ask to see them. Without both a satisfactory Phase 1 Environmental Assessment and occupancy permit in place you will not get a mortgage.

How does buying a former grow-op affect value?

In this video Calgary Real Estate Agent Kelley Skar explains how purchasing a former grow-op will affect value of your home should you decide to sell. Since former grow-ops were once a hazard to the surrounding area they can contribute to a decline of the market value of the property.
For more information, please contact: Gino Pezzani.

Canadian Building Permits – June, 2018

The total value of Canadian building permits declined 4.6 per cent on a monthly basis in April, with all classes of permits declining with the exception of commercial buildings. Year-over-year, the value of permits was up 6.5 per cent.

The largest declines in permitting activity were posted in BC, which saw the total value of permits fall 22.6 per cent in April after posting a record high in March. Year-over-year, total permits values were down only 1.9 per cent at $1.24 billion. Non-residential permits were down 31.8 per cent on a monthly basis and were 28 per cent lower year-over-year. Residential permits fell 19.6 per cent on a monthly basis but were 10.1 per cent higher year-over-year.

Construction intentions in April were down in three of BC’s four census metropolitan areas (CMA):
• Permits in the Abbotsford-Mission CMA fell 26.7 per cent on a monthly basis to $23.8 million. Year-over-year, permit values were down more than half.
• In the Victoria CMA, total construction intentions increased 16.4 per cent to $109.1 million , a 5.6 per cent rise over this time lats year.
• In the Kelowna CMA, permits tumbled 30.6 per cent monthly basis, and were down 37.7 per cent year-over-year to $60 million.
• The Vancouver CMA recorded permit activity valued at $755.9 million, falling 27.3 per cent from the over $1 billion in total permits registered in March. Year-over-year, permits were up 11.9 per cent.

For more information, please contact: Gino Pezzani.