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Questionable tactics encourage B.C. home buyers to avoid taxes Add to ...

Practices open door to lost GST and capital gains revenue on multimillion-dollar purchases in Vancouver

This house in the suburb of Burnaby was built in 2015 and sold for $1.65-million in September. The MLS listing said the house was brand new and vacant.

Some real estate listings in British Columbia are marketing newly built, potentially vacant properties as personal residences, a deceptive tactic that can encourage buyers to avoid paying the GST and enable sellers to avoid declaring capital gains on multimillion-dollar transactions.

The phenomenon, observed in Vancouver’s high-end housing market, raises the prospect of significant lost revenues through federal tax evasion in a sector already identified by the Canada Revenue Agency as high risk.

As part of an ongoing investigation into the forces that drive Vancouver’s expensive housing market, The Globe and Mail examined hundreds of property listings and marketing materials in the Lower Mainland for evidence of questionable claims by agents.

While there is no way to quantify the scope of the phenomenon, the data suggest various forms and degrees of deception are common. Some have potential tax implications, while others raise ethical questions about a profession that has come under heightened scrutiny from the province and the industry regulator.

With the average price of a single-family detached home in Vancouver at $2.5-million, the potential tax savings for buyers and sellers is significant. A newly built house at that price would cost the buyer an additional $125,000 in GST, plus capital gains of tens of thousands by a seller who bought and sold the property as a business venture. Many newly built homes are priced well above the average, so for Ottawa, the losses on a single deceptive transaction can be considerable.

Several experienced Vancouver-area agents who spoke with The Globe said they believe the risk of tax evasion is high in the sales of new, multimillion-dollar homes, based on how they see other agents promoting the properties firsthand. The Globe was referred to dozens of recent sales, where brand-new and seemingly vacant homes – some staged with furniture – were being shown to clients as “owner-occupied” – therefore tax-free – when in fact no one appears to have lived in them. In addition, The Globe also found dozens of newly constructed homes currently marketed by agents as GST exempt, an exemption the Real Estate Council of B.C. cautions agents against advertising without the advice of a tax expert.

The Canada Revenue Agency acknowledged this type of tax evasion is a problem in the Vancouver area, where speculation in the housing market has drawn increased scrutiny. The GST is supposed to apply to all sales of new homes, except in rare circumstances.

Red flags

While it is impossible to demonstrate tax evasion through public records, The Globe reviewed and compared MLS listings, title records, occupancy permit dates, corporate records, property histories and new-home warranties for red flags that indicate risk. More than 50 listings had some evidence of misleading information or questionable claims of tax-exemption on properties marketed as new. The Globe then zeroed in on more than a dozen properties that had multiple flags. The properties were all owned by builders or speculators who purchased a house, knocked it down, constructed a new one and then put it up for sale.

“There are no exemptions in the GST/HST legislation that would apply to the sale of the home in this scenario,” the Canada Revenue Agency said in a statement. Buyers must pay tax on the first sale of any new house if it was built as a business venture and then put on the market, the agency said.

Despite being newly built and never sold, the homes in question were classified as owner-occupied on Multiple Listing Service data – an indicator the GST would not apply. In each case, the section in MLS property information that asks whether GST is included was left blank.

Various exemptions for homeowners and builders exist, some with subjective qualities that make them vulnerable to abuse. According to the CRA, a newly built home can be considered tax-exempt if the owner built it for private use and sold it later; or if the owner built with plans to sell, but changed their mind, moved in, and decided to sell after having done so.

There is an additional rule under B.C.’s homeowner-protection legislation that owners must live in a new home for a year before trying to sell, unless they prove they’re facing undue hardship. That provision exists so people who build homes for personal use don’t have to get a new-home warranty, which is a costly and cumbersome process. All of the dozen properties The Globe examined in depth had new-home warranties, suggesting the owners built with the intention to sell.

This house in the suburb of Burnaby was built in 2015 and sold for $1.65-million in September. The MLS listing said the house was brand new and vacant. Rafal Gerszak/For The Globe and Mail

‘You have to be very careful’

One luxury home in Vancouver was completed in January, 2015, and immediately put up for sale, for $6.8-million. The GST at that price would be $344,000. New Coast Realty agent Sandra Li took over the listing from another agent in August and advertised the property for several months as new and tax-exempt – or “new home with NO GST!” in the enthusiastic parlance of real estate marketing. Online photos showed pristine, empty rooms.

It was built by a small-scale developer, who also owns the house.

Last month, The Globe asked Ms. Li why she promoted it as tax free. “The house is new,” she said, “but it is one year old already.”

According to CRA rules, a new unoccupied home that’s never been sold is still subject to GST no matter how long it takes to sell it.

Two days after The Globe contacted Ms. Li, the ads suggesting the property was GST exempt were removed from real estate agents’ websites. On MLS, the house was then listed as new, but with “GST included.” In January, the property sold for $5.25-million.

Vancouver lawyer Ron Usher, who advises notaries on real estate transactions, said that if a buyer purchases a new house, tax free, they could be on the hook if and when the CRA caught on. Even if the buyer was deceived by a seller or agent, the CRA could put a lien on the property.

“The buyer would have to pay. And that’s a serious amount of money,” Mr. Usher said. “You have to be very careful about claims of GST exemption.”

Alternatively, he said, a buyer who has been misled by a listing could be in for a shock at closing if a lawyer or notary determines the transaction is taxable, an eleventh-hour change that could add hundreds of thousands of dollars to the purchase price.

“On every deal, the practice is to have a signed declaration, from the vendor, about the GST status,” he said. “If tax applied, the buyer may have a cause of action against the realtor for misrepresentation.”

Formal complaints about agents misrepresenting the GST are rare, however. A review of recent Real Estate Council of B.C. disciplinary records found just two cases, from 2012 and 2015, in which buyers complained to the regulator that they were misled to believe his purchase was GST exempt.

In the 2015 case, the buyer learned the day before closing that he would have to pay $12,450 in tax on his $250,000 Kelowna-area condominium. None of the paperwork made reference to GST. The council ruled that the agent, Jason Stoesz, should have advised the buyer to seek expert advice on whether he would have to pay the GST, before the deal was made. He was given a reprimand and also fined $2,500.

In a complaint-based regulatory system, however, there is debatable impetus for buyers – who stand to benefit greatly from GST exemption – to complain about their own transactions to the Real Estate Council.

Another house in the Vancouver suburb of Burnaby was built in 2015 and sold for $1.65-million in September, 2015. The MLS listing said the house was new and vacant.

The property even had a new address, which was issued as part of the building permit, with two eights in it – a marketing move meant to attract Chinese buyers, some of whom consider that number lucky and are willing to pay a premium for properties with eights in the address. Agent Parm Grewal of RE/MAX also advertised the home with no GST. The tax owing by the buyer would have been $82,900. According to public documents, the final sale price registered with the province was the same as the advertised price on MLS, an indicator the GST was not included in the sale price. (GST is typically not included in the final purchase price registered with the province when it was paid over and above the sale price.)

It is unclear if the GST was paid in the end. Mr. Grewal did not respond to multiple requests for comment from The Globe.

The CRA said it is auditing cases of possible GST evasion on new-home sales, but declined to give specifics.

“This forms a component of the CRA’s greater approach to compliance,” the agency said. “Over the past year, the CRA has increased its level of effort in investigating real estate cases in the Metro Vancouver area.”

The CRA is also investigating scores of cases of undeclared capital gains, many involving homeowners who evade taxes by wrongfully declaring investment properties as principal residences – a distinction that is extremely difficult for the authorities to police, because of patchwork data and voluntary disclosures, not to mention the vagaries of homeowners’ lives (a couple’s investment property, for example, could arguably become a primary residence in the event of a separation).

According to federal law, the sale of a principal residence is not subject to capital-gains taxation. The seller of a property that is considered a business venture, however, is required to declare capital gains on their income taxes. And in a lucrative housing market like Vancouver’s, those gains can be substantial.

Since April, the CRA said, 41 people have been audited on speculative Vancouver real estate transactions. They’ve been ordered to pay $1-million in extra taxes, plus another $750,000, in 13 cases of gross negligence. In February, the agency told The Globe it was investigating another 128 cases.

The Real Estate Council of B.C. advises its members to refer clients to accountants or lawyers for GST and capital-gains determinations, because agents are not tax experts. “They are responsible for the accuracy of any advice they may provide,” said Maureen Coleman, the regulator’s professional standards adviser.

Ms. Coleman said the council has investigated complaints about licensees misrepresenting how much GST should be paid. However, none of those cases was referred to the CRA.

“We deal only with our own legislation,” she said.

Questionable marketing

With so much activity in the real-estate sector, Lower Mainlanders are inundated with marketing materials from brokerages and agents competing for a piece of the action. It is the familiar sign of a robust market and the result is a barrage of flyers, websites, newspaper and radio ads, billboards and door-knocking blitzes – all encouraging property owners to sell their own house or buy someone else’s.

While the vast majority of marketing techniques are harmless and legitimate efforts to drum up business, many of them contain dubious or misleading claims that raise questions about the integrity of a regulated profession that facilitates hundreds of millions of dollars in transactions per year – some of them involving foreign buyers whose primary exposure to properties is through online marketing information, such as websites.

The Globe and Mail reviewed dozens of marketing materials in the Lower Mainland, primarily websites and print advertisements, and spoke with several people in the industry who identified brokerages and agents with a reputation for questionable claims. The search was illuminating, but by no means exhaustive. In most cases, it was impossible to determine what was human error or an attempt to deceive.

In one typical example, an agent prominently displayed pictures of a palatial $17.8-million home on his personal Chinese-language website. The address listed for the property was on Drummond Drive, on Vancouver’s west side. The Globe visited the address and observed an older, smaller house than the one pictured. On a different website, which featured listings from many agents, the listing showed the same house observed by The Globe. The agent, Wayne Du of Broadway Amex Realty, did not respond to requests for comment, but the misleading listing on his personal site disappeared soon after he was contacted.

A screenshot of a real estate listing ad for a home in the Point Grey neighbourhood in Vancouver, on Drummond Drive.
The home located at the address listed in the ad for a Drummond Drive house. Ben Nelms/For The Globe and Mail

Another advertisement, in a magazine, promised investors they could make a million dollars in a year by buying Vancouver property – a reasonable claim by some metrics. The advertisement, promoting agent Roy Yang from Royal Pacific Realty, featured four addresses with sale prices from 2014 and 2015. According to the ad, each had increased in value by a million dollars or more in a year.

Property sales data showing all transactions on the properties in question, however, suggest both prices and profits were exaggerated by several million dollars. The Globe attempted to ask Mr. Yang about the discrepancies, but he did not respond to requests for comment.

Other marketing techniques are so brazen they border on baffling.

One Richmond property owner described waking up to a for-sale sign spiked into her front lawn. “I thought, maybe this is a mistake. Somebody put a sign on the wrong property,” Came Fong Tham, who is also a real estate agent, told The Globe. “So, I called the New Coast agent and said: ‘Hey, you have a sign on my lawn!’ And she said: ‘Are you interested in selling? I have clients for you.’ She didn’t apologize that this was the wrong address or anything.” The managing broker of New Coast, Josh Rosenberg, told The Globe “this was not intended to slight anyone. … When the owner called the agent, they removed it right away.”

Former Realtor’s assistant Lynn Yang is pictured in Vancouver, British Columbia on January 6, 2016. Ben Nelms/For The Globe and Mail

Lynn Yang, a former sales assistant at New Coast Realty, said she was familiar with the technique: Staff would blitz a neighbourhood with signs overnight to give the impression of activity and stir up interest from potential sellers. She said the end goal of all the advertising and promotion is to list or acquire as many properties as possible, then sell to foreign investors who will pay a premium. “I love to see people who are getting rich, but not this way,” Ms. Yang said.

Another questionable marketing technique involved agents posing as private buyers in advertisements intended to entice homeowners to sell. In Vancouver, where speculation has led to a backlash, some homeowners are reluctant to sell to investors and agents, and will often hold out for a buyer who is more likely to make the house a home.

Examples of these “average buyer” advertisements abound, in online classifieds throughout the Vancouver area. “We’ve sold our house so looking for an older house/lot in Vancouver west. Our price range is from 2.5 to 3 mil; depending on the size and the area,” said one recent ad on Craigslist, the classified website.

The phone number in the advertisement belonged to a real-estate agent and was found on several other websites advertising agents.

The Real Estate Council of B.C. said its members routinely complain about inaccuracies in competitors’ ads, but agents are rarely disciplined. Ms. Coleman said the council can deal with these types of complaints quickly: “By picking up the phone and saying, ‘Take it down – and advise us when you have taken it down.’” She said it’s frustrating for the self-governing council when people see possible misconduct by agents, but don’t file complaints.

“We would appreciate knowing,” Ms. Coleman said, “so we can take matters up with our licensees.”


Editor's note: An earlier version of this story did not include the fact that Mr. Stoesz was also fined.

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