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A man and woman wait at a bus stop as for sale signs are seen outside houses for sale in Point Grey in Vancouver, B.C., on Sunday October 4, 2015. (DARRYL DYCK/THE GLOBE AND MAIL)
A man and woman wait at a bus stop as for sale signs are seen outside houses for sale in Point Grey in Vancouver, B.C., on Sunday October 4, 2015. (DARRYL DYCK/THE GLOBE AND MAIL)

Real estate

B.C. pledges to close loophole that allows some real estate investors to dodge taxes Add to ...

The B.C. government is pledging to close a loophole that allows some real estate investors to avoid paying the province’s property transfer tax.

The move comes in reaction to a Globe and Mail investigation that found some wealthy foreign investors are buying real estate in Vancouver and putting it in the names of relatives or corporations, which helps the investors avoid taxes.

“Canadians, the vast majority of whom pay the taxes they owe, want to know that everyone is doing the same,” Finance Minister Mike de Jong said in Victoria on Wednesday, when asked about The Globe’s findings.

In B.C., corporations whose sole purpose is to hold properties in trust for an individual can transfer shares in the trust to any new owner without triggering a change in ownership. That means the buyer pays no transfer tax. Ontario has already closed that loophole, and Mr. de Jong said B.C. will look to do the same in the next budget. Mr. de Jong also said the province may consider raising the tax on the most expensive properties and putting the money toward tax relief for low-end buyers.

On the federal level, Canada Revenue Agency insiders and legal experts say the tax regime is too weak to do much about foreign investors fuelling Vancouver’s real estate market by buying and selling expensive houses, while paying little or no income or capital gains taxes.

The Globe investigation found one third of 250 multimillion-dollar Vancouver houses purchased recently in areas popular with Chinese buyers are registered to homemakers, students and corporations – which obscures the real buyers’ identities, and means they can escape the notice of tax authorities.

“Canada has the reputation of being very soft on tax evasion, money laundering and vigorous enforcement of its tax code,” said Sam Hyman, a Vancouver immigration lawyer, adding that he has seen “widespread” tax avoidance by foreign investors.

“Some are taking advantage of loopholes and some are actually evading taxes.”

A review of more than 200 court cases involving divorces and other disputes revealed that some foreign-born owners told the courts and tax authorities their incomes were less than $30,000 – even as they moved millions of dollars into Canada through relatives.

“This permits the Canadian residents – spouses and children and grandchildren – to receive millions of dollars in their hands – as ‘gifts’ from overseas – without anyone in these scenarios paying one cent of income tax in Canada,” Mr. Hyman said.

The court records suggest many breadwinners declare to the CRA that they are non-residents, which means they have to pay income tax only on earnings in Canada, which are low or non-existent.

Some who file Canadian taxes as residents appear to under-report their worldwide income.

If and when their Canadian properties are sold, the actual investor does not have to pay capital gains tax if their daughter, son or spouse claims the home was their primary residence, therefore tax exempt.

After inquiries by The Globe and Mail, the CRA said it has “numerous ongoing investigations” into real estate purchases.

However, the union representing federal tax auditors said the department best suited to do that work has been “gutted.”

The Professional Institute of the Public Service of Canada says 262 auditors were recently moved out of the international section to work on domestic files, a loss of crucial expertise.

“It makes no sense whatsoever to cut these auditors – because you’ve spent years training these people and the issues are extremely complex,” Shannon Bittman, the auditors’ representative with PIPSC, said from Ottawa.

She said if the CRA had the mandate and staff to take them on, these types of investors would be deemed residents and subject to tax on their worldwide income – even though some people have fought the CRA in tax court over this and won.

“It depends on whether or not you own real estate and if your wife and kids are here … that is one of the strongest factors,” she said. “If so, it’s highly likely they would be determined to be a resident of Canada.”

A former federal auditor who spoke on the condition that he not be named, agreed that the CRA is ineffective in this area.

“Most of those auditors are gone. The whole CRA is a joke,” the former auditor said.

He added that Canada’s three-decade-old tax treaty with China is weak and out of date. That makes it impossible to verify income in that country, he said, and Canadian rules also make it difficult for auditors to get at bank records here.

“In the U.S., if you are a tax auditor, you can ask for records from banks. In Canada, we have the ‘bank requirement’ form. The bank has to agree. They won’t turn in their clients.”

The Globe and Mail asked the CRA to respond to criticism that it does not have enough auditors to pursue tax evasion by foreign investors.

“The CRA takes non-compliance seriously,” it replied. “Several measures have been introduced to close tax loopholes, clarify tax rules, reduce aggressive international tax avoidance and improve the integrity of the tax system.”

One example it cited is the new offshore informant program, which pays people for information on international tax cheats.

In addition, the immigration system has holes, legal experts say. One is that foreigners can acquire permanent resident status – including health-care coverage and other benefits – without paying income tax as long as they stay in Canada less than six months per year.

“To give people who are multimillionaires complete access to permanent residency without the responsibilities and obligations to contribute their fair share of taxes is an absolute abomination,” Mr. Hyman said.

People who apply for permanent residency in the United States are required by the Internal Revenue Service to file U.S. taxes.

“The big difference between the U.S. and Canada is when you are a permanent resident in Canada, there is no obligation to file taxes in Canada. And you can be a permanent resident of Canada for immigration purposes forever,” said Richard Kurland, another Vancouver immigration lawyer.

A lesser-known Canadian residency program which is exploding in popularity among Chinese citizens offers a 10-year “temporary resident” visa, which gives people another tax-free avenue into Canada.

Statistics obtained through access to information show 82,636 of those visas were issued to Chinese citizens in 2012. By last year, that had jumped to 337,393. The visas allow people to stay in Canada up to six months of every year for a decade with no strings attached.

A visitor to the United States who stays 180 days per year for more than two years in a row is considered a resident for tax purposes.

All the legal experts and CRA insiders consulted by The Globe felt Canada needs to change its tax laws and the CRA needs more resources to enforce them, so wealthy foreign investors pay their fair share.

“Government inaction is what bothers me the most,” Mr. Hyman said. “This does not pass the fairness test – or the sustainability test – based on the government’s own admission that they have funding shortfalls.”

The Liberal Party responded to questions from The Globe by promising to “direct CRA to immediately begin an analysis and stronger enforcement of tax evasion.” Neither the NDP nor the Conservatives responded by deadline.

With a report from Justine Hunter in Victoria.

Email Kathy Tomlinson at ktomlinson@globeandmail.com

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Follow on Twitter: @KathyTGlobe

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