The North Shore mountains loom over Burnaby, B.C., in January, 2016.Hamid Ebrahimi/iStockPhoto / Getty Images
A prominent Vancouver immigration lawyer and other experts are praising the surprising amount of information that the province has demanded on the declaration form for its new Speculation and Vacancy Tax (SVT).
They say such data, which includes social insurance numbers, will finally enable governments to nab foreign and domestic speculators who are reaping windfalls from property purchases without contributing their fair share of taxes.
Such buyers have scooped up equity gains without reporting the profits, thereby driving up prices and shutting local income earners out of the market. Because many global buyers leave their spouses and children in the Lower Mainland, and earn income outside the country, they are also enjoying the benefits of medical care and schooling without contributing to the system. Until now, income reporting was an honour system, dependent on people telling the truth.
Homeowners have been receiving letters from the province for the last month, requiring them to declare whether they are residing in the homes they own. But to the surprise of many, the declaration didn’t stop there – the form also asks that every owner declare their social insurance number and percentage of income tax reported to Canada Revenue Agency.
Now, with social insurance numbers tied to property ownership, they say it’s a new day.
The collection of that extra income tax information is vital, says lawyer Richard Kurland, who has been outspoken on this issue for years, saying that the double whammy of failure to declare global income by wealthy foreign buyers, coupled with speculative buying practices, has lead to the current affordability crisis.
Mr. Kurland has been to Ottawa to present his ideas on how to overcome the tax evasion that has dumped Vancouver’s housing market on its head.
“It’s not a perfect system, but it’s a game changer,” he says of the SVT. “Locals were paying taxes on capital gains and foreigners were declaring their profit to no one – not Canada, not their home country – so they could afford to keep buying more and more property while the locals could not, because they had to give a piece of the pie in tax. And we were outbid.
“That’s why we had this problem – all because the [previous] government refused to collect the information on who knows what, which crippled enforcement of the Income Tax Act, which let these guys take profit, untaxed, anywhere in the world and they were able to beat out the locals in house auctions again and again.”
If they are a foreign owner or member of a satellite family (a person whose total worldwide income is not reported in Canada), they owe 2 per cent of the property’s value. If they are a Canadian citizen or permanent resident with an empty property, they own 0.5 per cent. There are many exemptions, including a property inhabited by a renter.
The B.C. Ministry of Finance confirmed that it has an agreement with CRA and is in regular contact with the CRA, the Department of Finance and other federal agencies to share speculation tax information, as well as information related to the homeowner grant, “to improve tax enforcement.” In an email, the Ministry said that tax administrators would use the data to conduct audits on those who report levels of income that do not “appear to support their lifestyle.”
As well, “the declaration process is designed in a manner to effectively capture those evading taxes and/or failing to declare income in Canada. It does so by connecting properties to people who own them along with their levels of worldwide income. The collection of worldwide income is a pioneering effort that will make the tax system fairer.”
The Ministry also said that it is “happy to see an openness from the federal government to collaborate,” in order to “boost our efforts to crack down on speculators and tax evasion that has driven up prices in our real estate market.”
Generally, only Canadian residents can claim an exemption, which means they are subject to taxation of any income, including worldwide. Now, every year, automatically, the government will have access to fresh data, to cross-reference with CRA, Mr. Kurland says.
“The key is the capability of attaching a person’s identity to ownership,” he says. “In other words, with data matching, you will know who owns what and whether or not they are a tax resident in Canada. And that is the core of the problem. I don’t think it could have been possible to do without collecting the social insurance number – I was surprised to see it, because normally you would not see that information collected by a municipal authority.
As well, he adds, the new information will help in the battle against money laundering, which was revealed by a provincial report last year as occurring in casinos and real estate.
“That’s the plus,” Mr. Kurland says. “This is an effective tool against money laundering because you know who owns what. Then [government] can go, ‘Okay Mr. Smith, great, you bought and sold three houses for $1-million each. We looked at your income tax returns for 20 years and you have been earning $40,000 a year. Where did the money come from?’
“Now, you can ask the questions.”
Economist Jock Finlayson, long-time executive vice-president and chief policy officer at the Business Council of B.C., who’s sat on many boards, including the Bank of Canada, says the Council generally approves of the tax. He sees it as a tool that could screen out those who have, for example, been pretending to use a house as a principal residence in order to escape paying capital gains tax, even though they are living elsewhere.
“There just wasn’t a lot of enforcement around that,” Mr. Finlayson says. “I think it’s good to step up tax enforcement and compliance generally, and I say that because the vast majority of tax payers comply with the rules, whether households or businesses. To the extent that those who don’t comply get away with it, it means the rest of us have to pay more in tax to fund the same quantum of services. That is the principal I would be guided by.
“In aid of that, it’s appropriate for governments to collect more information. But at some point there will be a backlash if it’s perceived as too intrusive. I’m not saying we are at that point yet –but you have to be mindful of that, or governments do.”
Some groups, including the opposition party, counter that the new tax is too much red tape for some citizens and an invasion of privacy. But a poll by Research Co. showed that the majority of British Columbians support the new tax measures announced as part of last year’s budget, which are seen as crucial to staunching the flow of widespread tax avoidance and evasion.
Engineer Paul Robinson is an immigrant who arrived in Vancouver several years ago under the skilled-worker program, but despite making a good living he cannot afford to buy a new home. He celebrates the new tax.
“Hard-working tax paying residents in B.C. have been subsidizing the lifestyle of tax-evading millionaires,” Mr. Robinson says. “We then must compete with our after-tax income against untaxed offshore money for housing in our own city. It’s not a level playing field.”
Derek Holloway is a recently retired senior assessor for BC Assessment and he would like to see the government target large commercial and industrial properties as well, a sector where foreign money is flowing. But he applauds the collection of new data in housing.
“[Government] can hopefully cross reference with the RCMP and gaming commission people and if [speculators] are buying luxury houses and cars and boats and betting money on the horses at the racetrack and laundering their money, at least they can stop putting it into real estate,” Mr. Holloway says.
“This is the only government that is truly responsible, because previous governments didn’t give a damn. We have a market screaming along, super over heated, values skyrocketing and they were collecting [property transfer tax] on it, they loved it. It was filling the coffers.”
Justin Fung, spokesperson for Housing Action for Local Taxpayers, says the SVT achieves much of what his group had been lobbying for the past few years. He suggests it’s a policy move that should be adapted by other jurisdictions.
“You can’t build a sustainable economy off the back of property transfer taxes that are a one-time windfall for government, so this has some sustainability to it, and it feels like the right mechanism going forward, to make sure our housing market starts to come back to being aligned with our local markets,” Mr. Fung says.
Mr. Kurland said the high-end market for properties in areas such as West Vancouver and the west side of the city had already began to tumble when the new tax measures were announced early last year. With the collection of more data, he sees more unloading of properties.
“With this one – the social insurance number – we are going to see a torrent, but only from people who have something to hide. If you have nothing to hide, there is no reason to sell.”
The new speculation and vacancy tax declaration form is required of every property owner within Metro Vancouver and other urban cores, including Victoria region, Nanaimo and Kelowna.
The ability to cross-reference data could also mean that people who haven’t been declaring income on rental basement suites might suddenly come into CRA’s view. But more broadly, it means more data sharing across international borders.
“The exciting thing, at least in my world, is the ability to then exchange information under other agreements between Canada and other nations around the world, taxation information about who owns what in those other jurisdictions,” Mr. Kurland says.
Ownership outside the country would be of particular interest to the government of China.
“It’s almost a magic mirror. When the new system of the prescribed form came in, the high-end residential property in Vancouver began to tumble, quickly. With the social insurance number, we are going to see a torrent, but only from people who have something to hide. If you have nothing to hide, there is no reason to sell.”