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B.C. Finance Minister Carole James, centre, says her government is exploring a range of options with the CRA to combat tax evasion.CHAD HIPOLITO/The Canadian Press

Ontario and British Columbia are exploring ways to track preconstruction condo flips in the wake of a federal crackdown on real estate tax cheating.

The Canada Revenue Agency is scrutinizing thousands of transactions in the Toronto and Vancouver areas to determine whether required taxes were paid by people who sold their preconstruction condominium units before buildings were completed, a practice known as paper flipping or selling on assignment.

CRA probes presale condo flips in Toronto as part of real estate crackdown

Read more: How a murky system of preferential access skews new condo sales

Unlike the resale housing market, there are no publicly accessible registries that track presale condo purchases and assignment sales in Ontario and B.C., meaning there is no way to know how common or profitable the practice is – or how much tax may be owing. When buildings are completed, only the final purchaser is recorded on public land registries.

Flipping preconstruction condos allows investors to speculate on price gains for a unit's entire value until it is flipped, while only paying deposits of about 20 per cent.

B.C. Finance Minister Carole James said her government is exploring a range of options – including registries – in talks with the CRA to combat tax evasion.

"There have been all kinds of ideas created – registries, all those kinds of things," she said in an interview on Tuesday. "We're open to looking at all the options. People should be paying their taxes."

Ontario Finance Minister Charles Sousa said he supports disclosure of preconstruction condo flips to ensure investors are paying their fair share of taxes.

"The system is susceptible to tax avoidance so we're taking steps to close those opportunities," he said in an interview on Tuesday. "Just like grocers need to disclose all their sales, in this case developers are disclosing the sale but that doesn't happen until the very end of the transaction. In between, there is activity and it should be disclosed."

However, Mr. Sousa said he's "not sure how you provide a registry system" because current registries capture only final ownership.

Mr. Sousa took pains to make clear that there is nothing untoward about assignment sales, placing them in a wider context of real estate flipping.

"Paper flipping is not illegal. The practice exists," he said. "We want to encourage speculators to get involved and buy properties, renovate them and fix them. That's encouraged."

Mr. Sousa's comments struck a different tone from earlier this year when he blamed real estate speculators for adding uncertainty and risk to the Greater Toronto Area's soaring housing market, calling them "property scalpers." In April, the Ontario government unveiled several policy changes intended to cool real estate prices, including a promise to "understand and tackle practices that may be contributing to tax avoidance and excessive speculation in the housing market such as 'paper flipping.'"

The Ontario government also introduced a 15-per-cent foreign-buyers tax on residential-property purchases in the Greater Golden Horsehoe region modelled after a tax the B.C. government imposed in the Vancouver area last year.

International investors who purchase preconstruction homes are not subject to the tax if they flip the contracts before the projects are completed in Ontario. The Non-Resident Speculation Tax is paid on the closing date, not when a contract is signed.

Asked whether he believes the rules should be changed so foreigners pay the tax when they sign presale contracts, Mr. Sousa said: "No, I think it's very clear that at the moment you take ownership of a home and you're not a resident Canadian and you don't pay taxes here, you will be subject to an additional 15 per cent. During assignment, that isn't susceptible to NRST because that only occurs at the time of title ownership, so I'm not sure it's a tax loophole."

The CRA obtained court orders compelling 44 Toronto-area developers to provide information and documents about their customers in 69 condominium projects last year. As a result, the agency identified 2,810 preconstruction flips. Approximately 100 of those transactions have been targeted for audits, 15 of which have been completed, spokesman Paul Murphy said. Of those, five cases resulted in reassessments that found approximately $70,000 of "understated income taxes owing," he said. Analysis on the remaining files is continuing.

The agency recently obtained similar court orders for Vancouver developers.

The CRA said it is working with provincial governments to improve information sharing to help identify potential tax cheating.

People who flip real estate are required to report profits on their tax returns and generally must pay taxes on 100 per cent of the extra income. Those who break the rules face fines and risk being criminally charged.

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