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Paper flips, when a condo buyer resells a unit before it is completed, are private and unregulated.

Fred Lum/The Globe and Mail

Every day, condominium developers in the country's hottest markets turn to the internet to track down an unusual breed of competitors: their own customers trying to flip preconstruction units without permission.

Builders in Toronto and Vancouver say their staff are constantly on guard for unauthorized ads or pre-sale flips in an effort to ensure buyers are following strict rules spelled out in their sales contracts around timing and advertising.

"You don't want to be competing with your own product that you just sold," said Jon Stovell, president and CEO of Reliance Properties in Vancouver.

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For many buyers, the ability to offload condo contracts before buildings are finished – known as selling on assignment or paper flipping – provides a welcome escape clause if life circumstances change during the several years between purchase and occupancy. For real estate speculators betting on soaring prices, paper flips can be lucrative investments. And for developers, assignments are often a source of headaches but a practice many say they feel compelled to permit for competitive reasons.

But unlike the resale market, preconstruction condo sales and paper flips are a private, unregulated corner of the industry, with no public registries that track transactions or rules requiring developers to report assignments to any government body. Builders presell the vast majority of units in their projects to obtain bank financing that allows them to start construction.

However, in the wake of recent news about a Canada Revenue Agency crackdown on tax evasion in condo assignments, the presales sector is facing renewed calls for mandatory tracking and disclosure. Preconstruction condo flips – which have been blamed for pushing up prices and adding volatility to the country's two largest housing markets – are also, in some cases, vehicles for money laundering and other shady activity.

"This idea that you would have this sphere where sales were being made without any official record, that's highly problematic," said Josh Gordon, a professor at Simon Fraser University in British Columbia who researches the Vancouver and Toronto housing markets.

"In terms of being able to track transactions in a field like this where you know that it's subject to these types of problems, I don't see why, as a government, you would want to allow that to happen."

After The Globe reported on the CRA blitz, British Columbia and Ontario said they are exploring a range of options with Ottawa to track preconstruction condo flips. B.C. Finance Minister Carole James said registries are part of the discussions, while her Ontario counterpart, Charles Sousa, said he supports disclosure but casts doubt on the viability of registries because current systems only capture ownership at closing.

Unlike the stock market, buying preconstruction condos requires deposits of only about 20 per cent, while allowing investors to speculate on price gains for units' entire values between the initial purchase and the date of a flip. However, any profits from selling presale contracts must be reported on income-tax returns and are generally fully taxable.

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Developers in Toronto and Vancouver estimate that between 5 per cent and 10 per cent of presale condos are flipped before buildings are completed. In the Greater Toronto Area alone, more than 26,000 new condo units were sold in the first nine months of 2017, with forecasts that this will be a record year. Despite recent slumps in housing sales after the introduction of foreign-buyers taxes, both cities' overall condo markets are booming.

There is no official data on price gains for presale condos sold on assignment. But developments completed this year in the Toronto area, for example, have appreciated by an average of 45 per cent over the approximately five years since presales were launched, from about $575 to $835 a square foot, according to Urbanation, a real estate consulting firm. Values are also skyrocketing in Vancouver, with average prices jumping between 60 per cent and 80 per cent from presale to resale in some recent projects.

Paper flips became more common in Toronto and Vancouver as markets for new condos exploded in recent decades. For home buyers making commitments about their housing needs several years into the future, assignment clauses are important factors in many purchase decisions.

"It's something that's offered, I think, almost universally so it's more of a competitive thing. Consumers know of them and they ask about them," said Jim Ritchie, executive vice-president of sales and marketing at Tridel, a major GTA developer. "It does give the purchaser a little bit of flexibility."

However, builders say assignment sales are often time-consuming, laborious transactions that can add risk to their projects by increasing the chances of sales not closing, in some cases because buyers of flipped contracts overpay. Developers generally require customers to obtain permission to assign and allow such transactions only when projects are virtually sold out so that they aren't competing with paper flippers as they sell their own leftover units.

The practice also requires constant policing by staff to ensure customers are representing projects accurately and following rigid conditions laid out in original sales contracts, including around advertising, builders say. Some ban assignment ads on the industry's Multiple Listings Service, social media or websites such as Kijiji and Craigslist.

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The industry's strict rules make finding buyers for presale condo contracts challenging. "It's networking, that's about it. That and smoke signals. That really makes it difficult to sell," said Dennis Paradis, a realtor in York Region, who specializes in presale condo assignments. To sweeten deals, flips are usually sold at slight discounts compared to current unit valuations.

Mr. Paradis said many people trying to flip contracts are desperate because of changed life circumstances, such as larger families, divorce or a need to relocate, and are not aware of tax rules. "Certainly the tax implications are not well understood," he said. "I don't think that this is explained to many people."

For Jim Barker, finding a buyer for his presale contract is not about making money but rather part of the fallout of getting fired as general manager of the Toronto Argonauts in January. He's now facing a possible move to the United States and won't need the one-bedroom unit near Yonge Street and Eglinton Avenue.

"I'm not trying to make a bunch of money off of this," said the 61-year-old, adding he's aware he will have to pay income tax on any profits. "I'm trying to just get my money back out of it so that I can use it to go get something wherever I'm going to be."

Many developers charge fees ranging from a few hundred to thousands of dollars to process assignments. Reliance Properties and the Jim Pattison Group recently increased the cost for assignments in their luxury-condo building in Vancouver to 25 per cent of the appreciation between the original purchase price and the negotiated price of the flip, rather than the initial fee of 1 per cent of the purchase price. In the two years since presales began in the 53-storey tower, prices have skyrocketed.

"We were seeking to dampen the amount of assignments occurring. We don't consider them to be particularly beneficial to the project," Mr. Stovell said. "We want to allow people still that opportunity to assign but we're sort of trying to remove a bit of the impetus to just do it without a real need."

Other builders ban presale flips entirely. Toronto developer and real estate broker Brad Lamb doesn't allow them because of the increased risk and drag on prices for unsold units. "It hurts you as a developer to allow assignments," he said.

Despite this, a few customers still try to clandestinely find buyers for presale flips in his projects by placing ads online missing key details, such as the building's address or name. His staff constantly scours a host of websites for telltale photos and features and calls sellers posing as potential buyers to confirm details. When they find rogue ads, Mr. Lamb sends cease-and-desist letters and threatens to seize customers' deposits and take their units back if such postings aren't pulled.

Faced with persistent public anger over high housing costs and suspicion about the role of foreign buyers, Vancouver City Council recently passed a motion to give local residents first dibs on new presale properties, a move the development industry dismissed as poorly conceived and unlikely to solve the city's problems. The move comes more than a year after the B.C. government imposed a 15-per-cent tax on purchases by foreign buyers in metro Vancouver. Ontario followed suit with a similar tax on sales for the Toronto region in April.

As real estate prices in both cities climbed beyond the reach of many in the past couple of years, questions have been raised over preferential access to preconstruction condos granted to industry insiders, whose clients – including foreign investors – are able to buy the most desirable and affordable units in popular developments before the public can even enter showrooms.

"There is a sense that in the real estate world there are kind of favoured individuals and groups that developers sell to and in the context of markets that are rising rapidly in terms of price, that creates the scope for a lot of profit making. And if some people and the general public in a way is systematically excluded from that, then there is going to be resentment because you essentially have kind of a property scalping dynamic," Prof. Gordon said.

For non-Canadian investors, preconstruction condo flips offer a curious loophole. International residents who assign contracts do not have to pay foreign-buyers taxes in Vancouver or Toronto because the levies are collected when projects are finished. Offshore investors are required to pay taxes on gains but audit recoveries are difficult to pursue outside Canada. "It's going to be very hard to track down that money," Prof. Gordon said.

In its wide-ranging crackdown on tax evasion, the CRA is targeting preconstruction condo flips in Toronto and Vancouver. But in order to conduct audits, the agency was forced to go to court to obtain judicial orders requiring developers to provide information about transactions, the only route available.

Asked how the agency chooses which projects to focus on, spokesman Paul Murphy said in an e-mail: "The Canada Revenue Agency reviews all real estate developer transactions that have been identified as being at a high risk of tax non-compliance. Risk factors in this sector may include, among others, the size of a development or the number of projects overseen by a developer." He said the CRA doesn't consider builders to be breaking tax rules.

The CRA obtained court orders for 69 condo developments in the Toronto region last year and found a total of 2,810 flips. Approximately 100 of those transactions have been targeted for audits, 15 of which have been completed. Of those, five cases resulted in reassessments that found a total of about $70,000 in unpaid income taxes. The agency also received judicial orders for three condo projects in the Vancouver region this summer, and has identified 50 assignment sales. Staff are still analyzing the data.

For its part, the real estate development industry says it is not against providing records to the CRA but maintains that doing so without court orders would breach current privacy provisions. Many developers also say they would not oppose new rules requiring them to report presale assignments, saying people should pay their fair share of taxes.

"I don't see the downside of it," Mr. Ritchie said. "If that is still available to a consumer, then so be it but they should understand the rules more clearly and, if it's regulated, I guess they would."

However, many have concerns about what form such disclosures could take. Some developers strongly oppose public registries for condo presales and assignments, noting they are private agreements between developers and home buyers to purchase future units.

"Are we going to publish all private contracts between private parties? You know, if you buy a car, if you invest in stocks, we're going to put a public registry of what stocks you own and so on? I don't really understand why that would be necessary," Mr. Stovell said. "It's almost like trying to out people just for doing an assignment, even if it's legal and they're paying the tax on it. … I'm a little suspicious of the motivation."

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