Federal Finance Minister Bill Morneau has said he'll be watching as a parliamentary committee prepares to study how frothy real estate sales in Toronto and Vancouver are affecting the country's financial system, but tax experts say there are already some remedies within easy reach to address the problem.
Since a Globe and Mail investigation revealed possible tax evasion and fraud in Metro Vancouver's housing market, B.C. Finance Minister Mike de Jong has urged his federal counterpart to toughen existing rules.
Experts say there are already several solutions that provincial authorities and the Canada Revenue Agency can implement, many without changing existing federal tax laws, to help curtail the speculative activity detailed by The Globe. The investigation showed how real estate speculator Kenny Gu paid almost nothing in taxes last year, while millions of dollars flowed through his personal and corporate bank accounts.
Documents suggest Mr. Gu is among a network of speculators who flip homes for a profit, then dodge taxes by classifying multiple homes as principal residences – without living in them.
Currently, the CRA requires homeowners who sell a principal residence to designate it as such on a standard form and keep it for their personal records, but they don't have to report the sale with their tax return. That has allowed taxpayers to buy and sell multiple properties without notifying the tax agency.
Owners selling their principal residence in Canada don't have to pay any tax on the sale.
Richard Kurland, a prominent Vancouver-based immigration lawyer, said this issue has become a matter of social justice, noting clients tell him they see this loophole being widely used by others. "When people who do the right thing feel badly because other people are getting away with doing the wrong thing – that's when you have to step in," Mr. Kurland said.
Here is a list of potential solutions experts say could help crack down on that practice:
Tracking real estate transactions and sharing tax residency information:
The contract of every residential property sold in B.C. already has a box the seller ticks to declare whether they reside in Canada for tax purposes, Mr. Kurland noted. That's done so that realtors and lawyers are not liable if their client leaves the country without paying the standard withholding tax of 25 per cent on their profits from the sale.
But that information is not registered with the land title office, he said.
The provincial government could compel each home buyer and seller to disclose their tax status to the Land Title and Survey Authority of B.C. any time the ownership of a residential property changes hands, according to Mr. Kurland.
That office could then pass these details to the CRA, which would allow the federal body to cross-reference individual tax records to weed out those avoiding paying the proper fees on investment residences.
"This is the lowest-hanging fruit possible," he said.
"B.C. refuses to collect the information – without explanation. They are not publicly saying why."
Mr. Kurland said he has been told privately by Liberal MLAs that such a move would contradict their political philosophy that "government should not have the capacity to know who owns what."
B.C.'s acting privacy commissioner Drew McArthur said B.C. could force homebuyers to disclose their tax status – and stay on the right side of the province's privacy law – as long as people are informed that the information is being shared with the CRA.
A spokesman at the B.C. finance ministry said his government began collecting social insurance numbers and citizenship information on all residential property transfers last month as part of its new tax on foreign buyers. It now shares that information with the CRA if the federal agency is conducting audits and reviews of individuals. But Mr. Kurland says that still leaves out the all-important tax status of the party in question.
Report every real estate transaction directly to the CRA
Gary McDonnell, a retired accountant and former partner at KPMG, said the simplest fix regarding the abuse of principal residence claims is for every real estate transaction to be reported directly to the federal tax agency.
"If the taxpayer knows that all property transactions are being reported to CRA, they would be under no illusions of getting away without reporting the sale of a property," Mr. McDonnell said.
Stock brokerage firms have long had to report all stock dispositions to the CRA, including the social insurance number of the account holder, he said. Before the government made that change to the rules, many critics said it was an invasion of privacy, Mr. McDonnell said.
"But they passed the law and it basically became accepted," he said.
Experts acknowledge it could take the CRA years to build the IT capability to receive – and act – on all this information.
Post tax auditors overseas
Much like how Ottawa has prescreened immigrants at airports across the globe for more than two decades, the federal government could send CRA officers to key cities in East Asia and Europe – where information-sharing agreements exist – to liaise with local auditors there. This is an expensive solution, "but the payback will be astronomical, very quickly," he said.
These CRA officers would offer "boots on the ground" to dig for property and tax records held by overseas bureaucracies, some of which are not able to share digital records with ease, he said.
"They've got to step outside the Canadian pond – it's a global problem, it requires a global solution," Mr. Kurland said.
In the 1990s, the CRA sent officers down to Florida to check land-registry data and capture Canadian snowbirds that were avoiding taxes, he said.
Continuing crackdown by the CRA
The CRA has doubled its efforts to catch tax cheats in B.C.'s real estate sector, completing nearly 2,500 audits related to real estate in B.C. and Ontario over the past year. The agency plans to do as many or more in the next year and now has 50 auditors looking into Metro Vancouver real estate transactions, specifically targeting 500 "high-dollar-value" deals from 2015.
Federal figures reviewed by The Globe and confirmed by the tax agency show that auditors discovered $14.3-million in unpaid taxes from 339 individuals and companies last year through increased scrutiny of flips and other real-estate transactions in the region.
But a CRA auditor, who requested anonymity for fear of being fired, told The Globe that the agency is barely scratching the surface of the tax dodging going on and its auditors won't catch many people because they are inexperienced with such files.
In a bulletin this week, the federal agency warned that it will investigate anyone who flips properties, which it defined as anyone who buys and resells a home in a short period of time for a profit.
The CRA said there are three main categories of flippers who could face penalties for not reporting their profits as business income: professional contractors, shadow flippers – those who assign contracts for profit – and people who live in a home briefly so they can claim a principal-residence exemption several times in their lifetime.