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CRA investigates pre-sale condo flips

Lack of data puts final buyer at risk

Canada Revenue Agency is dipping its feet into the unclear world of pre-construction condo sales and assignments.

Prior to a development being constructed, speculative buyers may pay a deposit for the right to buy a unit upon completion at present-day pricing. If the market price rises in the intervening years of construction, the buyer could sell (assign) the pre-sale contract (the right to buy) and reap a large profit. This is perfectly legal as long as the transaction is recorded and the appropriate capital gains or business taxes are paid. 

However, CRA appears concerned that some of these transactions are being kept hidden and taxes are being withheld from the government.

If that’s the case, it could pose a financial risk to local buyers seeking to purchase a turn-key unit (meaning a unit to live in as opposed to speculate on).

Because, while pre-sale contracts can be flipped numerous times, only the final sale is registered in Canada. This means a local buyer could be on the hook for the taxes owing, if they were not paid here, or from overseas.

“Where a certificate of compliance is not received by the purchaser from the vendor, the purchaser will be held liable” for the taxes, said CRA spokesperson Patrick Samson.

The taxman is presently investigating tax compliance on “pre-sales” at three Vancouver development sites and 44 in the Greater Toronto Area. While there is no investigation in Richmond, numerous condo and townhouse developments have been listed online locally and in Asia, where the financing arrangement appears to be particularly popular.

Richmond could be at the forefront of such concerns.

“I’ve seen advertisements in Hong Kong promoting Richmond projects,” said Richmond born-and-raised realtor and real estate pundit Steve Saretsky.

According to University of B.C. real estate economist Tom Davidoff, pre-sales have been a popular means for developers to finance their projects.

“The banks are happier to lend because there’s more collateral” in the project, explained Davidoff.

Concord
Concord Gardens pre-sold in Hong Kong

While the transactions are taxable, the CRA has found unstated reasons to investigate compliance.

“In general, people who buy and resell homes, which includes pre-sale contracts, in a short period for a profit may be engaged in property flipping,” which is “considered to be fully taxable,” said Samson.

He added that the same rules apply for pre-construction sales and flips made in a Shanghai or Hong Kong office (where Richmond condos have been listed by developers, or third-party agents who buy and sell units in bulk, according to Saretsky).

“The Canadian Income Tax Act requires non-residents who dispose of taxable Canadian property to notify the CRA . . . irrespective of where the transaction takes place,” explained Samson.

Davidoff said the fact there is no public record keeping of pre-sales and subsequent flips means final buyers not only have limited information to the market but are also put at risk.

Saretsky calls the system “murky,” pointing to the fact the CRA has had to take developers to court to get lists of pre-sale contracts.

Davidoff said developers have been reluctant to provide details, from what is effectively an honour system, because “A, there’s a lack of reporting infrastructure and B, there’s a lack of incentive.”

Saretsky said, as a result of heavy pre-sale contract buying and flipping (all of which should be taxed), prices have jumped in the past year, as developers are now asking more money for pre-sales. Now, pre-sales are a bad bet, he said.

Davidoff said while he doesn’t know the extent to which condos are being pre-sold overseas he said it makes sense that they are because “that’s where the money is” and pre-sale contracts have no 15 per cent foreign buyers’ tax. 

Saretsky said it could very well be Canadians purchasing the pre-sales in Hong Kong, which nevertheless adds to unaffordability for local income earners.

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