New real estate tax enforcement measures still lack teeth

Tax evasion common in principal residence declarations, says international tax accountant Steven Flynn

On Monday, the provincial government amended its property transfer tax form to require sellers disclose their residency status for tax purposes, in writing. Both the Canada Revenue Agency and B.C. Ministry of Finance touted the move as a step to improving tax compliance on capital gains in real estate, which has become a widespread concern in professional legal and accounting circles in Metro Vancouver.

Capital gains tax evasion by non-residents is seen as one of several significant factors that make Metro Vancouver real estate an attractive bargain for foreign investors, thus separating local incomes from housing costs.

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However, without an army of CRA auditors, the steps taken by the Ministry — under the new NDP government, which promised to address house flipping and speculation — remain largely unenforceable according to experts, including Richmond-based international tax accountant Steven Flynn, of W.L. Dueck and Co. LLP.

The problem persists that the new form remains an honour system. 

When someone sells a residential property that is not one’s principal residence, one must pay taxes on the profits (increased equity), much like a stock. Furthermore the buyer is expected withhold money from the seller until the CRA determines monies owed. Prior to Monday, the seller simply had to declare to the buyer (who is responsible for all taxes owing) that they were a resident for tax purposes under the Income Tax Act. Now, the form requires checking a box.

It does not, noted Flynn, require any substantial documentation from the seller.

For information “to have any relevance to Canada Revenue, it has to have a connection to that taxpayer’s file and that’s either your social insurance number (SIN) or something called an individual taxpayer number. If you’re not eligible to work in Canada you generally can’t get these numbers, but you can still buy property. 

“You need some nine-digit identifying number. Otherwise, my concern is, what is Canada Revenue going to do with this information?” asked Flynn.

The United States has such a system, noted Flynn. There, a seller’s information can be immediately cross-examined with annual income tax filings and other property transactions.

Neither the Ministry nor CRA explained why a seller’s tax information isn’t required on the form (which is shared to CRA).  

“The changes on this version of the return are intended to assist the CRA with auditing and enforcing income tax laws,” stated a Ministry spokesperson. 

The News asked Flynn if tax evasion by foreign investors is as much a problem as has been suggested by other professionals in various media reports.

“Yup, absolutely it is.

“If the only thing you have to do is sign a piece of paper that certifies something; if there’s no repercussions for it then how honest does one have to be? I’m sitting there, I have no connection to Canada other than I sold property, and I’m in some other country. I know if I just sign this paper, ya I know, I committed an act of fraud, but they (CRA) have to come get me.

“We all know it happens,” said Flynn.

The CRA told the News that asking the seller to tick a box is a step toward ensuring the buyer withholds tax and receives a certificate of compliance.

But, noted Flynn, “the certificate of compliance process doesn’t help CRA enforce tax law against dishonest sellers who lie about being a resident of Canada.”

Richmond realtor and former tax attorney Arnold Shuchat has also weighed in.

Shuchat concurs that tax compliance “should all be hammered out at the time of transaction.

“Enter the data, the transaction number, boom, the guy’s a resident, done. 

“The CRA doesn’t have enough (employees) to audit, let alone find a guy in a different country,” Shuchat told the News.

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