CRA probes presale condo flips in Toronto Within Property crackdown

Federal government auditors are inspecting 2,800 preconstruction condo flips from the Toronto area as part of a crackdown on tax evasion in the real estate market.

The Canada Revenue Agency obtained court orders last year forcing 44 condominium developers to hand over information about individuals who offered their components before projects were finished, a practice called paper flipping or selling on mission. The bureau is still analyzing the information it received.

“In the Toronto area specifically, audit work has improved substantially on what are known as ‘assignment earnings,'” Paul Murphy, a CRA spokesman, said in an email. “The gains from flipping property are usually thought of as fully taxable as business income{}”

Along with its Toronto blitz, the CRA has obtained judicial orders requiring Vancouver condominium developers to offer information regarding buyers that flipped units. Speculation from the presale condo market has been blamed for helping to push up home prices to record heights in both towns in the past few decades.

Presale condo units can be purchased with deposits of just about 20 percent over time with the balance not required until a construction is completed. Nevertheless, selling units on assignment allows for speculation on cost growth for the unit’s whole value between the first purchase date and the reverse.

In Ontario and British Columbia, there are no public registries that track mission sales, meaning there isn’t any way to know how widespread — and rewarding — the clinic is. However, the CRA’s crackdown is a sign that it’s identified newspaper flipping as a substantial source of potential tax cheating.

As GTA property prices soared earlier this year, Ontario Finance Minister Charles Sousa blamed property speculators for including uncertainty and danger to the current market, going so far as to call them “property scalpers.”

While the region’s property market has since slumped, the condominium industry remains on track to be at or near a record sales year. The provincial government’s 16-point package of policy changes designed to cool the marketplace, unveiled in April, included a vow to “understand and handle practices which might be contributing to tax avoidance and excessive speculation in the housing market like ‘paper flipping{}'”

Contracts for preconstruction condo purchases and mission sales are held by programmers rather than being registered with property registries, meaning there’s no publicly accessible means to review such records in front of a construction is completed. Developers typically charge an administration fee for mission sales and some limit the clinic. Unit ownership information is registered once jobs are shut.

The CRA obtains records about mission sales through court orders, called “unnamed men requirements,” that induce condominium developers to give documents and information about their clients. The agency filed 44 such programs between July and September of 2016 and all of the companies complied, Mr. Murphy said, adding there’s no assumption that programmers have participated in any wrongdoing.

As a consequence of those efforts, that are part of the CRA’s efforts to fight the underground economy, the agency identified 2,810 preconstruction condo moves in 69 jobs in the Toronto area and is combing through the information to determine tax compliance.

“The CRA has begun and proceeds to examine this information to find out whether audits have to be completed,” Mr. Murphy said. He didn’t respond to queries regarding the dollar value of taxes which weren’t paid and how much money was recovered.

Asked if the CRA would like that the Ontario government to require public documentation of presales, Mr. Murphy explained: “The Agency is working with the states to determine availability or enhance access to property data which will help to determine potential non-compliance.”

The real estate development industry generally supports the CRA’s practice of getting assignment sales information provided that such efforts are backed by court orders, according to the Canadian Home Builders’ Association.

“We really do not have a problem with that. Evidently, someone who is evading taxes must be held to account,” said David Foster, director of communications at the CHBA.

Condo owners that sell preconstruction units on mission should report the gains on their tax returns and generally have to pay taxes on 100 percent of the additional income. People who run afoul of those principles by failing to announce such trades or who pay taxes on just part of the profits can expect to be audited and to be made to pay taxes owing and a punishment of 50 percent in addition to interest and might face criminal charges, ” said William Howse, a Toronto tax attorney.

“They are making a profit on selling a piece of paper and the CRA place, and I agree with it entirely, is you are going to pay tax on every penny,” he said.

Mr. Howse said CRA auditors compare condominium developers’ lists of individuals who sign sales contracts against land-registry data once buildings are completed. In doing this, they could identify and target previous owners of components which were flipped, combing through previous tax returns to determine compliance.

“It is low-hanging fruit to be captured by the CRA,” he said. “Anyone who assigns an offer, sells an offer for a gain will be captured by the CRA. One hundred percent guaranteed that the CRA will have the ability to recognize these earnings and the amount of the gain. … For auditors, can you imagine how easy it is?”

Courtesy: The Globe And Mail

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