The Canadian Government has reported that, since 2015, it has identified over CAD1bn in additional gross taxes from its probe into the real estate sector.
The Canada Revenue Agency (CRA) said it has been working collaboratively with authorities in British Columbia and Ontario to respond to "an increase in tax risk."
This article reviews these federal efforts, and the various tax and enforcement measures being undertaken also in Ontario and British Columbia.
The Canadian tax agency appears to have stepped up its efforts in 2018, having assessed CAD171m more in additional gross taxes related to the real estate than in 2017. Penalties totalled over CAD57m – more than double the value of penalties issued the previous year.
In addition, over the period from April 2015 to March 2019, CRA auditors reviewed over 41,700 files in British Columbia and Ontario and assessed over CAD100m in penalties.
Canadian Finance Minister Bill Morneau made tax non-compliance in the real-estate sector a major focus of his 2019 Budget. Therein, he dedicated funding for the creation of a new Real Estate Task Force, which will initially focus its efforts in the Greater Toronto and Greater Vancouver areas.
It will seek to ensure that:
- taxpayers report all sales of their principal residence on their tax returns;
- any capital gain derived from a real estate sale, where the principal residence tax exemption does not apply, is identified as taxable;
- money made on real estate flipping is reported as income;
- commissions are reported as taxable income; and
- for goods and services tax/harmonised sales tax purposes, builders of new residential properties remit the appropriate amount of tax to the CRA.
It has also provided funding to Statistics Canada to advise on improving data sharing between the federal and provincial governments. This is to inform enforcement efforts. The Financial Transactions and Reports Analysis Centre of Canada, meanwhile, will expand its outreach and examinations in the real estate sector, with a focus on British Columbia, to improve the detection of money laundering activities.
Ontario introduced Canada's first tax on property speculation by non-residents – the non-resident speculation tax (NRST) – from 21 April 2017.
The NRST applies to purchases of residential property in the Greater Golden Horseshoe region, and it affects non-Canadian residents, non-permanent residents, and non-Canadian corporations. The NRST applies to transfers of land that contain at least one and not more than six single-family residences.
An additional property transfer tax is applied at a rate of 15% on residential property transfers to foreign entities in the Greater Vancouver Regional District.
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Thereafter, British Columbia followed suit in creating speculation and vacancy tax, effective retrospectively from 1 January 2018.
The annual tax is payable by owners of residential property in designated regions of the province, who are required to complete an annual declaration.
The rate of tax depends on the owner's tax residency and whether they are a Canadian citizen, permanent resident, or a member of a satellite family (one that receives considerable foreign income that is subject to low or no domestic tax). More than 99% of British Columbians are out of scope.
For 2019 and subsequent years, the tax is 2%, for foreign owners and satellite families; or 0.5 %, for Canadian citizens or permanent residents of Canada who are not members of a satellite family.
The BC Government has also recently proposed legislation for the creation of a new, publicly accessible register of who owns real estate in British Columbia, which would be the first registry of its kind in Canada.
It has also created a separate condo and strata assignment register, in a bid to crackdown on tax avoidance through condo flipping. As of 1 January 2019, developers that sell strata lots in development properties must include terms and a notice in their contracts to inform buyers of the new collection and reporting requirements.
Developers must collect information on the transaction, including the terms of the assignment and the name and social insurance number or business information of the parties to the assignment. This information must then be reported in the online register.
The registry aims to close a loophole in contract assignments in the condo pre-sale market. Through the selling and re-selling of contract assignments, a condo unit can be sold multiple times before the condo is lived in.
The Government was concerned that each of the buyers can inflate the price of the unit and not necessarily pay the appropriate tax. It wants those engaging in the "flipping" of pre-sale condos to pay their "fair share" of taxes.