The Canada Revenue Agency (CRA) conducted an in-depth investigation into B.C.'s real estate sector and found $1.3 billion in unpaid taxes.
In recent years, the CRA has significantly strengthened its audits of real estate, scrutinizing individual transactions and professional activities.
Jason Charron, CRA's Division Director of Compliance Programs, recently stated that "Canada's largest metropolitan area (Metro Vancouver) has seen a lot of non-compliance and has therefore been identified as a focus area. ”
Since launching a dedicated real estate task force in 2019, the CRA has focused primarily on Ontario and B.C., increasing the number of audits, issuing reassessment notices for additional taxes deemed payable, and imposing hundreds of millions of dollars in fines.
In Ontario, the CRA assessed $1.4 billion in unpaid taxes and penalties in the real estate sector between 2015 and 2023. In B.C., which has about one-third of Ontario's population, nearly the same amount ($1.3 billion) of tax non-compliance was also found during the same period.
These real estate audits cover a wide range of activities and entities, such as property sellers who illegally claim primary residence exemptions, undeclared capital gains, property investors residing outside of Canada, share transfers and corporate structures designed to obscure property beneficiaries, as well as homebuilder and real estate brokerage activities.
While the total value of unpaid taxes and fines is similar in British Columbia and Ontario, the nature of non-compliance in the two provinces is very different. In Ontario, most of the non-compliance identified by the CRA in the real estate sector is related to unpaid Goods and Services Tax (GST) and Provincial Sales Tax (HST) on new homes or improperly requested refunds. In B.C., most non-compliance is related to income tax.
Data provided by the CRA shows that between 2015 and 2023, the agency found $957 million in income tax-related non-compliance in B.C.'s real estate sector, more than five times the amount of $178 million found in Ontario during the same period.
The CRA said confidentiality laws prevented disclosure of information about the audit, but sent a written statement in general terms that income tax-related non-compliance included:
• A taxpayer who buys an expensive property without clearly reporting the source of income
• Profits from fast-track renovated properties are not reported in taxable business income
• Unreported capital gains from real estate sales (including non-Canadian residents)
• Undeclared income earned outside of Canada
• Non-compliance by real estate agents and developers
The CRA declined to say how much of the $957 million fell into a specific category. For example, how much money is related to property renovations, developers, or non-residents. The CRA said it was necessary to protect taxpayer information and maintain "the integrity of our risk assessment system."
The number of income tax-related audits conducted by the CRA in the B.C. real estate sector increased nearly tenfold from 114 audit filings in fiscal year 2015 to 1,089 last year.
In addition, there has been a corresponding surge in what the CRA calls "audit assessments," which are the total value of unpaid taxes and penalties imposed. In B.C.'s real estate sector, between 2015 and 2017, the income tax audit assessment was an average of $6.4 million per year; The average for the last two years has surged to $155.1 million per year, an increase of 2,300%.
Similarly, the Canadian federal government's budget for the CRA real estate audit team has increased. The budget for 2019 was $50 million, and last month, the budget for 2024 increased to $73 million for the next five years.
Tom Davidoff, an associate professor at UBC Sauder School of Business, said the work "seemed to have paid off adequately". He said there was "clearly some sort of tax compliance problem" in the industry, but it was not known how serious the problem was at this time. It would be "remarkable" if there was a problem and it was resolved.
Many BCers have been "sounding the alarm" for years about people evading taxes in real estate transactions, and Davidoff said that as director of UBC's Center for Urban Economics and Real Estate, this recent crackdown may not significantly reduce house prices in B.C., "but fines are real money after all and can be taken back where it rightfully belongs." ”
Davidoff is a co-author of a 2022 paper published in the Canadian Tax Journal that analyzed the top 1/5 homes in Metro Vancouver, with a median value of $3.7 million, while the median income tax paid by homeowners was only $15,800. The author writes, "Most of the mansions in Metro Vancouver appear to have been purchased with wealth derived from untaxed Canadian income. ”
With this in mind, Davidoff said the CRA's recent audit of B.C. real estate revealed "fraud" in income taxes.
Representatives of the BC chapter of Real Estate Agents and the Canadian Association of Home Builders said their members had not heard of the recent increase or change in the CRA's activities.
Erica Shiner, spokesperson for Tax Equity Canada, a not-for-profit tax policy advocacy group, said: "Tax evasion remains a problem in many areas, costing Canada billions of dollars in tax losses every year. ”