The Canada Revenue Agency (CRA) continues to unearth hundreds of millions of dollars of tax avoidance and evasion in B.C. real estate transactions annually.
Between April 2022 and March 2023, the agency issued $171.9 million of re-assessments from 1,998 files, according to the latest published figures of the agency’s real estate non-compliance tax audit program.
Since launching the program in 2015, the auditors have now completed 13,983 audit re-assessments totalling $1.309 billion in B.C. alone. The program primarily targets transactions in the greater Vancouver and Toronto areas. In Ontario, the agency has completed 60,716 audit re-assessments totalling $1.397 billion, since 2015.
The 9,078 total audits in 2023 amounted to re-assessments of $426 million, the second most of any year but short of the $527 million re-assessed in 2020.
Auditors are looking at three key areas: unreported income and capital gain taxes; ineligible GST/HST rebates; and unreported GST/HST on the sale of new or renovated homes.
In B.C., income tax re-assessments are the most substantial of all. Of the $171.9 million in assessments from last year's audits, $131.1 million falls into the income tax category, whereas $36.1 million is from unreported GST, and just $4.2 million is from ineligible GST/HST rebates for new and rental housing.
Auditors specifically looked at 1,089 cases of unreported or under-reported income in B.C., resulting in $86,036 per re-assessment in 2023. In 2021, auditors made record average re-assessments of $178,278 per file.
For income and capital gain taxes, auditors look at several matters, such as whether the income reported on tax returns is sufficient to support a taxpayer’s lifestyle, including the cost and maintenance of real estate.
“The CRA can establish correlations between a taxpayer’s reported income and their lifestyle. The acquisition of expensive assets, such as a high-end home, without an obvious income source, can be an indicator of potential unreported income on income tax returns,” the report states.
And, auditors are also looking at unreported worldwide income in cases where, for example, a person is declaring primary residency for capital gain exemptions but also not declaring worldwide income, as would be required by a Canadian resident claiming such an exemption.
In B.C., many , thus raising the potential for tax evasion or avoidance.
The agency notes that buying a property from a non-resident of Canada brings risks of non-payment of taxes.
“It is the responsibility of the buyer of the property to know whether the seller is a Canadian resident or a non-resident. Usually, the notaries or real estate lawyers who complete the legal documents associated with real estate transactions have the responsibility to complete these verifications.
“A purchaser who buys a property from a non-resident seller should request, from the seller, a issued by the CRA, prior to releasing the funds for the purchase. If not, the purchaser could be held liable to pay the CRA any unpaid income tax on behalf of the seller.”
In terms of GST and HST (in Ontario) re-assessments, the agency is largely looking at tax avoidance and evasion by homebuilders and developers.
Upon sale or lease of a new home, “the GST/HST is payable at once on the fair market value of the home, including the land value, and the builder must remit that tax to the CRA.”
Re-assessments can occur due to human error, tax avoidance measures and tax evasion. When it comes to tax evasion, the CRA will apply a penalty equal to 50 per cent of the additional tax payable if a taxpayer knowingly makes a false statement when filing a return.
About $37 million in penalties were assessed last year in total, meaning about 17 per cent of last year’s assessments (about $74 million of the $426 million) was from audits where tax evasion was determined — although not necessarily proven, should a person appeal in court.
Last year’s penalties were the fewest since 2018; but in 2022 tax evasion accounted for about 31 per cent of all re-assessments in the program.
In a statement to Glacier Media, the agency stated it “has been vigilant in monitoring tax compliance in real estate transactions.
“Since 2015, there has been a strong emphasis on major metropolitan areas such as the greater Toronto area and the Lower Mainland in British Columbia, where real estate activities have consistently remained at high levels. As the real estate environment evolves, the CRA adapts, expands, and completes real estate audits outside of these two areas when compliance risks have been identified.”
The CRA had not updated its audit figures for 20 months and it is unclear when the 2023-2024 fiscal year records will be published. For 2023 and onward, the CRA will be looking at house flipping more closely as profits made on sales within a year of buying will now be taxed as business income and not a capital gain.
