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CRA cracks down on tax cheating by real estate flippers
Since 2015, $43.7-million in real estate-related penalties have been handed down

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Friday, June 8, 2018 – Page H5

TORONTO -- With the recent announcement of more than $100million in new tax reassessments it's clear the federal government remains intensely interested in catching real estate flippers in Toronto and Vancouver. And some tax professionals and real estate insiders believe this is merely the beginning as the Canada Revenue Agency targets players in the property market who may have been cheating on their taxes for years.

"I know lots of guys - some of the things they've done I can't believe," says Jamie Johnston, broker of record for Re/Max Condos Plus Corp. in Toronto. "They measure risk and reward, and that's why they cheat."

It is extremely rare for Canadians to be convicted or sent to jail in tax evasion: for example there are about 29 million tax filings annually in Canada and there were 37 convictions between April, 2016 and March, 2017; that's about 0.0001 per cent.

It's a little less rare in the United States, where the Internal Revenue Service that sees about 151 million filings a year and had 2,672 convictions in 2016 (0.001 per cent). "In Canada you never go to jail, so the rewards are high and the risks are small. I think there's a systemic problem, a whole bunch of people are not paying," Mr. Johnston says.

But in the past two years the CRA has been sending a different signal: We are paying attention and the monetary risks are real.

Last week, CRA issued a release that summarized its recent enforcement efforts. Since 2015, $592-million in additional taxes related to real estate have been discovered, in the most recent year alone another $102.6-million was reassessed and $19.2-million in penalties for false claims have been levied (since 2015 it has levied $43.7-million in penalties).

The government is now reviewing about 10,000 real estate-related cases a year and it can take its time to find cheaters: it can review a filing for up to four years after it is submitted.

"While the Canada Revenue Agency has always had a presence in the real estate sector, we have increased the focus on the sector to address growing concerns of non-compliance," says Jeremy Ghio, press secretary for the office of Minister of National Revenue, Diane Lebouthillier.

"Over the last few years, the economic factors in the Greater Toronto Area and the Lower Mainland of British Columbia, such as high-valued markets combined with rapid price increases, have further increased the risk of tax non-compliance in the real estate sector. " In a previous era of lax enforcement, some condo and detached home flippers have been able to own multiple properties and sell them off without declaring all the eligible taxes. Now, many are discovering the CRA has some very powerful tools in its enforcement box. The CRA can follow land registry and other data sources, locate suspicious looking transactions that went unrecorded or under-reported on tax filings and then file a reassessment. If disputed, the CRA can compel developers, utilities, banks and telecom providers to hand over data about a home that is under suspicion.

"You're guilty till your proven innocent; that's how the CRA's model works," says Justin Kutyan, a partner and tax litigator with KPMG Law LLP, an arm of accountancy giant KPMG in Canada. "Even in tax court, the onus is on taxpayers to disprove the Minister's assumption of fact.

Our tax system is based on a selfreporting system - it's based upon honesty and integrity - and they have a lot of tools to doublecheck that you're honest. It becomes difficult, especially when they have the objective evidence: you barely showed up to the condo ever, you never swiped your card, you don't buy hydro, your mail's not forwarded there, Rogers has you listed at another house."

One area the CRA has turned its attention to is filers who improperly claimed a GST rebate for a new or substantially renovated home. Even though the maximum rebate is $24,000 it's only eligible for a primary residence and falsifying this can be a clue of other activity.

"On GST, they are just crazy at CRA. They are going after it hard," says Mr. Kutyan, who is a long-time tax litigator and who previously argued cases for the CRA before switching to the defence team with white-shoe law firm Osler, Hoskin and Harcourt LLP, and now KPMG. "I think those are creating leads on the income tax side."

Take the example of Gideon Margolin, a real estate broker who recently lost an appeal on a GST case involving the 2012 purchase (and 2014 sale) of a newconstruction house at 116 Riding Mountain Dr. in Richmond Hill, Ont. Mr. Margolin declined to comment on his case when reached by The Globe and Mail, but the court documents fill in some of the details. Justice Randall Bocock's ruling at the Tax Court of Canada found Mr. Margolin and his spouse, "did not intend to occupy it as their primary residence ... [and] neither of them actually used the ... property as their primary place of residence."

The Crown introduced into evidence readings from the gas and electricity meters that effectively showed little consumption of those utilities in the five months between when the house was completed by the builder and when Mr. Margolin sold it.

Mr. Margolin had several properties that he shuttled between, but movers and his cleaning lady testified that he essentially used Mountain Drive as a storage locker.

He also did not disclose that he bought and sold another newconstruction house in Vaughan, Ont. referred to as "Lynvest" in the ruling, until asked by the Crown lawyers during the trial.

"The Lynvest property was closed only 45 days before the acquisition of [116 Riding Mountain] and Lynvest was sold mere days before [116 Riding Mountain] was acquired, all escaping Mr. Margolin's initial recall," Justice Bocock wrote. The ruling notes that those other houses are not part of this case, even though Mr. Margolin told the court he was seeking to avoid "trouble" on them.

During all this time, and to this day, it appears Mr. Margolin primarily lived in a $2-million house on an 11-acre lot in King City, Ont.

These $24,000 GST rebates seem like small potatoes for the government, but once proved, they become the thin edge of the wedge to pry open and reassess the tax status of those flipped properties.

Most homeowners are aware that if they sell a newly purchased primary residence within one year they might be subject to capital gains taxes on 50 per cent of any profit they make on the sale. But if the CRA finds that the owner to be a habitual flipper, who doesn't live in the homes and that they are bought and sold as an occupation, they will assess those proceeds as business income and apply a tax rate to 100 per cent of the profits on any property. Not to mention, if tax filings are incorrect, the government can assign penalties - with interest compounded monthly - that back-date to the time of the original incorrect filing.

That's why Mr. Kutyan is seeing a lot more home flippers coming to him for legal advice and representation.

"We've been successful for some of these flippers to somehow at least get the penalties dropped and at least get a capital gains treatment," he says. His advice for flippers is to plan ahead and budget to pay your taxes.

"What's that saying? 'Pigs get fat and hogs get slaughtered?'"

Associated Graphic

A real estate broker recently lost an appeal on a GST case related to this house at 116 Riding Mountain Dr., in Richmond Hill, Ont. The judge found the owner never intended for the house to be a primary residence.

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