Condo flips flying under the radar
Some real estate industry experts say the lack of scrutiny is a major issue that is slipping through the cracks
By KERRY GOLD
Friday, April 20, 2018 Print Edition, Page H3
VANCOUVER -- You only have to scan the Multiple Listings Service to see Vancouver's property flips in action - and the money that's being made, by people working in and outside the real estate industry.
At Yaletown's Kinghorne Mews, Unit 802 is currently listed for $2.688-million. The sellers had purchased it in June, 2016, for $1.580-million. The same sellers, who are not listed as realtors, show up as having sold six listings for downtown condos in the past three years.
A realtor purchased 878 E. 13th Ave. in Vancouver for $887,850 in 2013, and sold it for $1.265-million in 2015. The second owner, represented by the same agent, sold it for $1.756-million in February this year.
In Onni's the Mark at 1372 Seymour St., there were three sales in 2014 that stand out.
An Onni executive was owner of Unit 4301, which he purchased in 2016 for $1.5million. The unit sold for $5.280-million a year later. A penthouse in the building, Unit 811, sold in 2014 to another Onni employee for $1.448-million. The seller, who's not identified on the listing, sold in 2017, for $6million.
Clearly, they got a very good deal.
An agent who saw both units says they were sold far below their value, and they were not made available to the public.
He cites Unit 4601, which is the same size as Unit 811, and also sold in 2014 - but for $3.725-million. That one was listed publicly.
Don't feel too badly for the buyer who paid more - he or she sold the property a year later, for $5.25-million.
Realtors are especially active investors.
One realtor had sold 16 properties over the past 15 years, all west side condos.
A search of condo sales shows that in the past 12 months on the west side, 101 sellers were also licensed realtors.
In February, the B.C. government introduced new tax measures aimed at returning home prices to a semblance of something approaching affordable, while also collecting funds to create much-needed affordable housing. The budget addressed investment properties left empty, and introduced a more expansive foreign buyer's tax, as well as heftier taxes for expensive homes. It included a promise for a registry to track condo presales - transactions that for too long have not been tracked.
And the Canada Revenue Agency recently made it a requirement that anyone who sells their home, even if it was their principal residence, needs to report it on their income tax return or face a fine as high as $8,000.
However, the free-for-all that is property flipping is so far escaping scrutiny and will continue to drive up prices if not checked. It's a major housing issue that is slipping through the cracks, some industry experts say.
There's nothing wrong with investing in real estate, even among those who work in the industry - some of whom have a passion for it - says property lawyer and commissioned notary public Ron Usher. He sat on the independent advisory group that was given the task of reviewing realtor misconduct in 2016.
"It's not inherently evil that somebody in real estate invests in real estate," Mr. Usher says. "Truth is, if he bought this as an investment and he's going to sell it, he's going to pay serious taxes on it."
However, as the United Nations' special rapporteur on adequate housing, Leilani Farha, has pointed out in a report, the financialization of housing has jacked up the cost of workforce housing and pushed local income earners out of the market. That's a problem. Money that has flowed into the country, mostly from China, is pushing on every housing market, from top down. And local investors are also seeing opportunities in all that new wealth.
As well, there is the question of lost tax dollars. Are people paying their taxes? Or are they claiming that their investment properties are their principal residences in order to avoid capital gains or income tax? Also, if a new property is under-priced because of insider advantage, the property transfer taxes are lower.
Mr. Usher believes we don't need new taxes so much as we need to enforce the taxes we already are expected to pay. Earnings on property should be reported the same mandatory way that a person's RRSP contributions are reported.
"So many people who are blowing their minds out about Vancouver real estate and the speculation tax act as if we didn't already have taxes. We have a whole tax regime, either as income or capital gain, and that's always been the law. We've just never had a good way to collect it, and it's a double problem with the non-resident. When a non-resident does the presale flip, nothing is getting reported anywhere."
When a person sells an investment property in B.C., he or she is taxed on 50 per cent of the net profit. If it's a principal residence, it's exempt.
Enforcement of that tax alone would throw cold water on the speculator party.
But our tax system is largely based on the honour system: You are expected to tell the truth about that house you sold when you fill out your income tax form. Mr. Usher says the system of "self-reporting" isn't working.
In a guest blog post on Price Tags, Mr. Usher outlined measures that needed to take effect immediately to redirect all that speculator cash sloshing around. One measure would be to require buyers to complete and file a "notice of acquisition," when they submit to the land title office for a land transfer. This notice would tip off the CRA, which would make an electronic note of the acquisition, and would then expect to see the goods and services tax remitted by the developer, for example. A seller would file a "notice of disposition," which would trigger an electronic note that they would be expected to pay capital gains tax on their tax return if it's an investment. Such a notice could also declare if it's a principal or secondary property.
As is, says Mr. Usher, the CRA would have to do an audit to acquire that type of insight. The information on property ownership just isn't there. It would be easy enough to track, since each property has a parcel identifier number.
"We've been voluntarily collecting information on real estate only after you've sold it. CRA has no idea who's bought. We don't have any idea what people's real estate portfolios are.
"Just like we did for property transfer tax, we have to have a system that requires proper notice of acquisition/disposition at the time of registration. Not when you are filling in the tax return."
If those notices had been filed at the time of registration, we wouldn't see the case of the developer who was just sentenced and fined for tax evasion. The CRA issued a press release Monday that said Rajinder Singh Mann of Surrey was sentenced to nine months of house arrest, 150 hours of community service and given a total fine of $462,092 for failure to remit the GST he had collected on the sale of 44 townhouses in Maple Ridge. Mr. Mann pleaded guilty to seven counts of GST fraud under the Excise Tax Act. The fraud had happened in 2010 and 2011.
But if the buyers had been required to file notices of acquisition, CRA would have been tipped off long ago that the developer had collected the GST, Mr. Usher says.
He has other suggestions to overhaul the system, such as mandatory transparency.
"Maybe we need to have a one-time census," he suggests. "We say: 'Everybody, we need to see every parcel identifier you have in B.C.' We need everybody to fess up, tell us who you are, give us your social insurance number, and the penalty if you don't is, we will deem you all to be non-residents and you pay crazy taxes when you dispose of it."
Other countries have tackled the flipping problem head on. In Singapore, property owners are charged a seller's stamp duty that decreases after three years to zero.
Realtor Ian Watt calls that "smart."
Mr. Watt believes that the reason flipping is so popular is because it's so easy to avoid taxes owed.
"Whether they are realtors or regular homeowners, they are using the system to get rich," he says. "If they are legitimately paying taxes as a business, there is probably not a lot of profit. But if they are taking advantage and cheating the CRA, and saying it's their principal residence, then there is profit.
"Clearly, it's a business and it's not what the owner/occupier tax-free exemption was put in place for."
Vancouver has seen more than a few condo sales over the past few years that featured huge price gains. Some of the vendors were realtors.
RAFAL GERSZAK/THE GLOBE AND MAIL