Vancouver real estate speculators taking advantage of loopholes and lax oversight

Good in-depth examination of Vancouver real estate practices by the Globe’s Kathy Tomlinson, showing the depth of the policy and regulatory failure:

Mr. Gu’s [real estate flipper/speculator] three corporations all reported losses, in unaudited financial statements ending last year. Photocopies of some cheques made out to his companies – a fraction of the total – show that those companies received a minimum of $7.6-million in large payments between 2014 and 2016, many marked as “loans” from clients.

When Mr. Gu flips a property, his contracts stipulate that lender clients get back what they put in, plus a set return – 15 per cent in one instance. After the mortgage and the bills are paid, Mr. Gu keeps whatever is left, which, in some cases, appears to be hundreds of thousands of dollars.

According to legal and tax experts, this arrangement would allow him to avoid taxes, because the properties are not in his name. Mr. Gu can also maximize financing, because individual clients applying for mortgages, ostensibly to buy the homes, can borrow more money collectively than Mr. Gu could if he tried to finance properties on his own.

On the tax front, records suggest that the clients classify some of the properties as their principal residences, even though they do not live in them. That’s despite the fact that Canadian rules stipulate that a taxpayer cannot call a home a principal residence and sell it tax-free, unless they purchased it to live in it, and didn’t sell it within the same year.

“If you are buying and selling these homes as a business practice, that is business income and it’s taxable,” says Toronto-area accountant David Cramer, one of several experts The Globe consulted while reporting this story. He suggests that both Mr. Gu and his clients should be declaring that income. “If these guys paid proper taxes, these transactions would not go on as they do,” he explains. “It wouldn’t be nearly as profitable as it is.”

Tax lawyer Jonathan Garbutt estimates that the tax revenue lost through such activity is massive, particularly in pricey Toronto and Vancouver. “I think this is yet another example of non-enforcement of penalties under the law. It’s pervasive and it’s systematic,” Mr. Garbutt says. “Unless it changes, this will get worse. We will have a corrupt system.”

Source: Vancouver real estate speculators taking advantage of loopholes and lax oversight – The Globe and Mail

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About Andrew
Andrew blogs and tweets public policy issues, particularly the relationship between the political and bureaucratic levels, citizenship and multiculturalism. His latest book, Policy Arrogance or Innocent Bias, recounts his experience as a senior public servant in this area.

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