Taxpayers also victims of ‘hot money’ behind Canada’s condo bubbles
Diane Francis May 4, 2012 – 2:38 PM ET | Last Updated: May 4, 2012 3:01 PM ET
There are three times more condo high-rises being built in Toronto than in New York City and seven times’ more than in Chicago
The condo bubbles in Toronto and Vancouver are caused by foreign speculation and are making housing unaffordable and creating financial risk for the country in terms of government-insured mortgages. But there’s another issue of vital concern to taxpayers.
There are three times more condo high-rises being built in Toronto than in New York City and seven times’ more than in Chicago. This boom is not the market at work, but is manipulation by “hot money” from abroad.
“I have come across something that I find astonishing, and which amounts to systemic tax fraud by investors, mostly foreign, on a massive scale,” wrote an investor involved in the industry.
He explained how it works:
1. Foreigners sign an agreement of purchase for a condo unit, or for 50 at a time, and put down a 5% deposit. This buys a right to buy the unit in future at a fixed price. In financial markets, this is known as a derivative.
2. Many developers include in the agreement of purchase the right to “assign” this right to buy at a fixed price. In financial markets, this is called creating a futures market. This assignment of a right to buy at a fixed price turns buyers into speculators (unless they want to move in or rent out the unit) who are set up to flip the units for a profit as prices are pushed upwards.
3. Some developers, and intermediaries, are in the business of helping speculators flip their rights and pocket a fee for doing so. For instance, Mr. X from Asia pays $15,000 for the right to buy a $300,000 condo, then, when the price of similar units rise to $400,000, he can assign the right, get his deposit back and make the $100,000 difference. There is a frenzy of this speculation going on which makes prices escalate so rights can be bought and resold over and over again before a building is completed.
4. The paperwork for these agreements is kept in-house and my source said one intermediary told him that there are no T-5s issued to the speculator or to the Canada Revenue Agency, something that stock and futures market intermediaries must do so that taxes can be paid on the $100,000 trading profits. Instead, the profits vanish, possibly along with the paperwork, and taxes paid will be by the end user if they buy, rent out the unit and make a capital gain down the road.
The Australians were victims of the same shenanigans and shut it down and now Canada must too
“[Condo] brokers tell me I can flip my assignment and pay no tax and there is no paper trail. They say we do it all day long,” said the investor who asked to remain anonymous.
Under CRA rules, foreigners making Canadian-sourced income are fully taxable by the federal and provincial governments. In Ontario or BC, the total tax bill would be 46% or $46,000 in tax for $100,000 profit.
The unpaid taxes could be staggering, said a real estate agent. In Toronto, 20,000 condo units have been sold each year for the past five years. Let’s assume one-quarter were sold to foreign speculators who flipped the assignment and made $100,000 profit without paying taxes. Their Canadian-sourced income would total $500 million a year, and they would owe 46% of that in taxes or $230 million.
Most condo developers may not be involved in this game, but a few – notably developers with Asian and Middle East owners or backers and buildings located in downtown areas – certainly are.
So this is what must happen. As I argued last week, Ottawa must forbid the purchase by foreigners of any residences in Canada as Australia did in 2010 after foreign speculation and tax evasion damaged its housing market.
The Canada Revenue Agency should send in auditors to the lawyers and intermediaries and developers who have the lists of those who signed agreements of purchase. If they did not close on those deals, and the deals sold for more money than the agreements, then auditors must work backwards and assess income taxes.
The Ontario and other securities commissions should get involved because what is happening, if these reports hold true, is that an unregulated financial futures market is being created using and abusing Canadian residential properties as vehicles. Likewise, the federal and provincial government tax collectors should get involved.
If speculators who owe taxes are long gone – many of them are offshore funds that buy out entire buildings then sell units abroad – then the intermediaries and developers should pay the taxes.
This frenzy is forcing prices upwards. Meanwhile, condos in the suburbs often take months to sell because buyers want them as homes, not as convenient money machines to flip.
The investor who described the tax shenanigans took his information to several politicians and called the CRA hotline, but got nowhere. Tax officials said they needed specific names and addresses to investigate, but this is beyond a simple case. This requires a task force to look into this.
A realtor said ordinary foreigners are buying from “funds” that are bundling units in Toronto and promising huge returns.
“Foreigners have been lured into so-called investment products, property units, with promises of high yields,” wrote this real estate professional. “They are often small investors who go to property seminars overseas. Many of these buildings do not allow Canadians to buy these units, obviously because of the tax implications.”
The Australians were victims of the same shenanigans and shut it down and now Canada must too.
Well, if the above story is true, (and I have no reason to believe it is not)….this is worse than I thought.
These condos are being built for foreign speculators who have a great scam going. All they need it is 5% down and obtain the rights to own the unit. However, they seek greater fools to flip the paperwork to and make a nice profit on each unit. I have heard this before. I had assumed many of those ghost condos were simply owned by foreigners as an investment , not a flipping vehicle.
However,they are escaping what amounts to a large amount of taxes owing under the rules. Very clever scheme,with little evidence ……. who would know ?
However why is the Gov’t ignoring the whistleblower ?
These foreign speculators are creating a bubble and making real estate unaffordable. I assume their mortgages don’t qualify for the CMHC insurance. If they did, this makes it even worse, as WE Canadian citizens are covering THEIR speculative gambles.
Or simply they are creating a bubble via an oversupply that competes with these units whose mortgages are insured by the CMHC. This class of units flipped/owned by foreigners simply adds inventory that might not otherwise exist, but adds to the oversupply nonetheless.
When the bubble bursts, as they inevitably do, those with CMHC insured mortgages will see their value collapse via an increase in supply, and many will bail for various reasons, leaving CMHC = Canadian Taxpayer holding the bag.
The Gov’t has all the resources to tackle this problem, it is not that difficult.
However, does it have the will ? If not WHY NOT?
My guess is some of them are insiders, conflict of interest…friends of developers,or they realize it has gotten so huge that if they clamp down it will have a major impact on construction thus the job and the economy. Unfortunately they never think long term, and the huge mess this will leave.
They, Gov’t are effectively selling out the country . If they did clamp down and, heaven forbid, actually DO THEIR Job and collect these taxes…the speculation would die off and the real market be allowed to work, and make housing more affordable for CANADIAN citizens.
Get off your ass Gov’t and do something, starting yesterday. You work for US, not against US.