Let’s make sure non-residents pay capital gains tax on real estate
Critics put pressure on B.C. government to gather and share information on sellers
It should be easy to ensure that offshore property speculators pay capital gains taxes on Canadian sales, but the B.C. government has given no sign it’s prepared to make the fix.
Immigration lawyers and Opposition politicians are pressing the province to start an information-sharing system that would make it much harder for house sellers to evade capital gains taxes by claiming they are “residents of Canada for tax purposes” when they are not. Some critics estimate the tax loss at hundreds of millions of dollars.
This tax avoidance was at the centre of a recent B.C. Supreme Court ruling, in which Justice Kenneth Affleck ordered notary Tony Liu pay $600,000 to a house purchaser he had represented.
That was to cover the capital gains tax that the Canadian Revenue Agency demanded from the buyer, which should have been paid by the non-resident seller of a $5.6-million Vancouver mansion.
A property seller who does not pay income taxes here is required to pay a capital gains tax on 25 per cent of their profit on a house sale. Theoretically, the law is designed to advantage domestic buyers and sellers over speculators, particularly from offshore.
In practice, the capital gains rule is rarely enforced, lawyers say, because B.C. doesn’t collect or share up-to-date information on whether property sellers pay income taxes in Canada.
That tax is inexplicably left to a real-estate industry “honour system” involving buyers, sellers and their agents, says Vancouver immigration lawyer Sam Hyman, who is among several experts offering a simple solution.
“How complicated is it to require a seller to produce proof they paid their income taxes as a Canadian tax resident?” asked Richard Kurland, a lawyer who produces the immigration newsletter, Lexbase.
“This really spotlights B.C.’s unchanging position, which is that it refuses to include on government (property-transfer) forms the question: ‘Are you a tax resident of Canada?’ ” Kurland said. “B.C. fails to create data that can be checked by Canada Revenue Agency, by not asking the right question. Instead, the B.C. government has begun asking, ‘What is your citizenship?’ But that’s irrelevant.”
In a city in which 45 per cent of the population is foreign born, Kurland said, it would be straightforward for CRA to run a data match on people who claim they are tax residents of Canada to see if they are paying income taxes.
“But if B.C. doesn’t go after the data, CRA can’t do its job.”
When B.C. Finance Ministry spokesman Jamie Edwardson was asked if he thought there were problems associated with B.C. buyers being unable to prove sellers pay income taxes, he declined to answer and said the question should be directed to the Canada Revenue Agency.
Kurland, Hyman and Torontobased immigration lawyer David Lesperance suggested the solution is for B.C. to build a brief delay into all house and condo sales while the Canada Revenue Agency confirms whether the seller of a property pays Canadian income taxes.
“There would be a nice pot of gold for tax collectors,” Lesperance said, if the B.C. government did this.
Hyman proposes a new property-transfer rule that would require a buyer, or their legal representative, to report each interim property purchase to the provincial land registry and Revenue Canada at the same time.
Tax officials, Hyman said, would then be able to share their information with Immigration Canada and Canadian Border Services, which would ensure the tax and immigration-status residency claims of the sellers are true.
“That way the buyer can obtain a ruling prior to completion of the transaction,” Hyman said. “This would replace the honour system, which allows a dishonest seller to pressure a purchaser who wants to make a deal to look the other way and not inquire of the seller’s tax status.”
The immigration lawyers say buyers in a heated real estate market often don’t properly investigate the sellers’ claim on real estate forms about their tax residency because they don’t want to have to withhold part of their payment out of fear the seller will back out of their tentative agreement.
B.C. New Democratic Party housing critic David Eby has run into a related reason the B.C. government does not provide data on who pays income taxes.
The MLA for Vancouver-Point Grey discovered in March that the Ministry of Finance maintains a tax-residency database for only 2014 and earlier.
“So even if you had a release form from a seller, saying ‘You have my permission to disclose to another person whether or not I’m a tax resident of B.C.,’ the province of British Columbia couldn’t tell you because they have no idea themselves,” said Eby.
Given the lack of data, Eby said, a buyer who hires “a diligent notary or lawyer” to search whether a seller really pays taxes in Canada can have no confidence they will find the truth.
If the seller turns out to be lying, the buyer could be liable for tens of thousands of dollars of the seller’s unpaid capital-gains profit.