Michael Ford (post until Oct. 31/19)
Tax

Lifestyle, income mismatch not proof of tax evasion

The Canada Revenue Agency’s (CRA) reported investigation into Vancouver’s real estate market and the lifestyles of those who own the costly properties will likely prove challenging for auditors, as not everyone living in an expensive house and claiming a low income is evading taxes, Toronto tax litigation lawyer David J. Rotfleisch tells Newstalk 1010’s The Night Side.

As the radio show notes, a briefing document leaked to The Globe and Mail reportedly says a key area of investigation for the CRA will be “lifestyle audits” focused on the B.C. real estate sector. The investigation is expected to bring individuals under scrutiny whose expensive homes and lifestyles don’t seem to match their incomes. 

As Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, tells listeners, in addition to “lifestyle audits,” the CRA will also be looking at unreported profits from real estate ‘flipping’ and improperly claimed housing tax credits as part of its regular audits.

“The phenomenon that is upsetting a lot of people on the West Coast and also has taken the CRA’s notice is that people are living in extremely expensive houses and reporting incomes below the poverty line — basically no income at all."

Behind the scenes of these situations, Rotfleisch explains, is usually one of two common scenarios.

“The first nefarious way is they are evading taxes. They have sources of income and they are just not reporting their income. It’s old-fashioned tax cheating,” he explains.

However, he says, the other legitimate reason that people are not declaring income is because they’re not earning income in Canada.

"They may very well be non-residents of Canada for tax purposes, even though they have a house, an expensive house, in Vancouver. They may be children of people who are living overseas or even living in Canada. Wealthy people buy a house for their kids when the kids go to university, so the kids have no income but the house is worth a lot. Or these people have substantive income overseas, but because they’re not resident in Canada, they’re not required to report their worldwide income in Canada.”

Ultimately, Rotfleisch tells listeners, having a lifestyle that does not match your income does not always indicate tax evasion.

“This is the challenge for the auditors. You can’t assume that somebody who is living in an expensive house and not showing income is breaking the law.”

However, he cautions, those who are targeted as part of the audit and are not properly declaring their income are facing potential problems, including tax evasion charges and jail.

“CRA will certainly charge people with tax evasion if they have the evidence to support it. That is a long road, I mean, they have to do the audits, they have to refer it to an investigator, the investigator has to look at the facts and see that it supports charges, they have to bring the criminal charges, they have to succeed in court. But they do that every year to a number of taxpayers and some taxpayers go to jail every year.”

As Rotfleisch tells AdvocateDaily.com, “anyone who has unreported income that has been used to buy real estate is at risk of being charged with tax evasion. A voluntary disclosure prior to the CRA tax audit will avoid prosecution and penalties.”

Rotfleisch explains that the CRA has also been focused on the Toronto market for a long time.

“I just sent off a Notice of Objection today on a denied housing rebate claim as part of the CRA’s task force. CRA went to every single condo developer, took the name of every single purchaser of pre-builds, whether or not they closed and they investigated and that’s been going on for years. I can’t tell you how many files I’ve got in the office involving that,” he explains.

While some of these audits are related to a discrepancy in lifestyle income versus housing value, he says most of them involve house flipping and housing rebates.

“We just finished one of those where CRA was threatening a gross negligence penalty charge, a $60,000 tax bill, we were 100 per cent successful,” adds Rotfleisch.

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