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Tax

Only legal non-residents exempt from paying CRA

While there is nothing unusual about parents buying real estate for their student children in Canada, offshore-based property buyers should make sure they are considered non-residents in order to avoid running into problems with the Canada Revenue Agency (CRA), says Toronto tax litigation lawyer David J. Rotfleisch.

As a recent Globe and Mail investigation found, public data, such as land titles, tax reporting and court records, suggests that “the typical wealthy foreign family buying Vancouver real estate pays little or no income or capital gains tax.”

The article notes that most of these wealthy foreign buyers are not breaking the law, but rather using loopholes in the system. The issue, says the article, is controversial in Vancouver as house prices are skyrocketing and single-family homes are largely unattainable for many long-time residents. 

“The first thing to remember is that there is no capital gains tax on the sale of a principal residence,” explains Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation.

“Non-residents don't pay tax on non-Canadian source income. For instance, if a Chinese resident parent bought an expensive property for and in the name of a child, there would be no obligation to pay tax on non-Canadian source income, and if the property was sold, the Canadian resident child would not have to pay tax on the gain due to the principal residence exemption,” Rotfleisch tells AdvocateDaily.com.

However, another basic tax rule is that if someone is a Canadian resident, they pay tax on their worldwide income, says Rotfleisch. It is certainly possible that there are wealthy resident Canadians who are not declaring all of their worldwide income. Those people, he says, would be committing tax evasion and are subject to jail and penalties as well as taxes owing plus interest.

The CRA has launched the Offshore Tax Informant Program (OTIP) that awards tipsters a percentage of tax for tips leading to unreported offshore income — so anyone avoiding tax in this way is clearly in CRA's crosshairs, says Rotfleisch. These individuals can avoid penalties and prosecution by participating in the CRA’s Voluntary Disclosures Program, he adds.

As the article notes, details of several cases of tax avoidance emerged in court records from hundreds of recent B.C. divorce and real estate matters. In a number of cases, the Globe reports, the judges either suspected or concluded significant overseas income was hidden.

“Some cases indicate that millionaires buy properties through relatives in Canada and then claim in their tax returns to be non-residents — which means they pay no Canadian taxes on their worldwide income. Others who file as residents appear to have grossly under-reported or failed to report their earnings,” says the article.

As Rotfleisch says: “The story states that CRA is pursuing several investigations involving real estate across the country. In my experience, most CRA real estate investigations relate to condo flips. There is no way of knowing if CRA is investigating any of the cases mentioned in the article. However tips are very important to CRA investigations, and ex-spouses are a common source of tips. So if there is a marriage breakup and the ex-spouse knows of tax evasion, there will often be a report to CRA, and CRA investigates all tips as a matter of course. The financial incentives in the OTIP make it extremely likely that a tip will be provided by a former spouse.”

To avoid running afoul of the CRA, offshore-based buyers of Canadian real estate should make sure they are properly non-resident of Canada, says Rotfleisch. If they are Canadian residents, however, they should be sure to declare their worldwide income.

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