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Published on: May 4, 2018
There is growing scrutiny of who is, and who is not, paying what taxes in Metro Vancouver’s presale condo market.
This part of the real estate market, which sells condos before they are built, has been exempt from the B.C. government’s foreign buyers tax and disclosure rules for “shadow flipping” — the assigning or selling of a sales contract by one buyer to another before a deal is finalized and officially registered at the land title office.
In recent years, per-square-foot prices for these condos across Metro Vancouver — which are not captured in regular, monthly real estate industry statistics because the sales are not considered finalized — have seen high, double-digit gains of between 40 to 60 per cent, and even steeper.
There is concern that initial access to these units is often limited to a circle of overseas buyers, realtors who are favoured for guaranteeing bulk sales, and the “friends and family” of developers.
These buyers are able to purchase at a lower price and then “assign” or sell their sales contracts to other buyers (who would otherwise not have access to the units) for a higher price, without necessarily paying capital gains or income taxes.
There are now signs that it is not only the sellers of presale condo contracts, but also the developers and later buyers, who may be liable, or at least complicit, in avoiding taxes.
The B.C. Ministry of Finance recently said it will require the collecting and reporting of all presale condo transactions, including assignments, which would improve clarity in the market, from the residency status of buyers and sellers to the volume of assignments at specific projects.
Ahead of this, quietly, some developers are no longer approving or allowing the assigning of presale condo contracts by non-residents (generally foreign buyers, although there are exceptions such as Canadians living abroad) to local residents, says Anne McMullin, CEO and president of the Urban Development Institute.
Some developers have always reserved the right to forbid (or they charge a small fee for approving) requests to make an assignment, but the question is why are some now changing their policies?
Lawyers who spoke off the record said they have tried hard to get clear answers from the provincial finance ministry about whether developers could be viewed as complicit in tax avoidance if they allow non-resident owners to assign a presale condo contract to a resident buyer, who does not have to pay the 20-per-cent foreign buyers tax.
McMullin says the UDI has also asked the finance ministry for an answer.
“There is a difference of opinion, and we don’t know. It’s unclear.”
The ministry says that, currently, the foreign buyers tax only applies to presale condos when the unit is constructed and the land title is registered. It adds that by tracking presale contract assignments, as it plans to do, it can stop tax evasion and understand this area of the market better.
Another possibility is that they may be wanting to stay well clear of approving assignments from non-residents to locals because of new rules unveiled by the Real Estate Marketing Act, which will increase fines for developers filing misleading information or statements about assignments from $100,000 to $1.25 million for the first offence and from $200,000 to $2.5 million for subsequent offences, says Jon Stovell, president and CEO of Reliance Properties and chair of the Urban Development Institute, which represents developers in B.C.
On the flip side, developers don’t want to be seen as discouraging non-resident owners from assigning their contracts to local buyers.
“Isn’t the point of the foreign buyers tax to make more homes available to locals? So when there is an assignment from a non-resident to a local buyer, you are meeting the objectives of the (foreign buyers tax) legislation,” said Stovell, even though the local buyer ends up paying a higher price under this scenario.
Local buyers seeking a presale condo assignment from a non-resident seller also need to know they may be required to withhold, and pay to the Canada Revenue Agency, a percentage of the gains made by the non-resident seller.
Developers and lawyers say the situation has been open to interpretation, but the CRA’s response to Postmedia this week was clear: When there is a sale of any residential property from a non-resident seller to a local buyer, it is the local buyer who is required to either get a clearance certificate or hold back 25 per cent of the gains in order to pay potential capital gains taxes. This is presumably because it is much harder for the CRA to track such payments from a non-resident seller.
If the CRA determines that gains from selling assignments are subject to income tax, the withholding requirement can increase to 50 per cent. This is triggered if a seller sells multiple properties rather than just a principal residence. The CRA says for income tax, the withholding rules do not specify the residency of the buyer, but if both seller and buyer are non-residents, then the requirement applies.
The CRA confirmed the same requirement exists when it comes to selling interests or options in residential real estate such as presale condo sales and assignment transfers: local buyers are required to withhold 25 per cent of the gains made by a non-resident seller.
In October last year, Stovell’s company hiked the fee it charges for allowing presale condo owners to assign or sell a contract at two of its developments, including the high-profile One Burrard project in Vancouver’s West End.
Reliance Properties started stipulating that instead of owners paying it a standard 1.5 per cent of the initial purchase price to get permission for an assignment sale, they would have to pay Reliance 25 per cent of the profit they made between the original sale and the assignment.
The company did not specify it was imposing this fee only on assignments from non-resident sellers to resident buyers. At the time, Stovell said there had been a rapid increase in requests by owners to assign presale condo units at One Burrard.
As well, he mentioned reports of “unauthorized advertising of (One Burrard) assignments” online, in particular, on private realtor websites and through emails and social media.
He explained that Reliance was hoping to dampen speculation. The presale units had long been sold out, and had increased in per-square-foot value by an estimated 40 per cent since they were released on the market in late 2015.
Asked to clarify if what he meant to say the company’s new policy was designed to curb assignments, and in doing so also mitigate any possibility of approving assignments where buyers might not complying with tax withholding rules that haven’t been clear, Stovell said that “the buyer is the assignee, not us, and they would be responsible for the 25-per-cent withholding.”
He advised local buyers of assignments to seek third-party tax advice from a lawyer.
“Is it the developer’s job to warn (local) buyers (of assignments from non-residents) to withhold (money to pay for) taxes?”