Ottawa took a step towards closing a tax loophole that impacts all Canadians earlier this morning, when Finance Minister Bill Morneau clearly told the world: You need to live here, in Canada, in order to benefit from our tax exemptions.
Impact felt by all at tax time
Up until now, anyone who sold their principal residence in Canada did not have to report that sale to the Canada Revenue Agency, or the profit earned on that sale. The reason was that the CRA provides a tax exemption on property that is used as your primary home.
As of today, however, the federal government will now require all Canadians tax-filers to report the sale of each and every property sold in the country. As with all assets, taxes are owed, however, if the property is a principal residence it’s still exempt.
“The CRA will audit tax forms,” says Morneau, “to verify that the beneficial owner lives here in Canada and is living in the home in order to claim and receive the Principal Residence tax Exemption (PRE).”
This move by the Trudeau Liberals is an effort to tackle the apparent abuse by non-residents that buy homes in Canada and then later claim the PRE on the sale of those properties.
“Tax filers will have to prove the principal residence exemption on their tax return,” says Morneau. “This exemption is for people who legitimately own a house and live in Canada and we feel this is an appropriate way to manage this risk. It ensures that everyone is playing by the rules.”
How this will impact Canadian homeowners
This announcement is one way the federal government hopes to help cool the hot real estate markets of Vancouver and Toronto without harming other regional markets.
“We recognize that there are different housing markets in different parts of the country and multiple factors that impact these markets,” says Morneau. “We believe these measures ensures tax fairness.”
B.C. may see the biggest impact of this new federal regulation change. By the last count, foreign investment accounted for nearly 6% of the approximately 48,000 residential real estate transactions in British Columbia between June 10 and Aug. 31, 2016. These transactions made up about 8.8% of the $31 billion in residential property that changed hands, according to the latest real estate transaction data released by the provincial government.
More tax loopholes require more plugs
However other tax loopholes remain—available for use by anyone with the money to do so.
For instance, wealthy foreign property buyers can continue to avoid paying taxes on property bought and sold in Canada using a type of trust known as a bare or basic trust.
Under this type of legal arrangement, a property can become the asset under a bare trust set up by one person, who then names a beneficiary, say, a family member, who has the legal right to the capital and/or assets held within this trust. In many cases, this can be a residential home within Canada. The beneficiary then becomes the rightful owner of all income or profits generated from the asset, including the appreciation of property values. While income generated from a bare trust’s assets can be taken in the form of interest, dividends or rent, there are no tax implications for the person who sets up the bare trust.
One way foreign buyers have used bare trusts to avoid paying Canadian tax is to create a company that owns the bare trust, where the property is held as an asset. The ownership of the company can then be sold and resold, but the company will continue to own the property and no change of ownership on that property is recorded—which avoids triggering tax.
As News 1130 reported, this is what happened with the recent sale of 1065 Nelson Street in Vancouver. Originally purchased by a company called Nelson Street Residence from Suncom for $68-million. According to the News 1130 article:
The company’s director Shan Gao avoided paying the property transfer tax of more than $2-million because the name on the title was left the same.
This practice is common in commercial real estate–and perfectly legal. Sources have told CTV News that the strategy of avoiding the tax is being used with high-end residential sales as well.
Another reason why bare trusts are popular with wealthy non-resident homebuyers is that it shelters them from having to disclose whether or not they are Canadian citizens