The Financial Post article by Diane Francis, her commentary and suggestion that the real push behind the rise of real estate in Toronto both physical and financial is in an interestingly way motivated by tax free yields to nameless offshore foreign investors both big and small.
It’s no mystery that there has been for many years and continues to be a lot of foreign money coming into Toronto real estate either from new immigrants to Canada,their relatives and investors ( both large and small).
As the world goes Toronto, Canada is a relatively safe place to put your money. We are not Australia. ” The Australians were victims of the same shenanigan and shut it down. Now Canada must too. ” says Diane Frances.
This information is interesting as a discuss point and a learning exercise. No one has yet investigated this example of a scheme and so we really do not know the extent of it.
If it is a real problem or just more speculation about the causes of rising prices and competition.
Yes it is true that, it is becoming harder and harder for first time and young purchasers to get into the real estate game – ownership. Ms. Francis suggests foreign speculation is the cause of unaffordable housing and “creating financial risk for the country in terms of government-insured mortgages “…and issue of taxes. Which should concern us tax payers of this country.
“There are three times more condo high-rises being built in Toronto than in New York City and seven times’ more than in Chicago. This boom is not the market at work, but is manipulation by “hot money” from abroad.
“I have come across something that I find astonishing, and which amounts to systemic tax fraud by investors, mostly foreign, on a massive scale,” wrote an investor involved in the industry.
What follows is a sample of how the HOT Money works the system of real estate development.
He explained how it works: [ This is an example how a scheme may work. ]
1. Foreigners sign an agreement of purchase for a condo unit, or for 50 at a time, and put down a 5% deposit. This buys a right to buy the unit in future at a fixed price. In financial markets, this is known as a derivative.
2. Many developers include in the agreement of purchase the right to “assign” this right to buy at a fixed price. In financial markets, this is called creating a futures market. This assignment of a right to buy at a fixed price turns buyers into speculators (unless they want to move in or rent out the unit) who are set up to flip the units for a profit as prices are pushed upwards.
3. Some developers, and intermediaries, are in the business of helping speculators flip their rights and pocket a fee for doing so. For instance, Mr. X from Asia pays $15,000 for the right to buy a $300,000 condo, then, when the price of similar units rise to $400,000, he can assign the right, get his deposit back and make the $100,000 difference. There is a frenzy of this speculation going on which makes prices escalate so rights can be bought and resold over and over again before a building is completed.
4. The paperwork for these agreements is kept in-house and my source said one intermediary told him that there are no T-5s issued to the speculator or to the Canada Revenue Agency, something that stock and futures market intermediaries must do so that taxes can be paid on the $100,000 trading profits. Instead, the profits vanish, possibly along with the paperwork, and taxes paid will be by the end user if they buy, rent out the unit and make a capital gain down the road.
“[Condo] brokers tell me I can flip my assignment and pay no tax and there is no paper trail. They say we do it all day long,” said the investor who asked to remain anonymous.
Under CRA rules, foreigners making Canadian-sourced income are fully taxable by the federal and provincial governments. In Ontario or BC, the total tax bill would be 46% or $46,000 in tax for $100,000 profit.
The unpaid taxes could be staggering, said a real estate agent. In Toronto, 20,000 condo units have been sold each year for the past five years. Let’s assume one-quarter were sold to foreign speculators who flipped the assignment and made $100,000 profit without paying taxes. Their Canadian-sourced income would total $500 million a year, and they would owe 46% of that in taxes or $230 million.
Most condo developers may not be involved in this game, but a few – notably developers with Asian and Middle East owners or backers and buildings located in downtown areas – certainly are.
So this is what must happen. As I argued last week, Ottawa must forbid the purchase by foreigners of any residences in Canada as Australia did in 2010 after foreign speculation and tax evasion damaged its housing market.
The Canada Revenue Agency should send in auditors to the lawyers and intermediaries and developers who have the lists of those who signed agreements of purchase. If they did not close on those deals, and the deals sold for more money than the agreements, then auditors must work backwards and assess income taxes.
The Ontario and other securities commissions should get involved because what is happening, if these reports hold true, is that an unregulated financial futures market is being created using and abusing Canadian residential properties as vehicles. Likewise, the federal and provincial government tax collectors should get involved.
If speculators who owe taxes are long gone – many of them are offshore funds that buy out entire buildings then sell units abroad – then the intermediaries and developers should pay the taxes.
This frenzy is forcing prices upwards. Meanwhile, condos in the suburbs often take months to sell because buyers want them as homes, not as convenient money machines to flip.
The investor who described the tax shenanigans took his information to several politicians and called the CRA hotline, but got nowhere. Tax officials said they needed specific names and addresses to investigate, but this is beyond a simple case. This requires a task force to look into this.
A realtor said ordinary foreigners are buying from “funds” that are bundling units in Toronto and promising huge returns.
“Foreigners have been lured into so-called investment products, property units, with promises of high yields,” wrote this real estate professional. “They are often small investors who go to property seminars overseas. Many of these buildings do not allow Canadians to buy these units, obviously because of the tax implications.” [ Financial Post, May 5 2012 ]
The above was a sample and commentary quoted from the Financial Post.
All the building that is going on in Toronto has impacted everything from the necessary infrastructure, to local and provincial taxes and revenues. People are moving in and it is a challenge to find rental units according to many realtors. There are thousands of jobs associated with the development industry and everyone seems to be carrying on nicely for now.
Wreck-less probing, commentary and speculation about the cause of the progress of development, rising prices, jobs, taxes, and calls for action to stop development that is being carried on in a rationally planned way does not help. The issue is more complex with many factors that affect the supply demand dynamics of property development and pricing.
Toronto has all the elements for the current rational development underway.
Yes there are a lot of condos being built.
If and when the music stops, condos may become more affordable for those first time buyers. However it seems they will have to wait a long time with historically low interest rates and a relatively stable employment situation in Toronto.
What are your thoughts from where you stand? What are your experiences and do they support a theory or cause of Toronto’s success? Leave a comment and share your thoughts below.
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