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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 24, 2016 | Trouble

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

TROUBLE modified

Tax avoidance is cool and legal. Tax evasion’s a crime. Like knocking off a milk store. Or ogling your assistant.

Avoiding tax is easy – contributing to an RRSP, splitting income with your spouse, making an investment account joint with your kids, putting your squeeze on the company payroll, getting paid through dividends, doing an estate freeze, creating a tax-deductible mortgage or setting up a family trust.

Evading tax is as common as it is illegal. Paying cash for services to avoid paying or remitting the HST or not declaring rental income are biggies. And lately, flipping houses.

As we’ve come to know, the T2 gang loves taxes. With plans to spend $120 billion more than they take in over the next four years, they have to. Every dollar counts. It’s why the TFSA contribution limit was gutted, plus a brand new tax bracket created for the quasi-wealthy and why there’s a lot more to come in the next budget. If you’re above-income, you have a bullseye on your butt.

So there’s now an Underground Economy Advisory Committee set up to report to the revenue minister, plus a new task force to crack down on tax evasion through offshore schemes – which will require taxpayer funding of $444 million, hopefully bringing in more than it costs (don’t hold your breath). This also explains the big push to punish Toronto condo flippers and Vancouver specuvestors.

In the GTA over the past year the CRA completed about 1,900 audits of real estate deals, with the average penalty coming to more than $22,000 in tax and HST. The Revenuers have just lately been sweeping into the Vancouver area, prompted by media reports of shadow flipping, crooked realtors and tax-evading Chinese dudes. Besides, with an intensely speculative bubble market in its climax phase these days, CRA auditors know there’ll be lots of low-hanging fruit to pick. It means a bunch of people who thought they were so clever might actually end up hunkered over their chequebooks. One recent penalty amounted to $2.5 million. Ouch.

So, what’s the crime?

Flipping’s at the top of the list. For example, someone buying a condo from builder plans for $425,000 and selling it upon completion for $500,000 might think they could write it off as their principal residence and pay no tax on the gain if they lived there for a few months. Well, forget that. In fact, the CRA doesn’t even consider this to be a capital gain, taxed at 50%, but rather business income, taxed at 100%. It means every dollar of profit can be added to the seller’s income and taxed at their marginal rate in that year.

The knives are also out for flippers that buy, gut, reno and sell. The law says HST must be added to the sale price of any “substantially renovated†house, which can bloat its market price dramatically. So the seller has to add that on, report and pay it. Or eat it. Or just evade it, and hope to slip through the cracks – a risky gamble since a public paper trail exists for the CRA to go sniffing down years in the future.

Then there are the shadow flippers – people who deal in assignment clauses. As this blog had detailed in the past, this is a major channel for condo sales in the GTA of late, with whole real estate brokerages specializing in assignments, or the resale of sale agreements. It’s all legal, but most of the poor people doing these deals have no idea any profit will be treated as income.

In the crosshairs, too, are non-residents. They don’t get to claim a real estate profit on a principal residence as tax-free. In fact, it’s not even a capital gain (taxed at half-rates) but must treated as Canadian income, and fully taxed. Worse, it has to be paid within ten days. Never forget you’ll face a tax bill on the sale of any investment or recreational property, like a duplex, rental condo or hobby farm. Cottages are among the most punitively treated, since all increases in value are taxable, but mortgage interest and carrying costs are not tax-deductible.

And that rental suite? Yup, every dollar you collect from your moldy tenants must be added to your employment income and taxed at your marginal rate, often shoving unsuspecting landlords into a hostile new tax bracket. Of course, a portion of your home’s costs are deductible (including some mortgage interest), but you’re compromising the tax-free status of potential profits on your home when you eventually bail.

Of course everyone reading this pathetic, law-&-order, government-loving, ammo-and-dogs blog is law-abiding and pays their fair share of taxes. But that shifty neighbour of yours with the pool and the Benz?

You might want to call that in. It’s the sunny way.

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July 24th, 2016

Posted In: The Greater Fool

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