The Real Estate Hyper-Boom:Evading Taxes and Fraud

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The Real Estate Hyper-Boom:Evading Taxes and Fraud

Vancouver's and Toronto's real estate hyper-boom are closely linked to government policies that have enabled tax evasion and fraud. However NDP Attorney General David Eby is starting to do something about this.

The B.C. government has made its first major move in the battle for housing affordability in Metro Vancouver and beyond by promising to raise the foreign-buyers tax to 20 per cent and institute a range of taxes to quell property speculation.

Now it looks as if the B.C. NDP is preparing to take on a more thorny challenge to confront the housing crisis. It’s a tax-related problem that Liberal MLA Mike DeJong promised to address three years ago when he was finance minister, but never did. The repercussions could be significant for increasing housing affordability. The challenge is the so-called “bare-trust loophole,” which wealthy individuals, both offshore and domestic, have long used to disguise their identities when buying and selling residential property in B.C. That way, they could avoid paying hundreds of millions of dollars in taxes. The loophole remains open in B.C. despite the province of Ontario largely closing it in the late 1980s.

B.C. Attorney General David Eby and anti-money-laundering expert Peter German were in Ottawa this week telling a parliamentary committee about how the transnational rich are pumping billions of dollars into B.C. real estate by using bare trust loopholes and other techniques that make it possible for them to avoid paying B.C.’s property transfer taxes, the foreign-buyers tax and federal capital gains taxes.

Arguing that the federal government’s anti-corruption measures have been a “colossal failure,” Eby confirmed his government is preparing to create a “beneficial ownership database” that would require public disclosure of the actual owners behind thousands of trusts and numbered companies. “The bottom line for British Columbians is they want to know who owns the property and they want to know where the money’s come from.”

The fact that massive volumes of foreign capital have long been fuelling the housing markets of Metro Vancouver, Toronto and elsewhere is no longer in serious dispute in Canada. Polling shows the public is intensely concerned. And even mortgage-lending banks are admitting to the crisis.

This month David McKay, head of the Royal Bank of Canada, said foreign wealth is “distorting” the country’s over-heated housing markets by adding “gasoline” to it. “We do not need foreign capital using Canadian real estate as a piggy bank.” McKay’s warning comes on the heels of a 2017 report by one of Metro Vancouver’s top housing analysts, Richard Wozny (who died in January), that shows how a “large, mysterious, untaxed pool of international capital” is being converted into speculative investment in residential real estate. Much of that investment, Wozny discovered, is being subsidized by tax avoidance and evasion, which hurts the tax-paying middle class.

B.C. immigration and anti-corruption specialists look forward to the B.C. NDP, and possibly the federal Liberals, doing the legislative work and information-sharing necessary to crack down on the loopholes that allow the transnational rich to avoid taxes.

Bare-trust loopholes are “pervasive” in B.C.’s real-estate industry, says Vancouver immigration lawyer Sam Hyman. The tax avoidance involved is “enormous.”

Adam Ross, a Vancouver researcher for Transparency International, said the B.C. government “will go a long way” to closing the bare-trust loophole if it follows through on its Feb. 20 budget pledge to collect information on the actual owners behind the companies used to buy properties. 

While there can be legitimate reasons for commercial properties to be held in trusts or companies, Ross said, these vehicles are increasingly being used in residential real-estate transactions “to circumvent tax obligations and obscure true ownership. A study commissioned by Transparency International Canada in December 2016 found that of the 100 most valuable residential properties in B.C., nearly 30 per cent were held through companies.”

Another investigation in 2015 by a media outlet reported that one third of 250 multi-million-dollar Vancouver houses purchased in neighbourhoods popular with Chinese buyers were registered to homemakers, students and corporations, all of which were said to obscure the real buyers’ identities, which meant they could escape the notice of tax authorities.

Richard Kurland, Vancouver-based publisher of the Lexbase immigration newsletter, said it’s understandable that the NDP is taking time to figure out how to properly clamp down on bare-trust loopholes. “They really will need stellar legal advice on wording. But they’re going the right direction.”

While Hyman applauds the efforts Eby and Finance Minister Carole James are putting into making property purchases more transparent (including to ensure non-residents don’t avoid the foreign buyers tax), the lawyer said the B.C. government has a way to go to restore the integrity of the B.C. Land Title system, which was meant to be an authoritative record of who owns which properties.

Costly court trials are increasingly being fought in B.C. over who are actually the “beneficial” owners of properties held by trusts, numbered companies and foreign students, Hyman said.

Hyman warned that so far the B.C. government is trying to create transparency about the identities of the owners involved only in future residential property purchases that employ trusts and numbered companies.

He believes, however, that the process of increasing transparency on residential property ownership should also be retroactive, applying to trust agreements that have existed for years.



However, this is now a universal problem. British Labour leader Jeremy Corbyn recommended that, instead of playing meaningless tit-for-tat diplomatic expulsions, the Conservative government could implement widespread financial sanctions against Russian oligarchs in London, following the poisoning of a former Russian double agent and his daughter. But, in last week's Dateline London program on BBC, three out of four panelists said the Conservative government couldn't implement such financial sanctions against Russian oligarchs because there is so much Russian oligarch money invested in the financial and real estate sectors of London that it would cause a major economic downturn.

In other words, Western banking systems and governments are allowing this to happen.  

New York has a similar problem. 

Mayor de Blasio said Friday that he’s troubled by shady Russian oligarchs snapping up multi-million-dollar properties in the city — but can’t figure out how to stop them.

“I see Russian oligarchs as a problem,” the mayor said during an interview with BuzzFeed.

“What has happened in Russia is deeply, deeply troubling across the board. The fact that oligarchy is people who basically stole the wealth of their country with the help of their government — by the way their government is trying to subvert our elections – there’s a whole host of things.”



Another example of real estate fraud that is in the courts in China further shows how extensive the problem is impacting Canada. 

China says the former chairman of Beijing-based Anbang Insurance Group defrauded mom-and-pop retail investors of more than US$10 billion and the company used that money to buy trophy assets overseas, including prime office towers in downtown Vancouver and a major B.C. seniors’ care company.

The allegation puts these B.C. deals, which each exceeded $1 billion, into the world of what is emerging as one of China’s biggest financial crime trials, with pundits trying to parse out Beijing’s desire to crack down on rising debt levels versus its political motivations for going after Wu Xiaohui and Anbang.

“It’s so interesting,” says Christine Duhaime, a Vancouver-based lawyer. “Goodness knows what it means for the Vancouver assets other than there will be a fire sale to get rid of them.” ...

Now, the visual of what is being suggested by the Chinese government’s allegations against Wu and Anbang should be a wake-up call, according to Alesia Nahirny, executive director of Transparency International Canada.

Nahirny says she wouldn’t categorize Anbang’s funds as necessarily being illicit. That’s normally a description reserved for money that is tied to nefarious and organized crime, but she says it’s a problem if Anbang has been diverting funds into deals in Canada that it raised by aggressively promoting risky wealth-management products to unsophisticated investors in China. “(Money from) practices that happen elsewhere is coming to us. We are connected to it. If we are not putting the proper measures in place, we are complicit,” says Nahirny. ...

Since a 2015 exposé in The New York Times about “hidden global wealth” pouring into Manhattan’s most elite condo buildings, there has been some attention on a “growing proportion” of wealthy foreigners, who have been the subject of government inquiries in their home countries for cases involving white-collar housing or environmental violations and financial fraud, buying assets in North America with few questions asked. ...

In Vancouver, commercial real estate broker Jim Szabo, vice-chairman at CBRE Ltd., who was involved with the sale of both the Bentall Centre property and the Fairmont Hotel at YVR to Anbang-related companies, said in an email that “with China putting in regulators, we only know what we have read in the press.”

While the B.C. government recently said it is asking questions about how care for seniors will be maintained at Retirement Concepts, Mike Old, co-ordinator of policy and planning for the Hospital Employees’ Union, said, “it’s prudent to prepare for fallout,” which could include Anbang “extracting revenue” by selling off some of its nursing homes or contracting out work.

“There has been a lack of transparency (for parties) on both sides of the Pacific. On that side, it has been for small investors. On this side, it’s average workers and seniors.”