The new federal budget attracted a lot of attention for the money it committed to getting first-time buyers, particularly millennials, into the housing market. What did not get as much coverage is the government’s increasing effort to keep closer tabs on real estate transactions.
Just a couple of days after the budget was delivered, the Canadian chapter of Transparency International published a scathing report on money laundering through Canadian real estate (TI Canada report). The organization works to expose corruption in government and business around the world.
Transparency International Canada has focused on Canadian real estate for a number of years and this is the latest in a string of reports on, what it says is, the sector’s susceptibility to criminal activity.
The report says that Canadian real estate is particularly attractive to international money laundering because of its stability, the recent level of returns and Canada’s lax efforts to identify who actually owns a property. In Canada, so-called, beneficial owners can keep their identities hidden by using companies, trusts or nominees to hold title. A beneficial owner is described as the natural person who owns, controls, or exercises ultimate effective control over a property.
The report focused on the Greater Toronto Area and looked at nearly 1.5 million property transactions dating back to 2008. It found:
- Corporate entities acquired $28.4 billion worth of GTA housing. Most of the companies were private and there is no information about their beneficial owner.
- Cash was used to make nearly $10 billion worth of housing purchases. In many cases that allowed the buyer to bypass anti-money laundering checks.
- More than $25.4 billion worth of residential mortgages were provided by unregulated lenders, which do not have anti-money laundering obligations. Nearly half of those mortgages went to corporate entities.
(This last point may be interesting to mortgage professionals, given the recent statistics that show increasing use of private lenders.)
TI Canada offers several recommendations for closing these loopholes. They include:
- Mandatory identification of beneficial owners.
- The expansion of anti-money laundering obligations to include mortgage brokers, unregulated mortgage lenders, and mortgage and title insurers, among others.
- Develop legal enforcement tools that will allow the gathering of intelligence and allow for the seizure of unlawfully acquired real estate.
However, provisions in the new budget appear to be focusing on collecting more of the taxes owed in real estate transactions. It provides the Canada Revenue Agency with $50 million over five years root out tax avoidance involving:
- Reporting the sale of a primary residence.
- Paying proper taxes on the sale of a secondary residence.
- Reporting gains from real estate flipping.
- Reporting commissions on home sales as taxable income.