Category Archives: 18. Spot The Speculator

Foreign Investor Anecdotes from the Globe and Mail – “One of the more expensive homes bought last year is registered to a student who is not living there. It changed ownership three times in five years and is now empty.”

“A Beijing-based private equity manager who bought a $2.3-million home in the hot Vancouver real estate market said he did that while earning just $19,000 a year. He also wired nearly $2-million to his family in Canada during the same period.

Jing Sun is among several foreign investors who bought property in Canada in recent years, but kept the extent of their wealth out of view of the tax authorities and the courts, a Globe and Mail investigation has found.

The Globe’s findings come amid a controversy in Vancouver, where many blame foreign buyers for soaring house prices that have made a single-family home unattainable for some long-time residents. The Urban Development Institute will tackle the topic for the first time in a sold-out public forum on Wednesday in Vancouver.

The subject became an election issue when Conservative Leader Stephen Harper promised to collect data on foreign ownership of Canadian real estate and to consider new taxes and regulations to keep housing affordable.

An in-depth look at public data – including land titles, tax reporting and court records – revealed a distinct pattern, suggesting the typical wealthy foreign family buying Vancouver real estate pays little or no income or capital gains tax.

“I actually have clients in this circumstance,” said David Chodikoff, a Toronto tax lawyer who was a prosecutor but now defends clients who have trouble with the Canada Revenue Agency.

He is among several experts who said most wealthy foreign buyers are not breaking the law, but simply using tax avoidance manoeuvres or loopholes in the system.

“They love to take advantage of Canadian tax law … and it is happening in other communities too,” Mr. Chodikoff said.

Many of the houses being snapped up are not huge mansions. Increasingly, they are family homes priced out of reach for locals whose taxes pay for public services, and some of whom earn more than the incomes reported by buyers such as Mr. Sun.

Court records show Mr. Sun’s wife lived without him in their pricey Vancouver home for six years while he sent her $260,000 a year from China. They paid $40,000 a year for their children to attend private school in Canada.

When the couple broke up, Mr. Sun stopped supporting the family. In his divorce case last year, he claimed he had been making $19,000 a year. The court asked for tax and other financial records, but he failed to produce any, the documents say.

He said his money was loans from friends and family in China. The judge did not believe that, saying his bank would not have approved his financing if he had no wealth of his own.

“In my view, the respondent has yet to overcome the unlikelihood … of a bank advancing him over $1-million [in a home mortgage] on the basis of a $19,000 salary,” B.C. Supreme Court Justice Emily Burke said last year.

Accountants and tax lawyers say it is common for investors from China to pay no income tax in Canada while moving their wealth to Canada through spouses and children here.

The Globe discovered one in three multimillion-dollar homes bought recently in Vancouver areas popular with foreign buyers is registered to a homemaker, student or corporation – one indicator of how the identity of the person who actually paid can be hidden.

When a spouse or child sells a property that is registered in their name, the real investor can avoid capital gains taxes – because the relative in Canada can claim it was their primary residence, therefore not an investment.

Other revealing data came from Statistics Canada, which tracks income that households report to the CRA.

In the Vancouver area of Dunbar, which realtors said is a top neighbourhood for Chinese clients, one in four of what Statscan calls “couple families” – excluding seniors – declared income of less than $35,000 in 2013. That puts them in the lowest tax bracket.

Given that the municipal property taxes on a $2-million to $3-million home are about $10,000, those reported income levels are questionable.

Land titles records on 250 houses bought in the past two years for more than $2-million in key Vancouver neighbourhoods indicate that 85 per cent of those new owners have Chinese names. There is no way to tell how many are Canadian. However, 2014 statistics from Macdonald Realty and ReMax show that 70 per cent of their clients were from mainland China.

The records list the occupations of non-corporate owners. The most frequent is “business person.” The next is “homemaker,” then “student.”

“When you sift through the information, you find that the wife [or student] has no income … there is no possible way they could afford to purchase the home,” Mr. Chodikoff said.

Several of the houses visited by The Globe appear to be unoccupied, with cobwebs at the front entrance and mail piled up.

One of the few owners who answered the door was a 25-year-old University of British Columbia science major who did not want to be identified. “My parents bought the house – for me to study here,” she said.

She is the registered owner of the $2-million home – but she said her parents live there too when they are not in China on business. “After I study, they will sell again.”

One of the more expensive homes bought last year – in Point Grey – is registered to a student who is not living there. It was bought for $4.8-million and has a stunning view of the mountains. It changed ownership three times in five years and is now empty.

The Globe found five out of 13 properties owned by students are empty and four are rented out, suggesting they were bought as investments.

A family friend picking up the mail at one house said the real owner is a business person in China who will not be in Canada for months. At another empty student-owned home, the backyard pool is filled with dirty water and garbage.

Many of the properties registered to homemakers are occupied. Several family members at those homes indicated the heads of the households are transferring wealth to Canada – because it is seen as a small, clean, inexpensive haven.

A homemaker listed as the owner of a $3.5-million house bought this year said her husband chose it “because it was good for our daughter’s [public] school to be nearby.”

She said she is staying in Vancouver – primarily so their children can get a Canadian education – while her husband travels back and forth.

She said the couple has permanent resident status in Canada, which benefits the family, but her husband earns good money in China from his food trading business.

A key question is whether foreign ownership actually is inflating the market while locals whose income tax dollars pay for roads and hospitals are squeezed out. If so, Canada would be losing affordable housing as well as much-needed provincial and federal tax revenue.

The data examined by The Globe suggest the foreign buyers have a significant, disproportionate impact on home prices.

One third of the 250 properties increased more than 50 per cent in price since 2010 – some of those more than doubled. They were also resold at least twice in that period.

The price of one property went up 40 per cent, then 123 per cent, in five years. The average single-family home in all of Vancouver increased 21 per cent in the same time period, according to the Canadian Real Estate Association.

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Top ten price increases
Vancouver properties in Dunbar, Point Grey and South Granville from a sample of 250 homes purchased in the past two years for more than $2-million

The most revealing picture on tax avoidance emerged in court records from more than 200 B.C. divorces and other disputes involving real estate investors.

In several, the judges suspected or concluded significant overseas income was hidden.

Essentially, CRA rules say a non-resident who buys and sells Canadian property must pay capital gains and other taxes on earnings from those investments. If they have a primary residence and family living in Canada, they must file resident tax returns and report all of their income.

Some cases indicate that millionaires buy properties through relatives in Canada and then claim in their tax returns to be non-residents – which means they pay no Canadian taxes on their worldwide income. Others who file as residents appear to have grossly under-reported or failed to report their earnings.

Several cases involved multiple properties in the names of spouses, children, girlfriends and corporations.

The most clear-cut example of suspected tax evasion was a 2013 spousal support case against Hong Kong businessman David Ho.

The judge determined he had a net worth of $15-million to $20-million when his girlfriend, Jade Chen, came to Canada and started managing assets for him. The court concluded Mr. Ho’s annual income – from one bank account alone – was 100 times higher than the total income he reported to the CRA, which was as little as $1,254 in 2009.

The court concluded that Mr. Ho bought several properties in the Vancouver area. He put one in Ms. Chen’s name, another in his son’s, and two – worth $5-million – in the name of a corporation that had no purpose but to hold his assets in trust.

When a corporation sells property, the shareholders can simply sell the company’s shares to the new buyer, so the home stays in the company name. In that scenario, no one pays the B.C. provincial property transfer tax – $40,000 on a $2-million sale – because no change in owner name is registered. Unlike Ontario, B.C. has not closed this loophole.

Mr. Ho became a Canadian citizen years ago and signed up for B.C. health coverage. Until recently, however, he claimed on his taxes that he was a non-resident.

“[Mr. Ho’s accountant] advised Mr. Ho to break all significant ties with Canada, such as owning property and bank accounts, to ensure that Canadian tax authorities considered him to be non-resident,” B.C. Supreme Court Justice Victoria Gray said.

The accountant, Frank Sze of Richmond, said that sometimes owners don’t want their names attached to the properties.

“There are a lot of people who don’t want their names to appear in the land registry. They don’t want to be known,” Mr. Sze told The Globe and Mail. When asked why, he said, “Just because.”

Even after Mr. Ho began paying Canadian income taxes as a resident in 2011, he claimed his income was only $27,500, the court documents said.

“Many of the concerns about Mr. Ho’s evidence related to how he handled assets and how he reported them for tax and legal purposes,” said the judge, who awarded Ms. Chen a quarter of a million dollars.

In some cases, Chinese investors have said their income was from family gifts and loans, which are tax-exempt.

When millionaire Xiong Hu Li’s wife divorced him in 2013, he ignored court orders to produce financial records, including tax returns. Instead, court records say, he claimed that all the money invested in Vancouver while he was in China came from his parents.

His wife, Rong Yao, had a $6-million Vancouver home, a condo, a Porsche and an Audi registered in her name. She testified at one point she owned 16 properties in B.C., until her husband had them transferred into his mother’s name.

B.C. Supreme Court Justice Mark McEwan concluded Mr. Li “appears to have significant financial interests in China … millions of dollars … the money in Canada is of less consequence to him than revealing his assets appears to be.”

The judge called Mr. Li’s failure to account for his wealth “reprehensible” and awarded Ms. Yao spousal support, plus almost $4-million in assets.

Tax experts told The Globe and Mail Canada’s tax regime is not set up to collect from foreign millionaires who earn money overseas and have homes and family in Canada.

“I think it’s a serious issue and its a problem for the government and a problem for Canadians,” Mr. Chodikoff said.

“There could be a quite significant loss of tax revenue. More resources need to be pumped into the CRA – and more political will – so there is a desire to have stronger laws.”

The CRA indicated it is investigating the situation, but gave no specifics.

“There have been no prosecutions for tax evasion of people in Vancouver who claim to be non-resident or claim China as their primary residence,” a statement from the agency said.

“The CRA can, however, confirm that it has numerous ongoing investigations across Canada, some relating to residential real estate.”

An accountant in Vancouver who spoke on condition that he not be named said that the point is to remove the money from China.

“The picture is, basically, a lot of these people don’t really live here,” said the accountant, who came to Canada several years ago, and has wealthy Chinese clients.

“The guy in China wants to shift the money to the children – to get it out of China. Then if the Chinese government goes after the man, the assets are with the children.”

– from ‘Foreign investors avoid taxes through Canadian real estate’, by Kathy Tomlinson, Globe and Mail, 7 Oct 2015

“We live next door to a large new house that replaced a beautiful one in excellent condition. It has been empty since its construction about 2 years ago. The owners live in another house nearby.”

“We live next door to a large new house that replaced a beautiful one in excellent condition.
This new house, contrary to the bylaw, does not meet the requirement that the bulk and size of new developement is similiar to existing developement. Nor is it as required, compatible with the existing amenity and design of developement. City Planning approved this contrary to the neighborhood objections.
It has been empty since its construction about 2 years ago.
The owners live in another house nearby.
In this block there are now 3 houses that have been empty for several years.”

– B. Mcloughlin, commenting 2:58 PM on March 8, 2013 below the Globe and Mail article Kerrisdale preservationists lament a tide of bulldozers.

Misallocation of resources.
– vreaa

Spot The Speculators #99 – ‘Canada Don’t Let Your Retirees Grow Up To Be Real Estate Cowboys’ – Alberta Couple Late 50’s; Net-worth $196K; RE Holdings $1,850K

“Alberta couple, Edward, 58, and Sue, 56, earn gross income of $247,200 per year from working in two great jobs — his in transportation management, hers in health care. Yet they are almost broke.
The problem is they are shelling out $47,514 per year just in interest charges on liabilities that amount to 6.7 times their annual pre-tax income. Their assets add up to $1.85-million, leaving them with a net worth of only $150,000 as the end of their careers comes into view.
The problem will get worse if not fixed, because they are not making a dent in the principal they owe. When interest rates rise, their debts will become ever more costly to carry. Unless they act, they will not be able to retire as planned. They may not even be able to avoid eventual insolvency. “Should we be selling off investments, some at a loss?” Edward asks. “We are working hard to keep our heads above water, but we feel that it is a losing battle. Our goal is to quit when I am 64. Question is: Can we do it with our heads above water?”
The numbers don’t look good: Their debt is about nine times their equity and their investment income is negative.”

– from ‘High-income couple has to deal with some real estate headaches’, Andrew Allentuck, Financial Post, 11 Feb 2013 [hat-tip kansai]

Breakdown of their assets and debt:

Assets (market value where applicable):
House: $950K
BC ‘income-generating’ property #1: $540K
BC ‘income-generating’ property #2: $240K
Arizona Condo: $120K
Total assets: $1.85M

House mortgage: $758K
BC property #1 mortgage: $446K
BC property #2 mortgage: $329K
Business Loan: $75K
CC Debt: $32.7K
Car loan: $13.2K
Total debt: $1.654M

Net-worth: $196K
RE holdings: $1,850K
Ratio of net-worth to RE: 1:9.4

By sensible estimates, one should hold no more than (90 minus your age)% of your net-worth in RE.
By that measure, this couple should have 33% or less of their net-worth in properties; the actual number for them is 944% (yes, not a typo – nine hundred and forty four percent).
If RE blinks, these guys are underwater. In fact, given the current market, they very likely are already underwater in that they’d probably have to drop prices by at least 10% to liquidate their holdings.
If prices drop by 30% or 40% or 50%, or even more, their retirement plans will be completely destroyed.
This is a more extreme example, but the fact remains that a very substantial percentage of Canadian ‘boomers’ are overdependent on the health of the RE market for their future financial health. And, like the couple in this example, they will likely be advised, or forced to the conclusion, that they have to lighten up their RE holdings.
– vreaa

Spot The Speculators #98 – “Robert has been tapping his savings for years to support his biggest investment, a rental property that bleeds more than $1,000 a month over the rents it produces.”

“Registered retirement savings plans are the lifejackets for the retirement of a British Columbia couple we’ll call Robert and Jill. At 55, he is a maintenance supervisor for a small town. Jill, 48, is a self-employed management consultant.
“We need to get more money for our retirement and we have to make up for the savings that Robert lost through bad investments,” Jill says.
“We have to rebuild our investments, specifically our RRSPs, if we are going to be able to retire comfortably.”
Their RRSPs have a balance of $355,000 heavily allocated to growth stocks and mutual funds.”

“Robert and Jill have been short of cash and have abandoned RRSP contributions in the wake of a divorce that cost Robert $100,000 on top of a six-figure loss on a business.”

“Unfortunately, Robert has been tapping his savings for years to support his biggest investment, a rental property that bleeds more than $1,000 a month over the rents it produces.
If the property were sold for its $650,000 estimated value, it would leave $200,000 after paying off the $414,366 selling costs. That would pay off $30,000 in other debts and leave $170,000 to put in RRSPs. In 10 years at retirement, that would have grown to as much as $290,500 and could then add $16,000 a year to retirement income.”

Residence $550K
Rental property $650K
RRSPs $356K
cash $10K
3 cars $35K

Mortgages $414K
LOC + CC $30K


– from ‘Family Finance: RRSPs to the rescue’, Andrew Allentuck, 6 Feb 2013 [hat-tip space889]

Clearly only hanging onto rental property for presumed future price gains. Ergo, speculators.
Percentage of net-worth in RE: 100%
Percentage of net-worth that should be in RE at age 55: 35% or less
Percentage of BC boomers in similar position: [your guess here]%
Implied price downside when couples like this started selling: [your guess here]%

– vreaa

Spot The Speculators #97 – “We are moving to Burnaby in March, so we decided to keep our house in North Vancouver and put it up for rent.”


“We are moving to Burnaby on March, so we decided to keep our place and give it [for] rent, it has never been rented before, very well cared and Very nice designed two levels, 3_Bed, 2_Bath, 1 seperate entry Den, located in one of the nice and quite neighborhood.
You have the option to choose(Furnished: $2700 or unfurnished: $2500).”
craigslist ad, 21 Jan 2013 [hat-tip Guy Smiley on VCI]

The ‘speculator’ classification is based largely on the assumption that they have purchased in Burnaby.
– vreaa

Spot The Speculator #96 – “In 2008, when I was 28 years old, I had saved $70,000, enough for a 20% down payment on a triplex in Toronto. I moved into one unit and the rent from the other two units paid for the mortgage and utilities.”

“I’ve always been very focused in my life. I was born a triplet and knew from an early age my parents wouldn’t be able to pay for many extras, or for postsecondary education for all of us. But I was determined to go to university and to buy a home of my own. So in high school I started working as a waitress for 20 hours a week. During the summers I took as many shifts as possible, often working seven days straight. I was a workaholic and should have cut back because my grades were suffering, but I persevered.”

“I earned enough to pay for tuition by living at home with my parents and commuting to York University. It wasn’t easy. I didn’t have a car so I used buses to make the two-hour journey to York and back each day. At one point I considered buying a car but was shocked when my dad showed me how expensive it was. I kept commuting every day for four years. Believe me, it was really depressing. I would get home every night and it was cold and dark, and I was tired. But I knew I was saving for my big goal of owning an investment property, which kept me going.”

“After graduating with an English degree in 2006, I had no student debt and $20,000 in savings from my waitressing job. Then I got a lucky break-I landed a job as an administrative assistant, paying $32,000 a year in downtown Toronto. In 2008, when I was 28 years old, I had saved $70,000, enough for a 20% down payment on a triplex in Little Italy. I moved into one unit and the rent from the other two units paid for the mortgage and utilities. Last year, I got married and my husband moved into the apartment with me. I’ve never doubted the triplex was one of the best financial decisions I’ve ever made.”

“The key for me was tracking my spending in a journal to see exactly where every penny was going so I knew where I could cut back and add to my savings. Most years I saved 70% of my earned income, which I used to pay for university and for the down payment on the triplex. By living at home a little longer than most people I was able to really beef up my down payment. That’s made me truly independent a lot more quickly than many of my friends who are still mired in debt.”

“Now my goal is to pay off the mortgage on the property as quickly as possible. I’ve done some renos over the years and I’m putting $500 a month extra on my mortgage to pay it off faster. The triplex’s value has also gone up. I bought it for $350,000 and it’s worth $450,000 today.”

– Angie Oliveira, 32, Toronto, as featured in ‘How to become a landlord’, Julie Cazzin, MoneySense 16 Jan 2013 [hat-tip proteus, who sent this link by e-mail and added “Saving 20k waitressing is a heroic accomplishment.”]

Angie has an admirably proactive savings habit. Because of this ability, she will quite likely do fine in the long run, but we suspect this will end up occurring despite her RE investment, not because of it.
Yes, she is describing a ‘cash-flow positive’ property (something unavailable in our city in 2008), but we’d like to see more of the math before being sure about that. Also, there is downside risk of increased mortgage rates, downward pressure on rents (TO condo glut), and unexpected expenses.
She bought a few years prior to the peak of a multigenerational bubble in real estate. If property prices drop 33% from the peak, she’ll likely still be able to maintain her ownership, but she will, on paper, have lost her profits and her downpayment. This is something we’d imagine would be particularly painful for her, given the hard work it has taken for her to accumulate her savings gains.
In that regard, it is interesting to note that it took her many years of extreme saving to accumulate $70K, but her RE purchase then rose in value by $100K from 2008 to 2012. In fact, she ‘made’ more on paper in RE than she did in entire income those 4 years, when taxation is taken into account. This is a good example of how RE price rises through the speculative mania have perverted the way in which people consider the relative value of real estate, money, work and saving; and how homes have become financial instruments as much as places of shelter.
– vreaa

Spot The Speculators #95 – “Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.”

“A couple we’ll call Tiff (49) and Sandy (45) turned their long-time friendship into a union when they bought a house in British Columbia and combined their fortunes in 2008. The relationship came with a lot of baggage, however. Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income.
Revenue from the income properties barely covers their total costs — mortgage and line-of-credit interest, taxes, utilities, insurance and maintenance. Add in falling prices in the sliding B.C. housing market and the couple is subsidizing losing investments.
They save only $100 a month for RRSPs and $25 a month in an RESP for a Sandy’s nine-year old child from a former marriage. At mid-life, the couple, each of whom works for a large publishing company, has just $31,000 of RRSPs and almost no cash.”

They started with 25% conventional down payments, but now find themselves with about 10% equity in the rental units as a result of falling property prices and debt-financed buyouts of former partners. Their return after paying all interest costs, utilities, insurance and taxes is negligible. Unless they can raise rents drastically or realize future capital gains, the investments are flops.

A financial crisis triggered, perhaps, by unemployment, illness or accident would require them to add debt, for they have just $2,000 in cash. If interest rates rise by 1% or 2%, they would be forced to refinance, but they already have 30-year amortizations. To pay more interest, they would have to face deregistration of some or all of their $31,000 of RRSPs, heavy taxes on payouts or, in the worst case, bankruptcy.

Family Finance asked Adrian Mastracci, a portfolio manager and financial planner at KCM Wealth Management Inc. in Vancouver, to work with the couple. He is candid in describing the issues.
“The couple’s problems are far too much debt, especially for properties that are poor investments, and an excessive concentration in real estate, for each unit is within just blocks of the others,” he says.

Real estate has produced substantial gains for homeowners in parts of B.C., but the boom is waning. When interest rates rise, prices could fall further, for most people buy what they can afford and, with higher borrowing costs, they will afford less.

– from ‘Bad real estate investments leave couple with $1.5-million in debt’, Andrew Allentuck, Financial Post, 11 Jan 2013 [hat-tip JoeQ]

Summary of finances for this couple:
Assets $2M [$1.862M in RE at current market prices; $137K other]
Debt $1.542M [3 mortgages, 1 LOC, CCs, Car loan]
Net worth $456K [Assets minus Debt]
Ratio of RE holdings to Net worth: 4.1 to 1
Put another way, more than 400% of their net worth is in RE.
(I find this figure as shocking as the debt to income ratio of 12)
If/when the market price of their RE holdings drop 25% they would be wiped out.

What, me, a speculator?
Just innocent locals doing what innocent locals do, right? Building wealth with RE.
How many more out there are in similar situations?
– vreaa