Tag Archives: Canada

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

Bank Of Canada Induced ‘Havoc’, Plus Bits & Pieces

“The governor of the Bank of Canada is sending a strong message to the markets: You do your job and we will do ours.
Stephen Poloz has been dogged by the perception that he has been attempting to “talk down the dollar” — essentially to help encourage business investment and expand export markets — as the economy struggles to regain its initial post-recession traction.
On Tuesday, Mr. Poloz attempted to set the markets straight, saying it is not up to his policymakers to determine currency levels. To do so, he said, would be to court economic “havoc.”

Financial Post, 16 Sep 2014

“Creating havoc with perversely subterranean interest rates, on the other hand, is completely within our mandate…”
– vreaa

“..new condos in [Toronto] and [Vancouver] routinely cost $700 a foot, while whole houses in the US average less than $100 for the same foot.”
– Just one of many reasons listed by Garth Turner in answer to the rhetorical question ‘How to tell when housing boom’s running on fumes?’, Greaterfool.ca, 14 Sept 2014

“British Columbia’s housing market is still red hot this year but declining affordability could slow it down by 2015, according to the Canadian Real Estate Association. …
The average price for a home is expected to rise by about six per cent in B.C. in 2014, but … the CREA is forecasting B.C.’s average real estate prices to rise by less than one per cent in 2015.”

Vancouver Sun, 15 Sep 2014

In Case You Thought Our Bubble Was Due To Special Local Factors…

“Johan and Alejandra are the kind of Swedes the IMF has been warning about – piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.
The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans.
“I may travel, I may want to invest in a new business,” said Alejandra, who runs a cafe in the city centre.
Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.
Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.
Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago – the first time in more than four years.”

– from ‘Swedish household debt soars as poll nears’, CNBC, 24 Aug 2014

“In the capital the latest full-year figures show that the average wage is £39,920, while the average house price is about £400,000.
Prices are therefore 10 times greater than wages.
But in South Buckinghamshire, in towns like Amersham and Beaconsfield, the average home is worth 20 times as much as the annual local salary.
Outside the South East, the place where houses are least affordable is the Cotswolds, where they cost 19 times wages.
The countryside may be scenic, but that is little compensation when the average worker, putting a third of his or her salary into a mortgage, would need over 60 years to pay it off.” …
“”I shall be disappointed if I only get £550,000 for it,” says Mike Golding, as he shows me into a two-bedroom, first-floor flat he is selling. It has no garden, few proper windows, and no view to speak of.
But such prices are not excessive in Stow on the Wold, a pretty market town in the Cotswolds, where the undersupply of affordable housing is matched only by the oversupply of Barbour jackets, local organic brie and bow-windowed tea shops.
One such tea shop is run by Anna Wright and her mother.
She and her boyfriend have been looking for a house to buy, but, faced with prices like the above, they have given up looking in Stow.
“We have been priced out of the market,” she says.
“You are privileged to grow up in the Cotswolds, but there’s never an expectation of buying a house here,” she tells me.
A few doors down, 21-year-old shop worker Nicola O’Driscoll is in the same position.
She has been forced to look for a flat in Cheltenham, no less than 18 miles away.
“It’s really unfair. I feel like they don’t want youngsters to live around here. Because there’s no way they can,” she says.

– from ‘The 62 areas where houses are less affordable than London’, BBC, 18 Aug 2014

Too-cheap money has caused many speculative bubbles in housing, and perverted the relationship between income and housing prices. – vreaa

Interest Rates Held Far Lower Than Necessary Cause Speculative Bubbles


“The Fed’s mode of operation has drastically changed over the past 12 years. Prior to 2002 the Fed would tighten monetary policy in reaction to outward signs of rising “price inflation” and loosen monetary policy in reaction to outward signs of falling “price inflation”, but beginning in 2002 the Fed became far more biased towards loose monetary policy. This bias is now so great that we are starting to wonder whether the Fed has become permanently loose.”

“The chart above comparing the Fed Funds Rate (FFR) target set by the Fed with the Future Inflation Gauge (FIG) clearly illustrates how the Fed has changed over the past two decades. Note that the Future Inflation Gauge is calculated monthly by the Economic Cycle Research Institute (ECRI) and should really be called the Future CPI Gauge, because it is designed to lead the CPI by about 11 months.”

“The chart shows that prior to 2002 the FFR tended to follow the FIG. After the FIG warned of rising “price pressures” the Fed would start hiking the FFR, and after the FIG started signaling reduced upward pressure on the CPI the Fed would start cutting the FFR. During 2002-2004, however, the Fed not only didn’t hike its targeted interest rate in response to a sharp increase in the FIG, it continued to cut the FFR. The Fed’s decision to maintain an ultra-loose stance during 2002-2004 was the fuel for the real estate investment bubble and set the stage for the collapse of 2007-2009 [in the US].” [editor’s note: The Canadian RE market was bailed out by parallel rate cuts here — before it had even crashed!]

“There was a lesson to be learned from what happened during 2002-2007, but the Fed apparently learned the wrong lesson. The lesson that should have been learned was: Don’t provide monetary fuel for bubble activities, because the eventual economic fallout will be devastating. Unfortunately, the lesson that was actually learned by the Fed was: An economic bust can be avoided forever by keeping monetary policy loose forever. The result is that the divergence between the FFR and the FIG that arose during the first half of the last decade is nothing compared to the divergence that is now in progress. Moreover, the near-zero FFR doesn’t do justice to the ‘looseness’ of the Fed’s current stance, in that 4+ years after the end of the last official recession the Fed is still pumping money as if the US were in the midst of a financial crisis.” …

“By ignoring investment bubbles and erring far more in favour of “inflation” than it has ever done in the past, the Fed is currently setting the stage for the mother-of-all economic busts.”

– from ‘Future ‘Inflation’ and Monetary Madness’, Steve Saville, 14 Oct 2013

Canadian markets are completely subservient to action in the US. (If you don’t believe this, watch any aspect of a Canadian market of any sort on a US market holiday. Flatline!)
Canadian interest rates were cut in lockstep with the US in late 2008, even though the RE market here sorely didn’t need the juicing. The BOC and the Min of Finance were, and are, at fault for dropping interest rates too far, and then holding them too low for too long.
If you want to see a graphic representation of the reason for our national RE bubble, look at the orange areas in chart below (a version of the one above). [BTW, the charts here are almost a year old.. the FIG is now back around 4, and the Fed Fund rate remains zero].
The policy is perverse, and the piper is yet to be paid.
– vreaa

fig c g

‘A decade ago 40% of all purchasers in the States were first-timers. Today is it 27%. In Canada the number exceeds 50%, and is rising.’

Josh sells real estate in urban Toronto. “Fourteen years now,” he says, “since I was 21. And in all that time, there’s been only one really crappy time – six years ago now.” …
Josh’s clients are mostly people his age – the sub-40 set. The average deal is around $800,000, he says, “but one in four, I’d say, range from one-two to one-four.” Of those spending more than a million, Josh figures the average mortgage is about 80% – taking into consideration CMHC insurance is no longer available for seven-figure deals.
“Used to be that a million-dollar mortgage was a big deal,” he adds. “Now I see them all the time.”
By the way, to carry $1,000,000 today with a variable-rate mortgage at just under prime is about $4,500 a month. With insurance and property tax, it’s a little over $5,000. The land transfer tax in Toronto on a $1.2 million so-so house needing serious renos in the north end is $40,200. So to close on that with 20% down would require cash of about $290,000, and then a million in financing. …
No wonder RBC came out with that report last week. The bank found people between 35 and 44 have far more debt than their parents did at the same age – and more leverage than any other group in society. Mortgage rates today may be 3% instead of the 14% they were in 1993, but the amount of debt has ballooned so dramatically that monthly payments eat up far more of disposable income.
As a result, people in this age group are more dependent on real estate than any in the past. Almost 100% of the increase in net worth for Josh’s cohort has come from housing appreciation, since they’re saving and investing virtually nothing outside of their walls.
While real estate augments, they win. When it declines, they’re screwed. …
[And] it’s worth understanding what happens to people like Josh’s clients once they have seen a disaster. In the US these days the appetite for house-buying is sinking with regularity among the young. A decade ago 40% of all purchasers in the States were first-timers. Today is it 27%. In Canada the number exceeds 50%, and is rising.
So either the American kids are wusses and might suffer, or the kids here are naïve and could implode.

– from Generations, by Garth Turner, greaterfool.ca, 10 Aug 2014

Our bubble is national, and will end as all bubbles do, with implosion.
Vancouver has the biggest bubble and the least non-RE support; it will suffer the most.
As one recent online article succinctly stated: “You can’t taper a Ponzi scheme”.
– vreaa

‘Canada’s moment as an economic standout is over.’

“Canadian employers created barely any jobs in July, surprising forecasters and reinforcing the Bank of Canada’s decision to keep interest rates low.
Statistics Canada’s monthly tally of hiring and firing produced a net gain of 200 positions last month, as a 60,000 increase in part-time jobs marginally outweighed a 59,700 plunge in full-time positions. …
“There is little job growth in Canada and the degree of slack in the labour market remains elevated,” David Watt, chief economist at HSBC’s Canadian unit, advised clients in a note.
Canada’s moment as a standout among the world’s richer economies is over. The country weathered the financial crisis relatively well and gross domestic product and employment rebounded to pre-recession levels faster than most of its peers. Economic growth now is coming much harder. For the better part of the year, Canada has tended to follow monthly gains in hiring with offsetting declines in the weeks that follow. …
The labour participation rate, which measures the percentage of the population either working or seeking work, dropped to 65.9 per cent, the lowest since October 2001. Employment in goods-producing industries has shrunk by 56,000 positions this year, reducing the headcount to its lowest since January 2012, according National Bank Financial. …
Canada’s economy is need of a jolt that just isn’t coming.
The Bank of Canada has signaled its readiness to leave its benchmark lending rate unchanged at 1 per cent for a considerable period, yet it is wary of cutting borrowing costs because that could prompt highly indebted households to take on more credit.”

– from ‘Surprisingly negative jobs report supports low-rate stance’, G&M, 8 Aug 2014

Canada’s housing price bubble has been the result of 12+ years of too-cheap money rather than growth in real economic fundamentals. At some point prices will reconcile with fundamentals. – vreaa

‘The Extra Breadwinner In The Family’ – ‘Does your house make more than you?’

Another nation, but just as relevant (and equally unsustainable) here in Vancouver. – vreaa
[Remember the Vancouver dentist who reportedly said that he “made more on the sale of that house than he made in his entire career”? (VREAA, 21 Aug 2011)]

“With house prices growing faster than incomes in many parts of the UK, is your house making more money than you do?
Thanks to an extra breadwinner in the family, Rebecca Fletcher, her husband and two daughters are living the good life in a rural cottage deep in the Hampshire countryside.
The extra breadwinner is their old family home – a three-bedroom, terraced house in south-west London which Mrs Fletcher, a primary school teacher, and her husband, a London solicitor, bought in 2007.
They paid £450,000 – right at the top of the house price boom of the last decade.
When house prices fell after the 2008 banking bust, they feared financial disaster.
“We thought, ‘Are we ever going to be able to move out of this house – are we ever going to recoup the money we’ve spent on it?'” says Mrs Fletcher.
Their fears proved unfounded.
In 2009, prices in south-west London started rising, and went on rising. By the time they sold their former home last August, the price was £655,000.
According to calculations done for the BBC by Lloyds Bank, in the 12 months before the sale, Mrs Fletcher’s London home had increased in price by about £100,000 – more than she and her husband’s earnings put together.”
– from ‘Does your house make more than you?’, Michael Robinson, BBC, 1 Aug 2014