INTRODUCTORY NOTE TO BLOG READERS This blog shouldn't just pick on realtors for unethical behaviour. If realtors show occasional snake like behaviour, then the builders and renovators are dinosaur sized snakes when it comes to ethical matters. Today on the blog we will feature a very common form of gst fraud that the government is seemingly taking a very lenient view on in Calgary, and highlight how the renovators and realtors work together to perpetuate the scam.
The Canadian Revenue Agency (CRA) controls the taxation of new housing. This agency loves taking huge lump sums from Construction project transaction, a massive source of revenue for the government given housing cost today. While all new housing 'recycles' old land into new taxable product (which I view as unfair, particularly for inner city projects), the same is even true for comprehensive renovation as I will show in the documents attached below.
If a renovator 'substantially' changes a house and meets the significance test of 90% (a major gut level reno), the CRA requires gst be paid on the ENTIRE sales price because in its view, the house is now 'new'. In Calgary, renovated houses of this magnitude can cost between 400k up to millions +$. By not remitting gst to the CRA, the renovater is evading a huge tax ($20-$50k would be most common). Having to pay the gst on the full sales price likely would ruin the economics of many projects, I can see the government taking a full half of many renovators margins on larger projects. Of course the renovators, or house flippers as they are now known, detest this rule, because the land is such a big portion of the value, they have to pay a massive amount of gst on a bigger reno where the land value is in excess of $550k. From what I have found the renovators tend to 'play dumb' on this issue, and either pretend that no matter to what extent the renovation is completed, it is never 'substantial', or they will just say some blanket statement such as 'renovated houses are used so gst does not apply to the sales price'. The CRA has of course published documents to dispel these myths about renovated houses.
What can be humorous when viewing the listing description published by the realtors is that they want to market the magnitude of the renovation as a sales feature, not downplay it for tax purposes. So what you will see is often the realtor will undermine his or her own clients position on the gst issue. This is the scenario we find ourselves in regarding the Kilkenny property we feature today on the post.
There are two listings in my area that are actively evading the GST. I found both of these listings by looking around for five minutes on the realtor.ca website. One project is just a block from my house and I have watched it get renovated, knowing from the start that this would be perhaps the most comprehensive renovation I have witnessed (I was right this reno took six months). This was not a routine project. They replaced all the 4 inch exterior walls! They even added an addition. There is almost nothing left of the original home once you start removing exterior walls. This project exceeds the definition of significance by a massive margin. The realtor even boasts of the changes to the house in the listing description using similar language to the CRA in how it defines significance.
I emailed the realtor and asked if the price included gst. The response was so typical of a realtor ' this is a renovation so gst does not apply'. I wonder if the realtor is totally ignorant of these matters or is just acting unethically to help the renovator evade the tax. I've considered publishing a screenshot of the listing, realtor response and the CRA bulletin on gst on this site. Would this infringe on privacy of the individuals involved? Do those acting to evade the tax need to be shielded from scrutiny? In this case my blog post is useless without sharing the info of the parties involved. I'll post up the info later so my blog readers can get a good look at the pervasive unethical behaviour we see in the realtor-renovator world today. Maybe the CRA will read my blog and crack down on tax evasion. The government could collect millions more by doing some routine screening of this stuff. You wonder why they don't bother.
UPDATE 1: Here is the listing