Feelings, Vibes, and Concepts

Fewer letters can spark fear in the average Canadian’s heart than the letters C R A. Of course we all know it stands for the Canada Revenue Agency. The CRA is probably the most feared government agency of all time.

As someone who has dealt for a very long time with both the CRA and the IRS, I would rather deal with the IRS any day of the week. Over the last couple of decades of filing taxes on both sides of the border, I will deal with the IRS 100% of the time if given the choice. Ever since the pandemic, it seems the CRA has gotten worse, not better – even though they have increased their work force by thousands of people. Even though there are more CRA employees than IRS employees, the service level at the CRA seems to be getting worse.

For years the CRA was taken as a bit of a joke – just pay a little bit of money to them on tax arrears and they would leave you alone. But more recently, the CRA has grown some new teeth, and they are not afraid to use them. This past week, we saw that the CRA is both flexing their new muscle, and overstepping their role, – getting ‘ out over their skies ‘ as we call it in the financial world, and it can have a lot of implications for the Canadian housing market.

On Monday, a Richmond BC man was sentenced by a federal judge after he was found guilty of tax evasion. A CRA investigation revealed that the accused (Bhullar ) failed to report $7,485,246 in taxable income on his individual income tax returns for the years 2011, 2012, and 2014. All of this so called income was actually capital gains from flipping assignment sales. In just 3 years, the accused generated almost 7.5 MILLION dollars flipping assignment sales. Gee whiz, I can’t figure out why real estate is soooo expensive in Canada??? The accused was ordered to pay $2,153,394.00 to the CRA in taxes, fees, fines, penalties and interest. What you may not know is that the judge also sentenced the accused to a jail sentence of 2 years less a day. Now, the sentence was a suspended sentence, however, the very fact that jail time was part of the sentence is a big big deal. Jail time is the kind if thing you expect from the US, not Canadian courts, for tax evasion. I find it odd that a person who evaded taxes received a harsher punishment than most career criminals get in Canada these days for crimes like rape and murder. It is the governments way of sending a fairly strong message : You can do what you want, but don’t fuck us over on taxes. Case in point – the recent case where a van was driven the wrong way down the 401 by a multiple time offender – killing 4 people – resulted in probation. So, do what you want, just don’t steal from the government.

No matter your feelings on the above, the Monday ruling marks a very big turning point in the CRA’s trajectory – they are coming after people who made money in real estate and didn’t report it. That includes flippers, landlords who owned second properties, cottage owners who didn’t declare the taxable secondary home, and assignment sale benefactors. How much of your mortgage brokering business was deals for people buying and flipping rentals and you know it was not reported to the CRA? How many cottages did you finance that never got reported as a secondary residence? How many of your current files have an extra suite – legal or not, and there is rental income collected by your client but not reported on tax returns? How many of your clients did you help take out a LOC so they could make a hefty deposited on 3 pre cons, and assign the units later – and not report it? Now, I am not saying that mortgage brokers should be in front of the judge staring down a sentence, but we did help fuel the boom. But, the problem is that now the CRA has proven they are coming for all of these people to try and collect as much revenue as they can. God knows they need the money to try and fill the holes in the current governments budget deficit. So, agencies like Canada Revenue are going to be tasked with finding that revenue – and it takes a lot of revenue to fill a gap for 62 BILLION dollars.

Now, I know a lot of people do not give 2 shits about tax policy, but this could be a big problem for brokers. Now that the CRA has proven they are going to chase people, it gives a lot of incentive to NOT buy things like rental properties, secondary homes, etc. etc. When the CRA is actively looking for money from people, it makes no sense to try and buy pre cons to assign later and make a few bucks. We could start to see the amount of deals available to brokers continue to tick lower on announcements like this.

Since we are talking about uncertainty, and keeping in the vein of the CRA, lets also speak to the announcement they made last week about the new capital gains tax. When Canadian parliament shut down for the Winter break, any and all bills not passed died with it – including the increase of the capital gains tax inclusion rate announced in the Spring of 2024. Even though the bill did not pass, the CRA announced they would still charge and collect tax at the new higher inclusion rate. Now, Canada Revenue’s mandate is to collect tax based on tax laws, not tax spirit. Apparently they are taking the whole Vibecession thing too far, and now are collecting tax based on feelings and vibes, instead of on tax law. The cool thing about this will be to see them collect taxes on the PROPOSED rules, and then get sued into oblivion by the tax lawyers. But, stop and think for a moment about how unsettling these types of situations are. How would people feel confident investing in a long term asset like real estate when the tax laws surrounding it are changed constantly, and apparently changed even before laws are put in place. If the CRA can simply tax people on feelings, vibes, and concepts, what else can they make up as they go along? Bullshit like this goes a long way to tamping down investor optimism in an asset class, and we all know housing doesn’t need any more reasons for people not to invest.

And finally on the note of CRA, it looks like we will be getting a new income verification program with the CRA and lenders. Now, this is something I welcome with open arms. Getting rid of the fraudsters, getting rid of the cheats, and getting rid of the degenerates that have run prices up is comforting to me. This should have been in place 2 decades ago, but somehow was never a priority. But, and there is always a but, let’s also remember that things like this are usually a 2 way street. If the lenders have access to CRA to confirm income, is there a back door built in that allows CRA to access data about who got a mortgage on what property, from what date to what date, and the purchase price vs. the sales price? Is it possible that the data will flow both ways between banks and CRA and allow the agency to see – in plain detail, black and white if you will, who owned what? Now, I am sure everyone will call me one of those conspiracy theorists, a tinfoil hat wearer if you will, but nothing in finance is as it seems these days, and the current ruling government has proven – time and time again, that rules simply exist to be made up, changed to their liking, and manipulated to suit their current agenda. Making a lot of money on housing used to be a humble brag, but now it is the societal equivalent of having an STD. Being a successful land baron is now seen as the problem, and puts you right in the bullseye of government policy and the Canada Revenue Agency. The CRA is on a mission to level the playing field even if the law is not on their side.