The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), together with the Canada Revenue Agency (CRA), recently issued an operational alert (the "Alert") intended to support reporting entities in recognizing financial transactions in the real estate sector suspected of being related to laundering the proceeds of tax evasion.
The Alert provides a set of contextual risk indicators relating to non-compliance with tax laws in the real estate sector, which includes tax evasion, to assist Canadian reporting entities in identifying the potential laundering of tax evasion proceeds through the financial system.
Reporting entities are encouraged to review the Alert in detail for a description of the various forms money laundering and tax evasion in the real estate sector can take.
Background
Funds generated from tax evasion are considered proceeds of crime, and funds used to invest in real estate may themselves be proceeds obtained from other crimes – such as drug trafficking and human trafficking – and are also subject to taxation. According to Canada's Updated Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada, Canadian real estate is considered to be attractive both as a destination of laundered funds and as a channel to launder proceeds of crime.
Money Laundering Through Real Estate
Money laundering through real estate can include elements such as:
- an influx of foreign capital from politically exposed persons,
- the use of underground banking networks, or
- an opaque ownership structure aimed at concealing the beneficial ownership.
Tax Evasion Through Real Estate
Tax evasion through real estate:
- is commonly facilitated by the ability to easily manipulate the price of a property, and the ability to use nominees, false identities, corporations or trusts to hide the ultimate beneficial owner(s)' identity,
- can occur by using real estate to generate income that goes
unreported to the CRA, particularly from
- capital gains made from buying and reselling the property within a short period for a profit,
- the sale of a property that is not the taxpayer's principal residence, or
- when non-residents do not report the capital gains from properties they acquired and sold in Canada as a business endeavour, or
- can originate from unreported and unremitted income tax and/or GST/HST collected from the sale of new or substantially renovated properties.
Money Laundering and Tax Evasion Indicators
The Alert states that reporting entities must consider the facts, the context and money laundering or terrorist financing indicators of a transaction, and consider what may be suspicious and reasonable in a given scenario.
The Alert sets out the following non-exhaustive list of money laundering and contextual tax evasion indicators associated with transactions in the real estate sector:
- Financing for the purchase of property is provided by a private lender or unlicensed money services business, other than a financial institution, with no logical explanation provided.
- Transactions are passing through a mortgage broker, immigration consultant(s), and/or tax haven trust account(s).
- No guarantee securing the mortgage/interest payment has been established and no logical explanation has been provided as to why.
- There is an excessively high or low price attached to the securities, goods, properties transferred from the buyer to the seller without adequate supporting documents.
- Transactions involve 'assignments of contract' where the same property is sold multiple times to different buyers and/or investors before being built and ready for occupancy.
- The same property is resold multiple times to different middle investors, speculators, or private individuals between the moment it was sold to someone and before the property's closing date.
- Different members of the same family control the main services linked to the real estate industry such as residential construction companies, real estate brokers and sales representatives, accountants, lawyers and/or notaries.
- Transactions involving a person purchasing a property on behalf of another who cannot complete the transaction, often due to lack of reported income or proper documentation required to obtain a mortgage.
- The value of the property purchased is inconsistent with reported/stated wealth and income of client.
- Statements from buyers as to the intended use of the property purchased (e.g., residence or investment) are inconsistent.
- Investment vehicles or offshore accounts are used for the purchase of property.
- Large amounts of money from foreign individuals or entities, located in a country that imposes limits on international transfers are wired through multiple smaller electronic transfers to be ultimately invested in real estate.
- Real estate brokers or sales representatives with past disciplinary issues are engaged in real estate development.
- Adverse media on the real estate professional or client involved in the transaction exists, linking them to criminal activity such as fraud, proceeds of crime, corruption/bribery, or tax evasion.
- Real estate brokers or sales representatives are acquiring properties and reselling them quickly with unknown or third party funds, in some instances using cash.
- Statements or questions are received from buyers as to how to avoid paying taxes on real estate property.
- Cryptocurrencies are used as payment to property developers or investors and/or speculators.
Reporting
Where there are reasonable grounds to suspect money laundering, a suspicious transaction report to FINTRAC would be required. For detailed guidance on reporting suspicious transactions reports, see Reporting suspicious transactions to FINTRAC (canada.ca).
The author would like to thankCathy Costa-Faria, Associate, for her assistance in writing this Update.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.