Affordable Housing: Canada’s Struggle for a Sustainable Market
Canadian governments have recognized foreign criminal investments are a major factor in escalating house prices
B.C. passed a yearly 2% speculation tax on foreign owned and vacant houses in 2017 that did nothing to dent the soaring prices
The Liberal government plans to make that failed solution a Canadian wide speculation tax
These criminals are not speculators. Here’s what’s needed to understand why those methods are ineffective and what to do that will be effective
Why the rise in average housing prices way beyond the wages of average workers? It’s a simple question of supply and demand. The average Canadian can no longer afford a house, so who can? Who has so much extra cash that they can scoop up tiny bungalows at a million dollars a pop, often leave them vacant, and pay someone to make them look occupied? There are two huge sources of demand, both foreign: drug lords and superrich tax evaders.
They are not speculators. They have their profit, they want a safe secure country with a stable political system for their investments.
A Huge, Big, Enormous Number of Black Dollars
How do we know this is such a big number?
First: need. Consider the problem of the average drug lord who makes $I billion profit every year. A billion dollars in bankmachine generated 20s, shrink-wrapped on skids, fills a warehouse. They can’t leave it that way.
Next, data. A report for the B. C. governemnt on money laundering in real estate led by Simon Fraser University professor Maureen Maloney estimated that, in 2018 alone, $47 billion was laundered through Canada. In 2015, Alberto got the award for the most amount of money laundering in a province at 10.2 billion; Ontario was runner-up with 8.2 billion.
But these are estimates. The greatest impediment to discovering the true owner at the time of the report is the fact that the shares of privately owned companies are confidential. Registration only required disclosure of a director, and that person’s name could be purchased for about $100 a year. The federal government passed legislation to supposedly reveal the true owner (called the beneficial owner), but that legislation will be completely ineffective because of a freight train size loophole. We need a bit more background to explain why this is so. I’ll return to it later.
Making it Easy for the Drug Lords [consider eliminating this section]
They have no trouble getting this money into the banking system as the recent revelations called the FinCen files (Financial Crimes Enforcement Division of the US Treasury Department) has revealed. The US Treasury routinely ignored reports by the banks of probable drug lord money-laundering transactions so the banks could continue to earn their commissions.
- If you want more on bank money laundering for drug cartels and getting away with it see: How Banks Helped Launder Money For Organized Crime And Got Away With It.
- For the Canadian connection including how the Fincen Files leak shows a Canadian drug lord in prison operating his empire through the Canadian banking system see: FinCEN Files reveal Canadian connection to global financial crime, corruption
The whistleblower who revealed this on going corruption in the Fincen leaks was charged, convicted and jailed in 2021— in a near media blackout— for breaching her obligations as a US Treasury department official to keep the department’s total failure to investigate these suspicious activity reports confidential.
As the whistleblower got jail, and no banker went to jail, drug lords and wealthy tax evaders have proof that they can continue to safely get their profits into the banking system.
This is not news. In 2014, the Panama Papers gave us a glimpse into how serious the matter is for Canada. They revealed that the wealth management industry regards Canada as a lax jurisdiction, making us a preferred destination to pass black money into and through. Financial advisors in the tax evasion game have, dubbed the process ‘snow washing’.
On Snow Washing
Canadians firmly believe that this type of activity only happens in other countries; it most certaily doesn’t happen here in Canada the good. But here’s what a wealth management consultant from Switzerland has to say about Canada as quoted in the Canada Papers:
“Canada is a horrible tax haven. Everybody is now switched over from using BVI companies and Cayman companies to Canadian LPs. It’s like the ultimate tax haven entity in the world,” — Mark Morris, independent tax consultant based in Zurich who specializes in international tax agreements.
The Liberals have proposed a 2% yearly speculation tax, but this criminal activity is not speculation this is long-term investing. And 2% is not a mosquito sized bite into their profits. The criminals will make that in a few months. And, house prices will continue to rise as long as they can continue to buy.
Other ineffective solutions
Hiding data
What is Affordable Housing?
According to Jennifer Keesmaat, former Toronto city planner, housing prices in Toronto would have to fall by 2/3rds (66%) to become affordable for most Canadians between 25 and 34 years of age.
Keesmat says the average family in the GTA makes $82,000.00.
Taking Without Giving
Economists gave us ahelpful concept. Some economic activity is purely extractive. It is a form of taking without giving, yet accepted as a basic right of anyone who has enough money to do it. Economists call it by an unhelpful name that does not reveal it’s harmful nature: rent seeking.
Foreign investment in the Canadian housing market is a prime example of rent seeking: taking from the average Canadian without giving any benefit to Canadian society.
Three Causes of Exorbitant Housing Prices
I’ve spoken of foreign black money, but there are two other causes to mention before I go further.
● House and/or condo flipping
● Real estate developers buying land around cities
All three causes depend on land speculation. Speculation extracts value but adds nothing to the house itself or the society which provides the security for the investment.
Foreign Black Money
“You cannot but help look at the issue of money laundering. Having a degree of anonymity allows individuals to obfuscate,” — Peter Dent, forensic accountant and past chair of Transparency International Canada, “Rules that allow you to obfuscate the true source of money behind transactions facilitate money laundering on a global scale.”
The Evidence
Philip Lee Shanok, writing in CBC news quotes a Transparency International finding that Ontario has seen 1.4 million residential property transactions dating back to 2008. Privately-owned corporations have spent $28.4 billion on luxury residential homes (those worth between $7–10 million). We don’t know who’s behind those corporations.
Transparency International also reported that between 2008 to 2018, $25.4 billion in residential mortgages in the GTA came from unregistered lenders (shadow banks) such as one in the many notorious secrecy jurisdictions like the Cayman Islands. There is no possibilty of knowing the source of these funds.
• Techniques perfected by drug lords beginning in the 1980s
Black Money
Statistic collectors really don’t know the extent of foreign ownership because of secret ownership corporations and the refusal of governments to enact effective laws to reveal beneficial ownership.
Provincial Non-Compliance
Calls for more data on foreign investors had been rejected by the BC Liberal government under Christy Clark[5]. The BC Liberals are known as a centre-right government, in contrast to the Federal Liberals which are centre-left.
More recently, the Ontario Progressive Conservatives under Doug Ford have stopped reporting data on foreign housing ownership and made it virtually impossible to track how the market is being affected by these speculators[6].
Signatures for sale
Another contributor to the issue is the use of “nominee directors”, paid signees to various companies used to keep the real owners off the paperwork[7]. These signatures for sale have allowed black money to operate in Canada quite extensively, especially from foreign buyers.
Because vacant houses have become a rallying point for those who oppose foreign investment, these investors are hiring local people to make it appear that the houses occupied. They cut the grass, collect junk mail, turn the lights on and off and such.
Likely Cause
Tax evasion and illicit drug money is being parked in the safety of Canadian real estate; a parachute for those worried about leaving all their wealth in potentially unstable home countries.
Secretly Owned Shell Corporations
● All private corporations are secret ownership corporations
● Incorporation papers only have to show a director who is a resident of Canada
● Trustees can have all of the powers of ownership and are called legal owners. Actual owners are called Beneficial Owners in law
A Simple Tax Evasion Scheme for John Smith
- Cayman Islands– Bank account, name of Sarah Jones [secrecy jurisdiction]
- Seychelles island— Secret Trust Sarah for Corporation [Seychelle’s lawyer’s office only]
- BVIs— Corporation Director William White, director and shareholder [Secret ownership corporation in secrecy jurisdiction]
- Nevada— Signs Secret Power of Attorney for John Smith
- Ultimate owner, John Smith ‘s identity kept in Nevada lawyer’s office file only
BTW: Surprised to see Nevada? That’s because your not a billionaire. Nevada is being called the New Switzerland.
This pattern can be repeated three or more times. The resulting diagram would look like the complicated rating of the three masted schooner.
For more on how they do it: Venice Film Festival Premier, “The Laundromat” Reveals Tax Havens[8].
Ineffective attempts at ending secret ownership of corporations
New rules mandate the establishment and maintenance of a new but private register of individuals with “significant control” over the corporation
Canadian Business Corporation
21.1 (1) The corporation shall prepare and maintain, at its registered office or at any other place in Canada designated by the directors, a register of individuals with significant control over the corporation that contains
1. (a) the names, dates of birth, and the latest known address of each individual with significant control;
(Definition Section) Significant number of shares
2.1 (3) For the purposes of this section, a significant number of shares of a corporation is
1. (a) any number of shares that carry 25% or more of the voting rights attached to all of the corporation’s outstanding voting shares; or
2. (b) any number of shares that is equal to 25% or more of all of the corporation’s outstanding shares measured by fair market value.
The Freight Train sized loophole
The justification for the 25% exemption is to save administration costs. There are few private corporations that this would apply to. Having a clerical person making $25/hr copy and paste even 100 names and addresses would not be a significant cost.
Determining 25% ownership, especially if there is a string of shell corporations, is a significant cost. Here’s what the CPA Society said about it:
“Other than the simplest cases, such as where one individual owns a single corporation, these recordkeeping requirements could be quite complicated. In particular, the broad definition of ‘significant control’ means you need to trace through a tiered corporate structure to identify which individuals ultimately hold interests and rights in shares. You then need to determine whether the holdings are significant. You also need to review the impact of a shareholders’ agreement or other similar agreements.”[9]
● Purpose of private register to keep things hidden from journalists and watchdogs (re: Panama Papers)
Public Registration Useless
The NDP propose a public registry
But with a 25% loophole that is no better.
The UK has a public registry that has serious flaws. An ICIJ analysis found 208,572 companies listed post box addresses with no connection to the company’s owner, 140,409 companies with owners or others who provided addresses in tax havens, and 416 companies that changed names more than five times, possibly to obscure corporate activity.
Clarifications and Proposed Solutions
Real Estate Industry Propaganda
Developers and their industry often use the following ideas to perpetuate misinformation in the public:
● The notion that housing prices cannot be lowered and that we have to learn to live with them.
● The idea that people should give up on ownership and be content to rent.
● That environmental laws need to be loosened to destroy assigned green spaces and instead develop them into rental units.
Always ask:
● Do they have a financial interest?
● What’s their bias?
● Do I have a financial interest? What’s my bias?
Beware of economists not disclosing they are paid for their opinion. See: Interview of leading economist Frederic Mishkin:
https://www.youtube.com/watch?v=8lHvTKzfu8Q
• Canada 1% (10%0 -only can understand. Enough fair distribution- more vulnerable- better society
• Critical mass- not majority
House Flipping Contributed to the 2008 Crash
Contrary to the popular idea that middle income buyers with bad credit caused the real estate crash and subsequent recession of 2008, it was in fact the fault of wealthy borrowers who flooded the market with properties bought for the intent of “flipping”.[10]
Ineffective Policies
While some solutions could be genuinely effective in the fight against rising housing prices, other programs and suggestions have proven wholly useless. These latter include:
● $20,000 First-Time Home Buyer’s Incentive — Although well-intentioned, this measure will have little to no impact for the larger problem markets like Toronto and Vancouver, and is open to exploitation by the recipient[13].
● Reduced amortization to 25 years.
● 15% foreign owner tax — This is largely ineffective as it doesn’t prevent the root problem of housing scarcity to exist, nor does it directly fund any kind of measure to provide more affordable housing. Tax created small pause, then continued upward
The Danger in Certain Policies
They encourage buyers in bubble market. When the next recession hits, buyers will loose hundreds of thousands of dollars
Foreign ownership tax useless
The Liberal, Conservative and NDP platforms all propose taxing nonresident buyers of housing properties. These taxes and through ineffective for two reasons, the land values will escalate to more to cover the one time tax; and these buyers are not concerned about cost. This is the illegal money, and Canada allows one of the most cost-effective methods of investing illegal money in a secure environment. Even if the tax was doubled or tripled, it would not have much effect.
Compounding the issues , the Ontario Progressive Conserative party under Doug Ford is no longer publishing data about the foreign buyers tax data mandated by the Ontario liberal government, making it impossible to track who is buying what, how the tax is being collected, and how effective the program actually is[14].
Last week, a report to the B.C. government suggested $5.3 billion in crime proceeds was used to buy real estate in that province in 2018. That report recommends the province take steps to increase data collection and boost transparency in real estate transactions.
Most government measures are also woefully unprepared to deal with emergent issues such as cryptocurrencies used in this type of money laundering. While some are scams, others like BitCoin are well-maintained by their supporters and can prove impenetrable without specific and qualified knowledge of their inner workings. Policy makers with this kind of expertise are currently in short supply, giving BitCoin and others an advantage where money laundering and other dark money practices are concerned.
Proposed Solutions
First: Get the information: Require all deeds to single family dwelling units to disclose the beneficial owner with no exceptions. The Ontario liberals had required that in 2016 on all new purchases for calculation of the 15% foreign ownership tax.
● Prohibit foreign ownership of single-family dwelling units, including condominium units.
● Speculation tax on house flipping. Any single family dwelling sold within one year of purchase would be subject to a 20% tax. [1976 ended flipping]
● Encourage more affordable housing in terms of smaller houses, townhouses and condominiums, not these monster homes on small lots.
● Prohibit ownership by corporations, trusts or any way except, by the beneficial owner (an individual)
● Prohibit ownership of more than two single dwelling unit properties by any individual or corporation
● 20% per year tax on all land held for speculation
Andrew Weaver, leader of the B.C. Green Party, is proposing measures similar to those found in New Zealand, which strongly restricts or even bans foreign ownership of residential properties[11].
US Treasury pilot project requiring title insurance companies to require beneficial owner disclosure. This resulted in a 70% reduction in cash purchases by such companies[12].
Creating a Sustainable Market
The unfortunate long-term consequence of all these issues is that Canadians become priced out of their own cities, creating a market gap that precedes a recession. This ultimately works against every party except the very wealthy, who can remain untouched due to their resources.
New buyers, low- and middle-income landlords and realtors are left with bad investments and often bankrupted. The housing market as a whole has a ripple effect on the broader economy.
Realtors and landlords can contribute meaningfully to a sustainable market, but to do so means refraining from taking advantage of the market, and playing a longer game that is just as equitable, without destabilizing the economy.
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Medium — https://medium.com/@JanWeirLaw
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Footnotes
[1] Jennifer Keesmaat — May 8 2019, The Globe and Mail
[2] Michael Goldstein — June 8, 2018 — Forbes
[3] Robert Cribb and Marco Chown Oved — January 25, 2017 — Canada Papers, Toronto Star
[4] Philip Lee-Shanok — March 21, 2019 — CBC News
[5] Greg Rasmussen- May 14, 2015 — CBC News
[6] Mike Crawley — May 13, 2019 — CBC News
[7] Marco Chown Oved and Robert Cribb — January 22, 2017 — Canada Papers, Toronto Star
[8] Jan Weir — November 13, 2017 — Rantt Media
[9] Bruce Ball, FCPA, FCA, CFP — April 9, 2019 — Chartered Professional Accountants Canada https://www.cpacanada.ca/en/business-and-accounting-resources/taxation/blog/2019/march/beneficial-ownership-rules-start-preparing-now
[10] Gwynn Guilford — August 29, 2017 — Quartz
[11] Liam Britten — August 15, 2018 — CBC News
[12] Max de Haldevang — June 11, 2019 — Quartz
[13] Daniel Tencer — June 17 2019 — Huffington Post
[14] Mike Crawley — May 13, 2019 — CBC News
