Operational Alert: Identifying Tax Evasion and Money Laundering Risks in Real Estate

Purpose
This Operational Alert aims to assist reporting entities in identifying potentially illicit financial transactions within the real estate sector that may be associated with laundering proceeds from tax evasion.

Issued jointly by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and the Canada Revenue Agency (CRA), this alert provides specific risk indicators related to non-compliance with tax laws within real estate, including potential tax evasion. By enhancing the detection of transactions related to real estate-linked tax evasion, Canada seeks to mitigate vulnerabilities in tax compliance and money laundering, ultimately fostering a stable real estate market for Canadians.

Background
Since July 12, 2010, tax evasion has been classified as an offense under the Income Tax Act and the Excise Tax Act. Tax evasion involves intentional non-compliance with tax laws, including falsifying records, concealing income, or inflating expenses. Funds from tax evasion, regarded as proceeds of crime, often intersect with money laundering, as similar techniques are used to disguise the origins of such funds. Additionally, investment in real estate may involve proceeds from other crimes (e.g., drug or human trafficking), further complicating taxation and compliance.

The Canadian real estate sector, covering all stages of the property process, is at risk of exploitation for money laundering and tax evasion. Criminal actors may leverage real estate’s attractiveness for concealing capital from foreign political figures, using underground networks, or establishing opaque ownership structures.

Common tax evasion techniques include property price manipulation and concealing true ownership using nominees, corporations, or trusts. Income generated through real estate, such as capital gains from property flipping or undeclared sales by non-residents, may also go unreported to the CRA, alongside unremitted income or Goods and Services Tax/Harmonized Sales Tax (GST/HST) from new or renovated properties.

Overview of Money Laundering and Tax Evasion in Real Estate
Tax evasion within real estate takes many forms. This alert emphasizes common practices such as non-bank property financing with unclear justification, frequently involving private lenders or unlicensed financial services. Another indicator includes complex fund flows through mortgage brokers, immigration consultants, or tax haven-linked trust accounts used for property purchases.

Methods of Tax Evasion in Real Estate
The sector may facilitate tax evasion through specific activities, including:

• Assignment Contracts: Developers or builders might sell property contracts multiple times, generating unreported income on deposits or penalties from cancelled sales. Such contracts, often linked to foreign buyers, may be exploited through cash or bank draft transactions, avoiding GST/HST reporting.
• Shadow Flipping: This tactic allows brokers or investors to assign property contracts before the closing date, profiting from unreported capital gains and commissions.
• Networks: Real estate-related businesses, often family-controlled, may work together to misrepresent costs, underreport income, and evade taxes.

Other illicit practices, such as mortgage fraud or identity fraud, may accompany tax evasion schemes, with straw buyers often used to conceal beneficial ownership. Suspicious transactions might involve structured electronic funds transfers below reporting thresholds or repeated transfers from different entities to a single beneficiary.

Reasonable Grounds to Suspect & Using Indicators
Determining whether to submit a suspicious transaction report requires more than intuition. Reporting entities should assess transaction facts, context, and relevant indicators of money laundering or terrorist financing. Indicators serve as red flags, prompting further evaluation of a transaction’s legitimacy. When combined with client knowledge, indicators help in recognizing potential suspicious transactions and identifying patterns suggestive of illicit activity.

A high-quality suspicious transaction report must detail all parties involved, the nature of the transactions, the instruments used, and the rationale for suspicion. Indicators relevant to real estate transactions should always be considered in tandem with client information to support an assessment of reasonable grounds for suspicion.

Indicators of Money Laundering & Tax Evasion in Real Estate
Common indicators for laundering tax evasion proceeds in real estate include:

• Financing through private, non-bank lenders without logical explanation.
• Fund flows through mortgage brokers, immigration consultants, or trust accounts in tax havens.
• Transactions that involve property assignments with multiple sales before closing.
• Real estate industry networks under family control, impacting construction, brokerage, or legal services.
• Property purchases made by straw buyers who lack sufficient income documentation.
• High-value properties inconsistent with client income or wealth.
• Use of offshore accounts or investment vehicles for real estate.
• Real estate professionals with previous disciplinary records in fraud or tax evasion.
• Questions from buyers on ways to avoid real estate taxes.
• Payments involving cryptocurrencies for property purchases.

Each indicator should be assessed alongside client knowledge and transaction details to establish reasonable grounds for suspicion. These indicators are intended to enhance reporting entities’ analysis of potentially suspicious real estate transactions.