The Canada Revenue Agency (CRA) is cracking down on tax compliance in real estate transactions. In B.C., media outlets reported that the agency recently hired 50 income tax auditors, 20 GST auditors and 15 workload-development officers specifically to investigate real estate transactions.

The CRA, along with the Financial Transactions and Reports Analysis Centre (FINTRAC), will be conducting "lifestyle audits" in a bid to crack down on tax evaders.

The agency says transactions in the Greater Toronto Area have been "the subject of greater scrutiny, including audits, for some years. More recently, the CRA has been actively monitoring and auditing real estate transactions in British Columbia."

In Ontario the CRA says during the year ending March 31, 2016, audits of 1,339 files recovered more than $17 million in taxes owing, with an additional $32 million collected from GST/HST audits.

B.C. had 114 tax audits and 225 GST/HST audits, resulting in more than $14 million in recoveries, says CRA. During the year, the agency applied 447 penalties totalling about $9.7 million. It says the highest penalty was almost $2.5 million.

"The CRA will apply a penalty equal to 50 per cent of the additional tax payable if a taxpayer knowingly makes a false statement when filing a return," says the agency.

When looking for non-compliance in the real estate sector, the CRA says it has five areas of concern. No. 1 is "questionable source of funds", which is where the lifestyle audits come in. For example, an individual may purchase a home in their name to hide the real buyer.

"The source of funds used to buy or maintain Canadian properties could be an unreported source that was never taxed, either in Canada or another country," says CRA. It says it can "establish correlations between a taxpayer's reported income and their lifestyle."

"The acquisition of expensive assets, such as a high-end home, without an obvious income source, can be an indicator of potential unreported income earned from legal or illegal sources."

Early this year, Darren Gibb, communications manager for FINTRAC, told REM magazine that "the international community and Government of Canada have acknowledged the real estate industry is vulnerable to money laundering." He said money laundering is "like the flow of water; it takes the path of least resistance. And, quite frankly, we're seeing how real estate is being used to launder money."

CRA's second area of concern is property flipping. Although the use of assignment clauses in real estate contracts received a lot of negative publicity in Vancouver earlier this year, the practice was not illegal. However, any money made on real estate flips, including real estate commissions and appreciation in value, must be reported.

"The CRA acquires and analyzes third-party data and has found that some flips are not being reported or are being reported incorrectly," says the agency. "The profits from flipping are generally considered to be fully taxable as business income. The facts of each case determine whether such profits should be reported as income or as a capital gain."

The agency says it looks at professional contractors and renovators, speculators or "middle investors" engaged in assignment sales, as well as individuals who renovate and sell their own properties.

Builders are the focus of the third area of concern as outlined by the CRA. New or substantially renovated homes are subject to GST/HST, unlike resale homes.

CRA says: "If a builder leases a new or substantially renovated home, the builder is deemed to have sold the home to themselves. The GST/HST is payable and collectible at once on the fair market value of the home, including the land value, and the builder must report that tax to the CRA."

The fourth CRA concern is unreported capital gains on the sale of a property. "In most cases, capital gains are taxable and must be reported to the CRA. Whether the capital gain is taxable or not can vary depending on whether the property is a principal residence or whether the seller of the property is a resident or non-resident of Canada."

The agency says if the seller of the property has lived in Canada and the property has been their principal residence, they may avoid having to pay some of the capital gains. But a non-resident who invests in Canadian property usually must pay tax on the capital gains from the sale.

Finally, unreported worldwide income is a factor that CRA examines. CRA says an individual's residency status is used to determine tax liability and that residency status is different than citizenship. A citizen of another country could be considered a resident of Canada if they have "significant residential ties" here, says CRA.

"Residents of Canada have to report their worldwide income to the CRA. Non-residents only have to report their Canadian source income, unless a tax treaty provides otherwise," says CRA. "An individual's residency status is therefore essential in determining what income must be reported."

In addition to its new focus on real estate transactions, CRA has set up an informant leads program, where you can snitch on someone who you believe may be cheating on their tax obligations.