Published: January 8, 2025
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and the Canada Revenue Agency (CRA) have recently released an operational alert (the “Alert”) designed to help reporting entities such as accountants, or real estate brokers identify financial transactions in the real estate sector that may be linked to laundering the proceeds of tax evasion. It is important to note that law firms are specifically excluded from the designation as reporting entities in order to preserve solicitor-client privilege. However, lawyers have to deal with Law Society regulations governing cash transactions.
The Alert outlines a series of contextual risk indicators associated with non-compliance with tax laws in the real estate sector, including tax evasion. These indicators aim to assist Canadian reporting entities in detecting potential instances of tax evasion proceeds being laundered through the financial system.
Reporting entities are encouraged to thoroughly review the Alert for detailed insights into the various methods by which money laundering and tax evasion can occur within the real estate sector.
Reasonable Grounds to Suspect Laundering Money From Tax Evasion
Reporting entities must establish reasonable grounds to suspect money laundering or terrorist financing before submitting a suspicious transaction report (STR) to FINTRAC. This determination requires analyzing facts, context, and indicators—not relying on intuition or proof of criminal activity. Indicators, or red flags, often arise from patterns, behaviours, or inconsistencies in transactions and may prompt further investigation to build suspicion.
STRs must include detailed information, such as the parties involved, the timing and location of transactions, the financial instruments used, and the reasons for suspicion. Linking specific transactions to money laundering indicators is crucial for a comprehensive report. High-quality STRs are essential for FINTRAC’s analysis and disclosure efforts. While proof of wrongdoing is unnecessary, reports must clearly document the factors that led to the suspicion. Guidance on completing STRs is available in FINTRAC’s resources on reporting suspicious transactions.
Money Laundering and Contextual Tax Evasion Indicators Associated with Transactions in the Real Estate Sector
Indicators related to laundering the proceeds of tax evasion in the real estate sector highlight transaction patterns and contextual factors, emphasizing the importance of knowing your client. Risks vary across property types (residential, commercial, industrial, or farming) and roles (e.g., developer, mortgage broker, private lender). Indicators from FINTRAC’s 2016 Operational Brief remain relevant and should be used alongside contextual tax evasion indicators.
These indicators, set out below, are not definitive on their own and should be assessed in conjunction with client knowledge and transaction circumstances. Reporting entities must evaluate whether there are reasonable grounds to suspect money laundering based on a combination of factors. Multiple indicators may collectively reveal links to suspicious activity, strengthening the basis for suspicion. Ultimately, these indicators guide reporting entities in identifying, analyzing, and assessing potential money laundering activities in real estate transactions.
- Financing for the purchase of property is provided by a private lender, an unlicensed money services business, other than a financial institution, with no logical explanation provided.
- Transactions are passing through a mortgage broker, immigration consultants, and/or tax haven trust accounts.
- No guarantee securing the mortgage/interest payment has been established, and no logical explanation provided as to why.
- There is an excessively high or low price attached to the securities, goods, or 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 (straw buyer) 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 the reported/stated wealth and income of the 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 the person to criminal activity such as fraud, proceeds of crime, corruption/bribery, or tax evasion.
- Real estate brokers or sales representatives acquire properties and resell 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 to pay property developers, investors, and/or speculators.
Report to FINTRAC
If there are reasonable grounds to suspect money laundering, a suspicious transaction report must be submitted to FINTRAC. For detailed guidance on reporting suspicious transactions, refer to Reporting suspicious transactions to FINTRAC on the Canada.ca website.
Pro tax tips – Tax Evasion is a Serious Offence
Tax evasion is a serious offence that can lead to substantial fines and imprisonment.
However, taxpayers who have made false statements or failed to properly address their tax obligations can voluntarily come forward through the Voluntary Disclosures Program (VDP) before they are approached by the CRA because of FINTRAC track reporting.
This program offers an opportunity to avoid prosecution and potentially reduce civil penalties. If you need assistance with the VDP, our leading Canadian tax law firm is here to help. With extensive experience and hundreds of successful VDP applications submitted on behalf of Canadian taxpayers, our skilled Canadian tax lawyers are ready to provide the support you need.
FAQ:
What are the typical elements of money laundering in real estate regarding proceeds from tax evasion?
Money laundering in real estate may involve:
- Inflows of foreign capital linked to politically exposed persons,
- Utilization of underground banking networks, or
- Complex ownership structures designed to obscure beneficial ownership.
How should a taxpayer report a suspected transaction regarding money laundering from the proceeds of tax evasion?
When reasonable grounds exist to suspect money laundering, submitting a suspicious transaction report to FINTRAC is mandatory. For comprehensive guidance, refer to Reporting Suspicious Transactions to FINTRAC on Canada.ca.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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