Artificial intelligence is changing the way information can be reviewed, compared and understood. In real estate, that development may eventually have implications extending well beyond property searches, valuations and marketing.
One of the potentially significant applications is tax compliance.
Real estate transactions generate enormous amounts of information. Properties are purchased and sold, mortgages are registered, corporations acquire assets, rental properties generate income, building permits document renovations, assignments transfer contractual interests and ownership may pass through corporations, trusts or other entities.
Much of this information has traditionally existed in separate records.
Artificial intelligence and increasingly sophisticated data-analysis tools make it possible to examine relationships among those records much more efficiently. That does not mean a computer can determine that someone has committed tax evasion. It does mean inconsistencies that might once have been difficult to identify may become considerably easier to find.
For property owners, investors and businesses, that distinction could become increasingly important.
Real Estate Leaves a Significant Financial Trail
Unlike many purchases, real estate rarely occurs anonymously.
A property has an identifiable location. Ownership is registered. Purchase and sale prices are generally documented. Financing may be registered against title. Lawyers, lenders, real estate professionals, accountants, municipalities and government agencies can each become involved in different parts of a transaction.
The property may subsequently generate rental income, undergo renovation, be refinanced, transferred between related parties or eventually sold.
Each event creates another piece of information.
What artificial intelligence can potentially do is examine those pieces together rather than treating every transaction as an isolated event.
The Canada Revenue Agency already describes real estate as an area of compliance focus and says that it uses third-party data to identify and analyze certain real-estate transactions. The CRA has also indicated that it can consider relationships between a taxpayer’s reported income and lifestyle, including circumstances where expensive assets are acquired without an apparent source of income.
That does not establish that anything improper has occurred. There may be entirely legitimate explanations for how a property was financed.
But it can identify a question that may deserve an answer.
Consider What the Information Might Reveal
Suppose someone reports relatively modest taxable income but purchases several properties over a short period.
There could be perfectly reasonable explanations. The purchaser may have inherited money, received family assistance, accumulated savings over many years, sold another investment, borrowed against existing assets or obtained financing through a corporation.
The purchase itself therefore proves very little.
The more interesting question is what happens when information begins to be compared.
If property acquisitions, mortgages, corporate ownership, reported income, property sales, rental activity and other available financial information appear consistent, there may be nothing unusual to investigate.
When they are inconsistent, however, technology can potentially identify the discrepancy.
That is fundamentally different from attempting to find tax non-compliance one transaction at a time.
Rental Properties May Become Easier to Identify
Rental income is another obvious example.
A property owner may own one or several investment properties. Those properties may have been financed as investments, advertised for rent, previously listed through a real estate brokerage or otherwise generate information indicating rental use.
The CRA requires rental income to be reported.
Historically, determining whether a particular property was producing undeclared rental income could require considerable investigative work. As different databases become more capable of being analyzed together, patterns may become easier to recognize.
Again, the existence of a second property does not establish that rental income exists. A property could be occupied by a family member, vacant, under renovation or used personally.
The important development is that discrepancies can increasingly generate questions.
Property owners should therefore think less about whether a particular piece of information is visible and more about whether the overall financial story surrounding a property is consistent.
Vacant Home Taxes Add Another Layer of Property Compliance
Municipal vacant-home and vacant-unit taxes provide another example of how property ownership is becoming increasingly connected to broader compliance obligations.
Municipalities such as Toronto and Ottawa require residential property owners to declare the occupancy status of certain properties each year. Those declarations may subsequently be audited, and owners can be required to provide documentation supporting their claim that a property was occupied or qualified for an exemption. Toronto, for example, identifies potential supporting documents including leases, income-tax notices of assessment, insurance records, identification and employment records. Ottawa similarly permits audits of declarations and may require evidence supporting occupancy or an exemption.
This becomes particularly interesting when considered alongside artificial intelligence and data analysis. A municipal declaration that a property is occupied, vacant, tenanted or being renovated does not exist entirely in isolation. Other records may potentially indicate where an owner resides, whether a property has been advertised for rent, whether building permits were issued, whether a lease exists, or whether other information appears consistent with the declared use of the property. AI-assisted systems could eventually make it easier to identify declarations that appear inconsistent with other available records and select those properties for review.
That does not mean an inconsistency establishes that the owner made a false declaration. A property may legitimately be occupied by a family member, temporarily vacant, undergoing permitted renovations or qualify for another exemption. The significance is that owners may increasingly be expected to substantiate the circumstances surrounding the property with records.
There is also an important real-estate transaction implication. Toronto expressly advises purchasers and vendors to make appropriate arrangements regarding vacant-home-tax declarations, recommends that vendors provide purchasers with a copy of the filed declaration and cautions purchasers to conduct due diligence concerning potential property-tax liabilities.
For buyers, sellers and their advisors, vacant-home taxes therefore should not be treated merely as an annual municipal administrative requirement. They can become part of transaction due diligence. Before closing, the parties may need to determine whether required declarations were submitted, whether an assessment or audit is outstanding, whether the property qualifies for an exemption and who will be responsible for any resulting tax liability.
As municipalities accumulate several years of occupancy declarations, the records themselves may also become increasingly useful for compliance analysis. A property’s history may eventually reveal a pattern of declared occupancy, vacancy, rental use, renovation or ownership changes. Combined with other property and financial information, that history could make inconsistencies easier to identify.
The practical lesson is the same as with income-tax compliance: property owners should make accurate declarations, retain supporting records and ensure that the way a property is actually being used is consistent with what has been reported to the relevant authorities.
Property Flipping Creates Another Clear Example
The tax treatment of property sales has become particularly important in Canada.
The CRA states that when a property is purchased primarily with the intention of reselling it for profit, the resulting profit is generally business income rather than a capital gain. Assignment-sale profits can also be treated as business income.
There is also a federal residential property flipping rule. Generally, where a housing unit or a right to acquire one is disposed of after being owned or held for less than 365 consecutive days, the resulting gain is deemed business income unless an applicable exception applies.
The CRA already uses third-party information in examining property-flipping activity.
Artificial intelligence could make this type of analysis increasingly sophisticated.
Instead of simply identifying someone who sold a property quickly, analytical systems could potentially consider the person’s transaction history, ownership period, renovations, other properties, corporations, assignment activity and patterns of buying and selling.
A single transaction may tell one story.
Ten related transactions may tell another.
Renovations and New Construction Can Create Additional Tax Questions
Renovations present another area where real estate, taxation and documentation intersect.
A person may purchase a property, substantially renovate it and sell it. Contractors may be hired, building permits obtained, materials purchased and financing arranged.
The tax treatment can depend considerably on the circumstances, including the owner’s intention and the nature of the project.
GST/HST can also become relevant with newly constructed or substantially renovated properties.
Technology capable of comparing property transactions with other available information could potentially make significant renovation and redevelopment activity easier to recognize.
For legitimate investors and developers, the lesson is not to avoid these transactions. It is to make sure the tax treatment of the project was considered before the transaction was structured rather than after questions arise.
Corporations Do Not Necessarily Make Ownership Invisible
Real estate is frequently owned through corporations.
There can be very legitimate commercial, tax, liability, estate-planning and investment reasons for doing so.
However, incorporating a company does not necessarily separate the property completely from the individuals behind it.
Canada has been moving toward greater beneficial-ownership transparency. Federal anti-money-laundering requirements also require real estate professionals in certain circumstances to identify and verify beneficial ownership when dealing with entities.
Beneficial ownership essentially asks a simple question:
Who ultimately owns or controls the entity involved in the transaction?
That information becomes increasingly important when several corporations, properties and individuals are connected.
A structure that appears complicated when examined one corporation at a time can look considerably simpler when technology maps the relationships among them.
Real Estate Professionals Are Part of the Information Environment
There is another implication that buyers and sellers may not immediately appreciate.
Real estate transactions involve regulated professionals who have their own record-keeping and compliance responsibilities.
Real estate brokerages have obligations under Canada’s anti-money-laundering and anti-terrorist-financing regime. Depending upon the circumstances, those obligations can include identifying clients, determining beneficial ownership, understanding the nature of business relationships and reporting certain transactions or attempted transactions.
FINTRAC has specifically identified real estate as an area that can potentially be used to facilitate tax evasion and money laundering. It has pointed to risks involving nominees, corporations, trusts, concealed beneficial ownership, property flipping and unreported income.
That does not make a real estate professional a tax auditor.
It does mean today’s real estate transaction operates within a much broader compliance environment than simply negotiating a purchase price and preparing an Agreement of Purchase and Sale.
The Issue Is Not Whether AI Can Prove Tax Evasion
This is perhaps the most important distinction.
Artificial intelligence does not need to prove tax evasion to have an enormous impact on tax enforcement.
It only needs to become effective at identifying transactions that deserve closer examination.
A computer may recognize that:
- a taxpayer’s property holdings appear inconsistent with reported income;
- several corporations appear to be controlled by related individuals;
- a series of properties has repeatedly been bought, renovated and resold;
- a property apparently being used as a rental does not appear consistent with reported rental income;
- or a transaction pattern differs substantially from comparable taxpayers or businesses.
There could be innocent explanations for every one of those circumstances.
That is why an anomaly should lead to investigation rather than an assumption of wrongdoing.
The appropriate process remains one in which information is examined, the taxpayer has an opportunity to explain the circumstances, supporting records are considered and ultimately a determination is made under the applicable law.
AI changes the ability to find the question.
It does not eliminate the need to establish the answer.
Documentation May Become More Important, Not Less
There is a practical implication for property owners that extends beyond tax returns.
Documentation matters.
Consider an investor who purchases a rental property, later occupies it personally, undertakes renovations and eventually sells it. Years later, the reason for certain decisions may no longer seem obvious.
Records can help reconstruct what actually occurred.
Agreements of Purchase and Sale, leases, invoices, financing documents, renovation records, permits, accounting records, correspondence and professional advice may all help establish the circumstances surrounding a transaction.
The more sophisticated data analysis becomes, the more valuable good documentation may become when something that appears unusual has a legitimate explanation.
Buyers Should Consider Tax Consequences Before the Purchase
Perhaps the larger real estate lesson is that tax planning should not begin when a property is sold.
It should begin when the investment is being considered.
- How will the property be owned?
- Will it be personally owned or corporately held?
- Will it become a principal residence, rental property, development project or short-term investment?
- Is the purchaser contemplating renovations followed by resale?
- Could GST/HST apply?
- Are there non-resident owners?
- Who are the beneficial owners?
- How will income and expenses be documented?
- What records should be retained?
These questions may require advice from an accountant or tax lawyer. The real estate professional’s role is not to provide tax advice outside their expertise, but an experienced real estate advisor should recognize when a transaction raises questions that should be addressed by the appropriate professional.
Identifying the question before the transaction is often considerably easier than solving the problem afterwards.
Technology Is Changing the Meaning of Transparency
For many years, people may have thought about financial privacy in terms of individual databases.
The land registry knew one thing. A municipality knew something else. A lender had another piece of information. A corporation maintained separate records. Tax filings contained still another part of the picture.
The significant change created by modern data analysis is not necessarily that governments suddenly possess entirely new information.
It is that existing information can increasingly be connected.
Real estate is especially suited to that kind of analysis because property transactions create relatively permanent records involving identifiable assets, identifiable parties and measurable financial values.
As artificial intelligence becomes better at identifying relationships and anomalies, the expectation that transactions can remain effectively disconnected from one another may become increasingly unrealistic.
For most property owners, that should not be alarming.
It should encourage something much more practical: thoughtful planning, accurate reporting, appropriate professional advice and good records.
Because the future of real estate compliance may be less about whether a particular transaction can be discovered and increasingly about whether all of the pieces of the transaction tell the same story.
This article is provided for general informational purposes and should not be considered legal, accounting or tax advice. Tax consequences depend upon the circumstances of each transaction. Property owners and investors should obtain advice from qualified tax, accounting and legal professionals where appropriate.
Written by Rodney Harvey, Broker of Record at Konfidis, Brokerage providing advisory-focused commercial, industrial, investment, and real estate brokerage services across Oshawa, Durham Region, and Ontario.
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