In the dynamic landscape of Canadian real estate, Assignment Sales have become increasingly prevalent. These transactions involve a purchaser (known as the assignor) who, having previously entered into an agreement of purchase and sale with a builder for a new house or residential condominium unit, subsequently sells (or assigns) their rights and obligations under that agreement to another party (referred to as the assignee). However, recent developments in tax regulations have significantly impacted the way these assignments are treated, particularly concerning weather the transaction will be considered business income or subject to capital gains, as well as Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) implications.
CRA may tax profits derived from an assignment sales in two ways:
Capital gain – where 50% of the profit is taxable
Business income – where 100% of the profit is taxable
Based on previous court cases, the majority of assignment sale cases under scrutiny by CRA, were deemed to be business income since the transactions lasted for a short period of time and is undertaken with the intention to make a quick profit. In such scenario, 100% of business profits will be taxable. To make its determination, the Canada Revenue Agency will consider the following four critical questions:
The Assignors history of previous transactions. This is probably the most important factor. If the Assignor has concluded several transactions of similar nature, it is highly probable the CRA will consider the Assignor as a business and tax it accordingly
The reasons behind the sale. Perhaps the property the individual initially purchased no longer aligns with their lifestyle, the individual relocated due to work reasons, started a family, or experienced other life changes. There can also be financial considerations where the original purchaser faces financial constraints. Rather than defaulting on the sale, they can assign the contract to a new buyer.
The duration of the transaction. How long the property was held before sale. For example, the person finances the purchase of the house by a short-term mortgage, or an open mortgage that can be paid off without penalty, rather than by a long-term or closed mortgage.
The motivation for the purchase of the property. The person is an individual and their stated intention to occupy the house as a place of residence is not supported by the circumstances of the case. For example, an individual has a family of four and enters into a purchase and sale agreement for a one-bedroom condo unit where they are not contemplating any changes in family circumstances.
Under the previous GST/HST rules, the tax treatment of assignment sales differs based on whether the assignor is an individual or not. While assignment sales made by individuals may be either taxable or exempt, those made by non-individuals (such as corporations) were generally taxable. The specifics depended on various factors, including the assignor’s intent and the circumstances of the sale.
Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated residential housing are taxable for GST/HST purposes, regardless of the original intention of the assignor.
Assignors who are not builders, and can demonstrate that their original intention when entering into the purchase agreement was to use the property as their primary place of residence may be exempt from paying GST/HST on the consideration received for the assignment of the contract. However, this exemption hinges on their ability to prove the principal residence exemption intent to the Canada Revenue Agency (CRA).
In the context of new condo and house assignment sales, a builder refers to a person or an entity who acquires an interest in a new house or condominium unit before it has been occupied by an individual as a place of residence or lodging. The primary purpose of the builder’s acquisition is typically to sell the house or an interest in the house, or to lease the house (except to an individual who is acquiring the house otherwise than in the course of a business or adventure or concern in the nature of trade). Essentially, the builder is involved in the initial construction and sale process, and their rights and obligations can be assigned to subsequent buyers during the assignment process
For assignment agreements entered into on or after May 7, 2022, the amendment specifies that the GST/HST will apply only to the “assignment fee” or the profit portion of the assignment price. The total assignment sale price outlined in the assignment agreement, which often includes the repayment of any deposit previously paid by the assignor to the builder, would not be subject to GST/HST.
Let’s look at an example: John and Jane own a four-bedroom apartment where they reside with their three children. In June 2022, they entered into an agreement with a builder for a four-bedroom house that was to be built. Closing date of the transaction was January 2023. In December 2022, Jane’s mother falls ill and she moves in with John and Jane permanently. John and Jane made the decision that their recently purchased house was no longer spacious enough for their needs. They realized they required a home with a granny suite. Consequently, they sold their stake in the 4-bedroom house to acquire a larger residence that would better accommodate their changed circumstances. Given that the original intention of John and Jane was to use the house as their primary residence, and have not acquired the interest in the house for the primary purpose of selling it, the CRA will not consider John and Jane as builders of the new house and the sale of the house is GST/HST exempt. If the sale of the interest resulted in profits, John and Jane are still subject to capital gains taxes.
You may qualify for a GST/HST new housing rebate or a provincial new housing rebate if you buy a new house from a builder or build one yourself. However, if you sell your interest in a house before you move in, you cannot get either rebate. This applies whether you are a builder who sells the contract to another buyer, or a buyer who is not a builder but sells the contract to someone else. In both cases, you do not meet the requirements for the rebates (e.g., you do not own the house or live in it as your main home).
For further information please contact Unity Financial Services at 1-877-Unity Financial Services or visit www.unityfs.ca