Moore
January 2023 Newsletter

Purchasers of new homes and condominiums sometimes sell their rights to the property before the closing.

This happens frequently with new homes or condos that take years to be built. It may happen because of a change in circumstances, or simply because the buyer wants to profit from an increase in market value of the property. Many builders’ purchase agreements permit such “assignment” of purchase rights, as an incentive encouraging people to buy.

 

Example

Alice signed an agreement in 2018 to pay $300,000 for a new condominium, to be built. She planned to live there and had no intention of selling it anytime soon.

The closing was supposed to take place in 2021. However due to construction delays caused by COVID-19, her unit won’t be ready until fall 2023.

Alice has paid $40,000 in deposits toward the new condo so far.

Meanwhile, Alice’s circumstances have changed. She had planned to live in the condo on her own. But since 2020 she’s in a new relationship. In summer 2023 she’ll be getting married, and will move to another town to be with her new husband.

So, Alice doesn’t need the condo. But its market value has gone up to $450,000, which is what the builder is now charging for identical units that are not yet sold. So, she can do better than simply asking the builder to cancel the deal.

Through a real estate agent, Alice finds a buyer, Joe, who is willing to pay $400,000 for the condo once it’s ready.

Alice assigns her rights under the Agreement of Purchase and Sale (that she has with the builder) to Joe. Joe will become the new buyer under the purchase agreement, taking Alice’s place.

Since Joe is willing to pay $400,000 for the condo and the “assignment” will give him the right to buy it for $300,000, Joe pays Alice $100,000 for the assignment of her purchase right.

As well, Joe pays Alice a further $40,000, to reimburse her for the $40,000 in deposits that she has already paid the builder, since Joe will get credit for that $40,000 when he closes the purchase with the builder.

 

Now, what happens for tax purposes?

GST/HST

First, let’s look at GST/HST (which applies at 13% in Ontario, 15% in the Atlantic provinces and 5% in other provinces; in Quebec, the 9.975% QST works the same as the GST).

Until May 6, 2022, the application of GST or HST to the assignment depended on Alice’s original intentions. If she intended all along to sell or “flip” the condo to make a profit, then GST or HST would apply to the assignment. But in this situation, where she planned only to live in the property, GST/HST wouldn’t have applied.

However, the GST/HST legislation was changed, for assignment contracts signed after May 6, 2022. (The new rule is in Excise Tax Act section 192.1, in case you want to look it up.)

Now, when Alice assigns the purchase agreement, GST or HST applies to the assignment. She must charge 5%, 13% or 15% tax, depending on the province the condo is in, and remit that amount to the CRA as “net tax” collected (minus the GST/HST she pays on legal fees and real estate commission if she registers for GST/HST before incurring those expenses). However, the reimbursement for her $40,000 deposit is deducted in calculating the “consideration” to which GST/HST applies, so she charges the tax on only $100,000.

If Alice assigns the agreement for a flat $140,000 as per above without adding tax, and the assignment contract says that any GST/HST is “included” rather than “extra”, then the GST or HST she must remit will be 5/105ths, 13/113ths or 15/115ths of $100,000, again depending on the province. In Ontario, for example, an HST-included price of $100,000 means the price is actually $88,495.58 plus HST of $11,504.42, which is 13% of that amount, for a total of $100,000.

Income tax

For income tax purposes, the tax treatment depends on Alice’s original intentions. If she intended all along to sell or “flip” the condo to make a profit — or even had a so-called “secondary intention” to sell if it proved worthwhile — then Alice’s $100,000 profit from the assignment (minus expenses such as real estate commission and legal fees) would be business profit. It would have to be reported as business income on her 2023 return, and she will pay tax on that income.

But in Alice’s case, she planned only to live in the property, not to sell it. So, the gain isn’t business profit. It’s a capital gain. Since she never actually gets the condo and moves in, the principal-residence exemption can’t apply. She has to report the $100,000 capital gain from the assignment (again minus expenses such as real estate commission and legal fees) on her 2023 tax return, and half of the capital gain is a “taxable capital gain” that is included in her income.

Of course, the CRA doesn’t know what Alice’s real intentions were. The CRA audits many assignment sales and will usually propose to assess the taxpayer on the basis that the gain is business income. Alice may need to prove to the CRA, with whatever evidence she can muster from her personal life (such as photos, emails, texts, letters from professional advisers and friends), that she originally intended to live in the condo indefinitely.

(As well, under a proposal announced on November 3, 2022, if a buyer assigns a residential purchase agreement within 12 months of first signing it, then the gain will be treated as business income regardless of their original intention, unless they can show a change in circumstances that falls within a specific list (death, divorce, illness, etc.). Since joining another person’s household is on the list, Alice would be OK even if she had signed the agreement only within the last 12 months.)

Conclusion

If you are considering assigning a purchase agreement for a new home or condo — or paying someone else to assign such an agreement to you — make sure you investigate the income tax and GST/HST consequences!

Last modified on January 12, 2023 12:00 am
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