CONDO HOUSE ASSIGNENT CRA AND HST FACTS
An assignment is when you are selling a condo or any property before it actually exists. You’re actually selling your contract to another buyer, you’re not actually selling the property yet because you don’t technically have title to the property yet.you buy something pre-construction with a builder, you sign the contract, you give your deposit cheques, and then there’s a few years of waiting until that property is built and the title transfers over to you. In the interim, if you’re selling it before that happens, that is not a typical resale transaction, it’s called an assignment. Some people know it as flipping.
There’s two sides to the assignment. There’s the assignor or the seller, and then there’s the assignee or the buyer. The assignor really is the one who’s at risk in a sale or assignment from an HST perspective.
Winds of Change. .. .You can run but you cant hide
Thanks to FINTRAC. Now what happens is when buyer put a deposit down on a property their name, their Social Insurance Number is associated with that deposit, and it stays with that deposit and that property all the way through. Then all of a sudden somebody else closes on it, so it becomes glaringly obvious to Revenue Canada something happened.
Jason put a deposit on this property. Roger closed on the property. CRA thinks...What happened? Had to be an assignment. If it was an assignment why didn’t we get our piece? Of course, that’s what they start with. They start with okay, if there was an assignment that happened here, Jason obviously got his money back. If he got his deposit back we’re entitled to our 13%. Jason, where’s my 13%? That leads to the second question, did you make any profit on this? Great, we want our 13% of that, which of course leads to the third question, what about our capital gains on the profit? The next question is how often have you done this? If you’ve done it too often maybe we’re no longer looking at capital gains on the profit, but we’re looking and saying you’re in the business of, now we want full tax.
Assignor~Sellers Implications :
What happens for an assignor, or the seller of the property, the first thing that Revenue Canada has to decide is whether or not when you sell that property you should be considered a builder. What that means is they look at what was your intention when you purchased the property and why are you selling the property.Typically though, if you’re assigning a property, selling a property before you take occupancy of it, nine times out of ten they’re going to rule you a builder. If they rule you a builder then you now, like any other builder, are required to collect HST when you sell the property.
Example: Firstly, If I’m the original purchaser of the unit and I buy a property for $300 000 and I put 20% down, or $60 000, and I want to assign the property, first thing I want is I want my $60 000 back. When I get my $60 000 back that’s not considered a return of a deposit, that’s considered a taxable sale. That $60 000 return of your deposit, which is not what it’s considered from CRA’s perspective, is subject to tax, which means you get that $60 000 back. You owe 13%.
Secondly, Since You’ve held onto this property for a period of time, so you want to try and make some money if you can. That markup is subject to tax as well. Let’s say that we buy a property for $300 000, we hold onto it for three years while it’s being built, then we assign the property for $340 000. There’s a $40 000 markup subject to HST and a $60 000 deposit subject to HST. Now the sellers owes HST on $100 000, roughly $13 000 is HST that they have to come up with.
Thirdly, CRA can now ask you about capital gains. Revenue Canada with regards to assignments, can send people letters saying, “Can you itemize all the information about all the assignments you’ve done in the last three or four years?” All of those are subject to HST and all of those are subject to capital gains or taxation issues.
Buyers Implications :
When I buy a property I’m entitled to an HST rebate, whether I’m using the new home rebate and I’m applying through the builder, or I’m using it an as investment property. Both are perfectly legal with an assignment property. The issue, though, is if I file for my HST rebate on closing with the builder I’m going to end up leaving money on the table. What ends up happening is the builder can only give me an HST based on their original purchase price.
If we go back to that example, the original purchaser buys the property for $300 000. They would end up having to pay roughly $24 000 in HST on closing and their eligible rebate would be roughly $24 000. Perfect. When the second purchaser comes along, the assignee, they’re buying the property for $340 000, but the first builder can only give them a rebate based on the original purchase price of $300 000. On closing the person who bought the assignment would have to pay $24 000 and be eligible for a rebate of $24 000.
An offer to purchase an assignment property (often on an OREA form 140 or 141) by a buyer's sales representative will state that, if applicable, HST is included in the purchase price (as we typically see in any offer to buy resale residential properties).
The sales representative who represents a seller of an assignment (and who is advising the seller) MUST be aware that according to the Canada Revenue Agency, there are sometimes situations where HST will, in fact, be applicable and payable by the assignor/seller who is assigning a contract to buy a newly constructed unit/residence.
When applicable, HST will be payable by the Assignor (buyer #1 from the builder) on the portion of the assignment sale price related to the return of deposits (paid to the builder by the assignor/seller) PLUS the gross profit (the difference between the builder price and the assignment price).
Whether or not HST is applicable to an assignment depends on the original intention/the plan (in the mind of the assignor/seller) when the offer to purchase was made with the builder. If the PRIMARY PURPOSE by the assignor/seller in buying from the builder was to profit by assigning/flipping the deal, THEN HST IS APPLICABLE to the assignment/sale.
On the other hand, if an individual originally signed an offer to purchase a condo apartment (to be newly constructed by a builder) with the primary intention that the unit bought would be used (for example) by:
(1) a son or daughter when attending University/College, OR
(2) a parent who wanted or needed a place to reside, or
(3) a spouse who planned to separate from the family, or
(4) the buyer(s) who intended to downsize, or
(5) the buyer(s) who intended to use the apartment when working downtown or when visiting Toronto
(6) a son or daughter who was engaged to be married, or
(7) buyer wanted to move closer to a workplace OR to relocate a place of work
THEN the Canada Revenue Agency would typically conclude that HST is not applicable on the assignment/sale if (at a later date) a reasonable change in circumstance resulted in an assignment/sale of the unit if, for example,
(1) such son/daughter chose not to go to University/College, or
(2) the buyer's mom or dad no longer could use or wanted to use such apartment as a residence
(due to their death or needs a retirement home), or
(3) intention to separate from family changed, or
(4) decision was made later not to downsize, or
(5) the buyer(s) reasonably changed his/their minds about such intended use, or
(6) the engaged son or daughter decided not to marry or decided to live elsewhere, or
(7) the workplace location changed or the intended relocation of workplace changed
The question is whether the facts or circumstances would indicate to the Canada Revenue Agency that the condo was originally being acquired from the builder for the primary purpose of personal use versus buying the unit for only a potential profit with the intention of assigning or flipping the deal. If a buyer purchases two or more new condo units or has a corporation purchase a residential unit, it is more difficult (perhaps impossible) to try to explain to the Canada Revenue Agency that the primary purpose in buying from the builder was to acquire the unit for personal use as a residence for an immediate family member.
MAKE SURE THAT AN ASSIGNMENT SALE WHICH STATES HST IS INCLUDED IN THE PRICE IS CONDITIONAL ON ASSIGNOR'S/SELLER'S or ASSIGNEE ~BUYERS LAWYER'S APPROVAL so that the lawyer for the assignor/seller or assignee ~buyers will be responsible to advise a seller whether or not HST is applicable to the assignment/sale.
Buying from a Non-Resident Seller :
He’s assigning the property to me. I buy the property. After the fact Revenue Canada determines this is a taxable sale. If they can’t find Non-Resident Seller ( original purchaser) to get the HST, they’re coming to me. Try not to buy an assignment from a non resident seller .
If you’re considering it, say to your lawyer, “Can you determine with Revenue Canada whether the sale of this product is subject to HST?” If it is, and we know this as the buyer, we know that the sale is subject to HST, we can now put a hold on that money so that it’s submitted to Revenue Canada. We can force the other lawyer. The other lawyer, they’re just going to follow the rules and going to do a hold back and that HST is going to go off to Revenue Canada. Now as the buyer in this case, you’re protected.
Common Strategies Used by Assignors:
One way that would work is a mutual release by the builder, and this isn’t going to happen very often. In this case what would happen is Andrew would buy the property originally. He wants to assign the property, but in order to not have to deal with this whole HST he goes to the builder and says, “Look Mr. builder, I have a client who wants to buy property. Can you release me from my obligation and sell the property to them?” Obviously the downside to this is original purchaser woould not making any money. He’s going to get his deposit back and his deposit is going to come from the builder, in which case it’s not subject to HST, so that’s okay because it’s a return of a deposit. The new purchaser then gets to buy the property at that agreed upon price, and original purchaser doesn’t have to deal with the HST issue.
What about builders offering free assignments to anybody related to original purchaser..
You need to get an amendment or an assignment of the sale. You can’t just do a change of title using a direction of title on closing. In case you plan to assign to your brother, If you do that neither you nor the brother is entitled to the rebate. You still have to pay HST if using a direction of title .
Instead, do name change amendment signed by the builder. Direction of title just changes the name on closing, but it doesn’t rights and responsibilities of the purchaser. As far as the purchase and sale agreement goes, there’s still a question about taxation.If you know you want to do that, you want to put it into your company’s name, add your company to the purchase and sale agreement via an amendment. Then you can close in your company’s name, then your company’s entitled to the rebate.
My Advice: Have your lawyer do a ruling.
Have your lawyer determine whether or not this sale is subject to HST, when you’re selling an assignment. If you’re doing it from a buyer’s perspective, really you should be doing the same thing. You should be going to your lawyer and saying, “Is this purchase going to be subject to HST?” Because that way you’re covering yourself.
A Little bit of planning is the way to make an informed decision !