new assignment hst

New Tax Rules for Real Estate Assignments and Flipping

Written by Sukhman Sandhu

Blog | real estate law, june 6, 2022.

To combat the sharp rise in real estate prices, the Canadian government has proposed new GST/HST rules in relation to Assignments (effective May 7, 2022) and Income Tax rules in relation to flipping real estate in general (effective January 1, 2023).

GST/HST to Apply for all Assignment Sales

As of May 7, 2022, where an individual sells an assignment of a new build or substantially renovated residential property, the transaction will be subject to HST, regardless of original intentions, as per the Canadian Excise Tax Act (“ETA”). Every individual assignor of residential real estate will now have to collect GST/HST on their assignment profit and remit it to the CRA.

Previously, if the original intention of entering the pre-construction Agreement of Purchase and Sale (APS) was for personal use, GST/HST did not apply to the assignment agreement. GST/HST previously only applied if the original intention was to sell for profit or flip the property. Effective May 7, 2022, whatever your intention, GST/HST will apply on the assignment profit.

Accompanied with some good news, the new rules do clarify that HST is no longer charged on recovered deposits. Prior to May 7, 2022, despite the court ruling against the CRA in a previous case dealing with this issue, the CRA continued to represent to tax payers that if the assignment is subject to GST/HST, the amount provided from the assignee (new buyer) to the assignor (original buyer) which reimburses the assignor for the assignor’s deposit to the builder is also subject to GST/HST. This created double taxation as the deposit that the assignor paid to the seller/builder is already subject to GST/HST.

For illustration purposes, envision Carrol purchased a new construction residential property for $1,200,000 and paid the builder’s lawyer a deposit of $200,000. Subsequently, Carrol entered into an assignment agreement for the assignment sale price of $1,500,000. Carrol in this situation is known as the ‘assignor’ and the individual who purchased from her is known as the ‘assignee’. The assignee must pay $500,000 to Carrol ($300,000 for the difference between assignment sale price of $1,500,000 and original purchase price of $1,200,000 + $200,000 to reimburse the assignor for assignor’s previous deposit to builder/builder’s lawyer) and $1,000,000 to the builder to complete the purchase (not including any closing/miscellaneous fees).

Prior to May 7, 2022, if Carrol’s original intention was to purchase for personal use, she would not be responsible to pay any HST/GST in relation to the assignment sale.

Prior to May 7, 2022, If Carrol’s original intention was not for personal use (i.e. investment property), then she would be liable to pay GST/HST on $500,000 (both the profit and deposit) which at the rate of 13% would have equaled $65,000. It is important to note that Carrol, on advise of her accountant, could have only paid GST/HST on $300,000 (avoiding any tax on deposit) by only remitting $39,000 and citing previous case ruling against double taxation on recovered deposit to the CRA.

As of May 7, 2022, regardless of Carrol’s original intention, she is liable to pay GST/HST on $300,000 which at the rate of 13% would equal $39,000.

Business Income instead of Capital Gains for Residential Property Flipping

Effective January 1, 2023, a new residential property flipping rule will classify the appreciation amount of all residential properties that are owned for less than 12 months to be business income under the Canadian Income Tax Act (“ITA”). This new legislation change will be subject to limited “life events” exceptions, such as the growth of a household, separation, a disability or illness, an employment change, insolvency, or an involuntary disposition.

Prior to January 1, 2023, investment properties (i.e. rentals) sold within or after 12 months of ownership are subject to capital gains tax which is 50% of business income tax and principal residence properties (owner-occupied) sold within or after 12 months of ownership are entirely exempt from tax.

Growing commentators believe that this proposed Residential Property Flipping Rule may also result in assignment sales treated as business income as opposed to capital gains. This would result in the assignor not only paying GST/HST on the portion of their assignment profit but also adding 100% of the assignment profit amount (minus remitted GST/HST) onto their annual personal income amount. We look forward to receiving further clarification in the near future.

If you are buying or selling investment properties, or have questions or concerns about residential or commercial real estate law in general, contact us at Sukh Law .

Sukh Law publishes articles for information purposes only and is not intended to constitute legal advice.

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The New Proposed HST Treatment On Pre-Construction Assignment Of Sales

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How HST Applies to Selling Assignments As of May 7th 2022

By Condo Culture

There have been plenty of conversations amongst the real estate community and assignment sellers regarding the Federal government announcing that they will be making HST payable on profits made by either end-user buyers or investors, effective May 7th, 2022.

Here’s What Has Changed

This additional charge has always been in place with HST on profits being the responsibility of the Seller. There were specific workarounds in place which won’t apply anymore. This regulation already applied to investors, so nothing changes with this particular type of purchaser. The government essentially wants to tighten up on end-users purchasing a pre-construction unit and subsequently assigning. So moving forward, regardless if the intention was to move into your unit as an end-user, any profit from any assignment sale will now be subject to HST .

Savings - Have a Professional Team On Your Side

Even if you’re an end-user buyer and need to sell your unit for whatever reason as an assignment sale, you can deduct certain expenses from your profit to reduce the amount of HST you pay. The commission of your REALTOR®, lawyer and accountant fees, other assignment-related costs, upgrades to the property, and additional ones are potentially eligible. It’s certainly possible to save between 15% to 20% on what you need to pay for HST based on leveraging applicable deductions.

We highly recommend having an experienced REALTOR®, accountant, and lawyer representing you who all have experience with assignment transactions. Your team can help you navigate through the process from start to finish and beyond, so there are no surprises along the way and to ensure you feel comfortable knowing that you didn’t pay more in HST than you need to in order to maximize your ROI.

Condo Culture has a vast amount of expertise handling all types of assignment transactions and we are all over new regulations as they morph and change over time, so be sure to reach out for any of your assignment selling or buying needs. Assignments can offer unique value given their off-market nature with less buyer competition. They are a great option to review as you explore all possible Condo purchase possibilities.

A Simple Assignment Selling Example

When selling an assignment unit, you pay HST on the deposits made on the purchase, plus the 13% on the home’s increase in value once the deal is complete.

Let’s look at an example - if you originally bought a condo for $450K and ultimately sold it as an assignment listing for $650K, then you will need to pay an additional 13% HST on the increase of $200K minus any deductions as outlined above.

Current Exclusive Assignment Opportunities

We have a bunch of fantastic assignment buying options available right now, including these two beauties.

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Analysis: This spectacular two-bedroom condo is in a highly sought-after corner unit looking out onto King Street. It’s well priced at $864/sq.ft. and that includes almost $20K in gorgeous upgrades along with a premium lighting package addition, plus a parking spot, as well.

Unit 512 at Station Park in Tower 2

🛌 1 bedroom 🛀 1 bathroom ⏹ 625 sq.ft. + a 60 sq.ft balcony ⬆Entertainment package upgrade included. Corner unit facing both King and Wellington Street with nice 5th-floor views. Expected occupancy: Early 2023 List price: $510,000

Analysis: This wonderful corner unit has a solid price per square foot at $816 including an entertainment package that has been added. It has a generous amount of space for a 1 bedroom unit and a good-sized balcony to lounge, dine, and entertain

We have helped hundreds of clients navigate the unique assignment selling and buying process, and would love to leverage our deep experience to help you succeed with your future transactions. In addition to our Assignment expertise, we are also experts in Condo Resale and Pre-Construction transactions - we are a full spectrum condo brokerage that’s at your service!

To learn more about our assignment selling and buying approach and unique expertise, be sure to read this informative article and connect with us if you have any questions or got any type of condo business to take care of.

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2022 Changes to GST/HST on Assignments

• Post author By Edward Tse
• Post date 11 May 2022
• 4 Comments on 2022 Changes to GST/HST on Assignments

The 2022 Federal budget included a few changes to the way some real estate transactions are taxed. The two mains changes are the new residential property flipping rule and changes to the way GST/HST on assignments is taxed for individual. In this post I will be discussing the latter.

Summary of the changes to GST/HST on assignments effective May 7th 2022:

• The new change makes it so that there is GST/HST on assignments regardless of original intentions. Previously, if the original intention of entering the pre-construction contract/Agreement of Purchase and Sale (APS) was for personal use, GST/HST on assignments did not apply. But if the intention was to sell for profit or flip the property, GST/HST applied.
• The legislation officially recognizes that GST/HST is not payable on the portion of the consideration exchanged that represents the deposit that the assignor paid to the seller/builder.

I have seen people talk about these changes as if it will slow down the housing market because they seem to incorrectly assume that GST/HST on assignments is double levied or increased. The changes actually add certainty to the way GST/HST on assignments are taxed.

Let’s do an example of pre- and post- May 7th 2022 changes. Here is the assignment details (closely maps on to OREA Form 145/150 Schedule B):

• Purchase Price on the original APS = $1,000,000
• Payment by Assignee to Assignor for this Assignment Agreement = $100,000*
• Total Purchase Price including the Original APS and this Assignment Agreement: $1,100,000
• Deposit paid by the Assignor to the seller under the original APS to be paid by the Assignee to the Assignor: $200,000

**For the sake of simplicity, this excludes GST/HST but in practice, most assignment agreements will stipulate that GST/HST is included

Under the pre-May 7th 2022 rules according to the CRA*, GST/HST would have been payable on the whole amount that the assignee pays to the assignor, $300,000, which results in HST payable of $39,000 in Ontario (13%*300,000).

*Note that it was the CRA’s view that GST/HST is levied on the deposit. In reality this was challenged successfully in a 2013 Tax Court case and a taxpayer can file their GST/HST return without including the amount attributable to the deposit. But the CRA continued to levy GST/HST on the deposit amount in audits and reassessments so taxpayers unaware of the Tax Court ruling would end up paying additional GST/HST.

Under the post-May 7th 2022 rules, GST/HST on assignments is officially only payable on the payment by the assignee to the assignor, $100,000, which results in HST payable of $13,000 in Ontario. This will force the CRA to update their practice guidelines and hopefully they will no longer expect GST/HST on deposits in audits and reassessments.

The Nitty-Gritty

Lately, I have seen a lot of incorrect information shared by investors, agents, accountants, and lawyers regarding the new GST/HST changes so I hope that this post can put to rest any uncertainty on this issue by giving concrete examples and referring to the budget documents (the link goes to the Supplementary Information attached to the Federal Budget).

Many people are confused about the new changes to GST/HST on assignments and I think it largely stems from the imprecise use of language when talking about assignment agreements.

Before we begin, let’s start with some general definitions I will use in this post and are relevant in assignments:

• APS = Agreement of Purchase of Sale = Pre-Construction Contract
• Buyer = Assignor. The buyer is the individual who signed APS to buy the property. They will also be the assignor in the assignment agreement by assigning the APS to the assignee.
• Seller = Builder. The seller is the builder who signed the APS to sell the property. Note that most pre-construction agreements have a clause that give the seller some rights in an assignment of the contract (ie. seek seller permission and/or an assignment fee).
• Assignee = first occupant. The assignee is the person who will be assigned the APS and wants to eventually close on the property and live in it therefore, in most cases, they will be the first occupant.
• Taxable Supply – means a supply that is made in the course of a commercial activity (from the Excise Tax Act (the “ ETA “) S123(1))
• Budget Day – April 7th 2022.

There are two main paragraphs most relevant to the new changes and I will explain what both of them mean. The first:

Budget 2022 proposes to amend the  Excise Tax Act  to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes. As a result, the GST/HST would apply to the total amount paid for a new home by its first occupant and there would be greater certainty regarding the GST/HST treatment of assignment sales. Supplementary Information for the 2022 Federal Budget (https://budget.gc.ca/2022/report-rapport/tm-mf-en.html#a5_2)

I believe some people have misinterpreted this paragraph, specifically the underlined section. The total amount paid by the first occupant is the purchase price on the APS (net of GST/HST as it is usually included in the price) plus the amount the first occupant/assignee paid for the assignment contract (also net of GST/HST).

The legislators have reframed the GST/HST on assignment sales from a taxable supply provided by the assignor, to the GST/HST owed because that is the “true purchase price” that the first occupant paid for the property. There is no double taxation. The amount of GST/HST on assignments is just being levied on the original APS price plus the additional amount the assignee paid to the assignor.

Which leads to the next paragraph:

Typically, the consideration for an assignment sale includes an amount attributable to a deposit that had previously been paid to the builder by the assignor. Since the deposit would already be subject to GST/HST when applied by the builder to the purchase price on closing, Budget 2022 proposes that the amount attributable to the deposit be excluded from the consideration for a taxable assignment sale. Supplementary Information for the 2022 Federal Budget (https://budget.gc.ca/2022/report-rapport/tm-mf-en.html#a5_2)

The GST/HST on the deposit never made sense because the assignee was essentially returning the deposit that the assignor already paid to the builder which was already subject to GST/HST in the APS. This new reframing of the assignment sale solves that quirk because the deposit is already accounted for in the assignee’s “true purchase price”.

The Nittier-Gritt ier

So this is where going to law school comes in handy. If the above has not convinced you, please read on but otherwise, this might be a bit dense as I convert each part of the change to the ETA in everyday language that even a non-tax lawyer can understand (hopefully).

If a taxable supply by way of sale of a  single unit residential complex  (as defined in subsection 254(1)) or of a residential condominium unit is made in Canada under an agreement of purchase and sale (in this section referred to as the “purchase agreement”) entered into with a builder of the single unit residential complex or of the residential condominium unit […]

Translation/simplification: If a taxable supply by way of an APS is entered into …

[…]and if another supply by way of assignment of the purchase agreement is made by a person (other than the builder) under another agreement, then the following rules apply for the purposes of this Part:

Translation/simplification: …and if there is another supply (profit from the assignment) by way of the assignment of the APS, then the following rules apply:

(a)   the other supply is deemed to be a taxable supply, by way of sale, of real property that is an interest in the single unit residential complex or residential condominium unit; and

They key phrase here is “other supply” because it does not refer to the original taxable supply which would have been the entire purchase price of the property in the APS. Instead, the “other supply” refers to the profit the assignor made in assigning the APS to the assignee.

Translation/simplification: (a) the profit from the assignment agreement is deemed to be a taxable supply.

(b)   the consideration for the other supply is deemed to be equal to the amount determined by the formula A-B where

Translation/simplification: (b) the profit from the assignment agreement is determined by the following formula A-B where

A is the consideration for the other supply as otherwise determined for the purposes of this Part, and

Translation/simplification: A is the total amount the assignor received before HST, and

B is (i)   if the other agreement indicates in writing that a part of the consideration for the other supply is attributable to the reimbursement of a deposit paid under the purchase agreement, the part of the consideration for the other supply, as otherwise determined for the purposes of this Part, that is solely attributable to the reimbursement of the deposit paid under the purchase agreement, and (ii)   in any other case, zero.

Translation/simplification: B is a reimbursement from the assignee to the assignor for the deposit paid in the APS if applicable

And putting it all together:

If a taxable supply by way of an APS is entered into and if there is another supply (profit from the assignment) by way of the assignment of the APS, then the following rules apply

(a) the profit from the assignment agreement is deemed to be a taxable supply.

(b) the profit from the assignment agreement is determined by the following formula A-B where

• A is the total amount the assignor received before HST, and
• B is a reimbursement from the assignee to the assignor for the deposit paid in the preconstruction agreement if applicable

This new change introduces more certainty and logic into the tax code which is good for society overall.

Realistically, this only disadvantages those who have a change in circumstance and are “forced” to assign their property before closing. For example, this could be due to interest rate hikes that prevent a taxpayer from obtaining a mortgage or getting a new job elsewhere and no longer needing the property.

But it does create a positive incentive for real estate flippers to follow the law as it closes off one of the avenues for avoiding GST/HST on assignments (though income tax is a whole other issue). I don’t think it will have any meaningful effect on house prices, unless people believe in the incorrect information.

4 replies on “2022 Changes to GST/HST on Assignments”

First, I love the article. I called CRA. The gentlemen there said he is not aware of any changes from May 7th and says HST is still chargeable on the deposit. This makes no sense that the deposit should have ever been considered to be taxed.

Thank you! Yes, the CRA phone reps aren’t really held accountable for the information they give out so if there is ever any conflicting information I would triple check it. As I mention in the post as well, the CRA continued to audit and reassess HST on the whole deposit. I guess the CRA auditors rely on their practice guidance which, as far as I can tell, is from 2011 and wasn’t updated even after the 2013 case against their interpretation. Hopefully they will be issued new practice guidance soon but it might take awhile for it to trickle down to the CRA phone reps.

Awesome article Ed. 👏

Thanks, glad it was helpful!

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New Assignment Rule 2022

New Assignment Rule 2022 – Buyer to Pay HST on Profit

New assignment rule 2022 – 13% hst in ontario, assignment sales entered into after may 7, 2022 are now subject to hst on the profit portion of the final price..

Pre-construction assignment sales are now subject to 13% HST in Ontario . This has to be paid only on the first buyer’s profit when the contract is sold to a second purchaser.

The HST is not charged on the total price of the property but only on the profit portion. It has to be paid by the second purchaser.

What is an Assignment Sale?

Assignment sale is when a buyer wishes to sell or offload his or her builder’s new condo at pre-construction stage to another interested buyer.

So there are three parties involved in an assignment sale: the builder, the first buyer and the second buyer. The first buyer has an “Agreement of Purchase and Sale” with the builder. The first buyer sells his “Agreement of Purchase and Sale” to the second buyer.

In a pre-construction assignment sale, since the property is not yet built, it is merely a transaction of “the interest in the Agreement of Purchase and Sale” of that property. The second buyer is not buying the property, he or she is buying the Agreement of Purchase and Sale of that property. This is known as an assignment sale.

Most of the builders of new condos permit assignment sales, often free of cost, or at a predetermined cost.

Get some tips and read more about the pros and cons of assignment sales.

What do the terms Assignor and Assignee mean?

Assignor (or the first buyer) is a person who is the original purchaser of a pre-construction home or condo directly from the builder. When the assignor sells the pre-construction unit to another purchaser before closing, that purchaser is known as an assignee.

An example of an Assignment Transaction

In simple terms, if an assignor bought a pre-construction home or condo for $500,000 and sells it as an assignment sale to an assignee for $600,000, then the assignee has to pay 13% HST on $100,000 to the government. It is the job of the lawyers to ensure that the HST portion is remitted to the government.

Why have these changes been introduced?

These measures have been introduced by our government to get more money into their coffers as they see a lot of speculation going on in the real estate market with people making handsome profits in recent years. It is aimed at curbing the rampant speculation and to slow down the feisty real estate market.

This rule intends to tax the assignee, just like any other buyer who purchases any goods and services from the market and pays 13% tax in Ontario.

As for the assignor, he or she will have to pay tax on the total income or the profit he or she makes from the transaction.

Note: This blog post and the contents herein DO NOT serve as legal or financial advice. Kindly consult with your professional accountant and lawyer before making any decision regarding sale or purchase of an assignment home or condo, and payment of taxes arising out of it.

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Important Changes for Assignment Transactions: Proposed Change Effective May 7, 2022.

The Federal government is targeting assignment transactions in an effort to decrease speculative trading noting that “homes should be for people to live in, not commodities to be traded and profited upon by housing speculators”.

For assignment agreements entered into prior to May 7, 2022, if the original purchaser was able to demonstrate an intention to live in the property at the time of signing the agreement to purchase the property with the builder (i.e. original purchaser was an end-user), the original purchaser was exempt from the requirement to pay 13% HST on closing. However, if the original purchaser intended to assign the unit prior to closing or to lease the unit to a third party (i.e. original purchaser was an investor), HST was payable.

Budget 2022 proposes that effective May 7, 2022, all assignments of newly constructed or substantially renovated residential housing are taxable for HST purposes. Note that this represents no change for investment-oriented purchasers as HST was already payable in this situation.

Have a question about assignments or need assistance in planning for your future assignment transaction? We would be pleased to review with you. This post was written by Slonee Malhotra, a qualified real estate lawyer with SorbaraLAW. 

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Assignment Sales and HST

An assignment sale is a type of real estate transaction that occurs when a buyer of a pre- construction home or condo decides to sell their rights to purchase the property to another buyer before the construction of the building is complete. This type of sale transfers the purchase agreement from the original buyer to the new buyer (known as the “assignee”)

As of May 2022, the government introduced a new rule requiring HST (Harmonized Sales Tax) to be paid on all assignment sales of single-unit residential or condo properties that are newly constructed or renovated. This means that the assignee must pay HST on the difference between the original purchase price and the resale price.

For example, if a pre-construction home was originally purchased for $500,000 and then sold as an assignment sale for $600,000, the assignee must pay $13,000 in HST (calculated as 13% of $100,000, which is the difference between the original purchase price and the resale price).

It is the responsibility of the lawyers involved in the transaction to make sure that the HST portion is remitted correctly, taking into account various factors such as the date of the assignment and the completion date of the building.

Despite the introduction of HST, an assignment sale still continues to have many benefits, such as being a more convenient way for original buyers to sell their rights to the property without having to go through hurdles of selling a fully completed property.

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• May 11, 2022

Tax Implications of a Real Estate Assignment: a Tax Exposure Calculator

This article provides an overview of GST/HST and Income Tax rules (current and proposed by the Federal Budget 2022) as they apply to real estate assignments sales.

In order to illustrate the points we discuss in the article, we have created a fun and interactive Assignment Tax Exposure Calculator for real estate assignments in Ontario (HST rate 13%) that result in business income for Income Tax purposes . If your assignment sale results in capital gain for Income Tax purposes, this calculator won't work for you (we might create one for our readers, if there is enough interest). Talk to your tax advisor to determine whether your assignment sale would result in business income or in capital gain.

We hope that our readers enjoy testing their business strategies with our Tax Exposure Calculator as they plan their assignment sales, but we caution them not to rely on the calculator in lieu of professional tax, legal or accounting advice.

Federal Budget 2022

A typical purchase agreement for a pre-construction residential property has a closing date scheduled months, often years in advance. As purchasers wait for the construction to complete/the transaction to close, some choose to assign their rights under the purchase agreement for the property for a fee. Federal Budget 2022 proposes new tax rules that will affect both such assignors and assignees.

Take, for example, Rebecca who purchased a pre-construction condominium in Downtown Toronto in 2017 for $300,000 (including HST) with a November 2022 tentative closing date. She provided a deposit of $60,000 to the builder. At the time of purchase, Rebecca’s intention was to live in the condo. As years went by, Rebecca changed her mind about living in Downtown; she decided to live in the suburbs instead. Lucky for Rebecca, the market value of her pre-construction condo surged to $500,000. In June 2022, Rebecca assigns her rights under the purchase agreement for the condo to a new purchaser who is willing to pay $260,000 ($60,000 to reimburse her for the deposit she made + $200,000 on account of the increase in price). Rebecca thinks she made an impressive profit of $200,000 but she did not consider taxes.

If you are like Rebecca, Federal Budget 2022 has some good news and some bad news for you (but mostly bad).

GST/HST to Apply on All Assignment Sales

The bad news is that effective May 7, 2022, under the Excise Tax Act (Canada) (“ETA”) every individual assignor of residential real estate would have to collect GST/HST on their assignment profit and remit it to the CRA. The rule will apply even to those who believe they are unrelated to the business of real estate and did not have a GST/HST number. Where an assignor is a non-resident, the assignee would be required to self-assess and pay the GST/HST to the CRA. In my example, Rebecca would have to remit 13% HST included in the $200,000 assignment profit ($23,008) directly to the CRA.

Before the Budget proposal, Rebecca’s HST liability depended on whether or not she purchased and assigned a condo in the course of a commercial activity. If Rebecca’s true intentions were to live in the condo, she would have been exempt from HST.

Income from Assignment: Business Income or Capital Gain?

Another element of bad news does not directly follow from the proposals, but raises concerns. Some commentators believe that, as an indirect effect of the Budget, we may see more assignment sales treated as business income (taxed at full rates) as opposed to capital gain (taxed at half rates) under the Income Tax Act (Canada) (“ITA”).

First, if all assignments are “taxable supplies” subject to GST/HST under the ETA, it generally implies the existence of a “commercial activity.” In its turn, a commercial activity generally implies business income treatment under the ITA. Granted, if an activity is deemed to be a “taxable supply” under the ETA, the deeming rule should not extend to a different Act, the ITA, but tax practitioners are watching carefully.

Second, Budget 2022 includes a new “anti-flipping” rule, which deems sales of residential properties owned for less than 12 months to generate business income under the ITA, subject to limited “life events” exceptions, such as a divorce or a job relocation. It is unclear whether the proposed “anti-flipping” rule would apply to assignments when taxpayers technically do not “own” the properties. Stay tuned.

In any event, the new “acceptable” list of life events replaces the current capital vs. income legal test entirely. Instead of determining whether the condo was Rebecca’s capital property or inventory, the focus shifts to merely checking whether her reason to sell/assign was on the list of the “acceptable” ones.

If Rebecca’s assignment profit is treated as business income for income tax purposes, her highest marginal tax rate would be 53.53% in Ontario. In very rough terms, Rebecca should budget well over 50% of her assignment profits for HST remittances and income tax. Depending on her marginal tax rate, she may be able to only keep about $88,000 of her original $200,000 assignment profit.

Before the Budget proposal, Rebecca’s intentions for the property (business or personal) would have been a question of fact. If she could prove that she intended to live in the condo, she would pay no HST and pay tax on capital gain. Her total tax liability would have been approximately $50,000 (25% of the $200,000 assignment profit).

No HST On Deposit Portion of Assignment Price

But there is also good news: the Budget proposes to exclude deposits from consideration for taxable supplies by assignment for GST/HST purposes. This means that GST/HST will only apply on the profit portion of the assignment price (in Rebecca’s case, $200,000), and not on the entire assignment price, which includes the deposit ($260,000). This is a welcome change that eliminates double taxation and is consistent with current caselaw ( Casa Blanca Homes Ltd. v. The Queen , 2013 TCC 338).

To generally estimate Income Tax and HST (Ontario) implications of an assignment that results in a business income, check out the Assignment Tax Exposure Calculator on our website .

IMPORTANT: Always speak to your tax professional to estimate or determine tax consequences applicable to your specific situation. DO NOT rely on our calculator for an accurate estimation of your tax liability. Nothing in this article constitutes legal advice and no solicitor-client relationship is created. If you require legal advice pertaining to your specific situation, please contact our tax lawyer . ​

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Everything you need to know about Preconstruction Assignment Sales

Have you sold pre-construction homes before closing on assignments?

Have you wondered about what are the tax implications on selling pre-construction homes before closing?

We often advise our clients to not to sell their pre-construction homes before closing if possible.  It can trigger a series of tax implications – HST and income tax implications. 

Before the announcement of Budget 2022, CRA had adopted the policies that HST would be applicable on not just the assignment fees, but also the deposit. 

This could be a huge tax cost that most investors weren’t aware of.

Now, let’s use an example to explain .

Say you agree to purchase a pre-construction home for $700,000.  You sign the agreement of purchase and sale and pay a deposit of $100,000 to the builder. 

The new home is expected to be completed a few years later.

You decided to sell the property on assignment before it’s ready for closing for an additional $50,000.

Scenario 1:  When you signed the agreement of purchase and sale, you intended to move into the property and use it as your primary residence.  

Life circumstances change.  You now decided to sell the property before closing.  You sold it on assignment before May 6, 2022 .

HST: As your intention was to move into the property as your primary residence, you had no HST liability obligation.

Again, intention is subjective.  If you’re questioned in court, you would have to provide evidence to prove your own intention. 

Most clients thought that the CRA would have to prove that they were wrong.  The truth however is that the taxpayers are the one who have the responsibility to prove to CRA their own filing position. 

Make sure your have documentation proving your initial intention.   

Income Tax: Assuming you have strong documentation proving that you did intend to purchase this pre-construction home as your primary residence, the $50,000 assignment fees could be reported as capital gain.

Scenario 2:  When you signed the agreement of purchase and sale, you intended to move into the property and use it as your primary residence.  

Life circumstances change.  You now decided to sell the property before closing.  You sold it on assignment after May 6, 2022 .

Budget 2022 changed the rule.  For all assignment sales happened after May 6, 2022, regardless of your intention, you’re required to pay HST on the assignment sales.

HST implication:

This means that the $50,000 collected is no longer all yours.  This $50,000 collected, if you don’t charge HST on top, is inclusive of HST.  

You must remit the HST to CRA on sale on assignment.  In this case, it would have been $5.8K. 

Presumably, you would also be able to claim Input Tax Credit, which is the HST you paid on services that you used to allow you to sell the property.  This includes the HST you paid on your legal cost and HST you paid on brokerage fees. 

The net amount can be remitted to CRA.

Income Tax Implication:

Budget 2022 also made some rule changes when it comes down to sale of property.  The sale of a property within one year of ownership is considered on income account, meaning 100% of the profit you make is taxable, with some exceptions allowed, effective Jan 1, 2023.

When you apply this new rule to this scenario, it is unknown as to whether an assignment sale is considered a flipped property.  It’s difficult to say whether this rule is applicable to assignment sale at this point.

Regardless, you still would need to keep proper and relevant documentation supporting your intention that you were trying to move into the property as your primary residence.  With proper documentation, you could still report the net income from assignment sale on capital account, meaning only 50% of the profit you make is taxable.

In our example, assuming client didn’t incur other cost of selling, the client would be reporting $44K of capital gain, 50% of which would be taxable.

Scenario 3:  When you signed the agreement of purchase and sale, you intended to rent out your property.  

Interest rate changed.  You now decided to sell the property before closing.  You sold it on assignment before May 6, 2022 .

Your intent was never to move into the property as your primary residence or have any of your family members moving in, as a result HST is applicable on assignment sale.

Assignment fees are subject to HST. $50,000 assignment fees you collected are subjected to HST.

CRA also adopted the position that the deposits $100K are also subject to HST as well.  Ouch!

You thought you made $50,000 – but after considering the HST on assignment fees $5.8K and HST on deposits $11.5K, you really only net $33K.

This calculation hasn’t considered the brokerage fees as well as the lawyer fees yet.  Yikes!

Income Tax implication:

The net amount profit of $33K (assuming there’s no brokerage fees or lawyer fees, if you have, the net profit is lower) would likely have to be reported as income, 100% of it is taxable. 

If you own the property in your personal name, the entire amount is added to your job income or whatever income you have in your personal name.  You’re taxed at the respective marginal tax rates, which can be as high as 53.5% in Ontario.

Triple Yikes!

If you own the property in the corporation, the profit is taxed as regular business income, most likely at 12.2% for qualified small businesses. 

Scenario 4:  When you signed the agreement of purchase and sale, you intended to rent out your property.  

Interest rate changed.  You now decided to sell the property before closing.  You sold it on assignment AFTER May 12, 2022 .

The Government also recognized that charging HST on deposits were not right.  Budget 2022 specified that HST would no longer be charged on deposits .

Assignment fees are subject to HST but deposits are not subject to HST anymore to avoid double taxation.

Assignment fees are reported as income 100% taxable.

So continuing with the same example, HST is applicable on the $50,000 assignment fees, meaning that you would incur HST liability of $5.8K as calculated above. 

Again, you could offset the HST liability with the HST you pay on realtor commission as well as lawyer fees on closing. 

The net amount would have to be paid to CRA.

The net profit of $44K (assuming there’s no brokerage fees or lawyer fees, if you have, the net profit is lower) would likely have to be reported as income, 100% of it is taxable. 

Similar to Scenario 3, if you own the property in your personal name, the entire amount is added to your job income or whatever income you have in your personal name.  You’re taxed at the respective marginal tax rates, which can be as high as 53.5% in Ontario.

Now that we’ve gone through the assignment sales tax implication in details – Are you still planning to sell your properties on assignment?

Let us know below.

Lastly, our team has been working tirelessly to prepare for the upcoming Wealth Hacker Conference on preparing everyone for the upcoming recession.  We have experts such as Dalia sharing her insights on how to protect your portfolio and grow from this recession.  If you are lost, join us at the upcoming Wealth Hacker Conference.  

Visit WealthHacker.ca now to get your tickets. 

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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All Assignments Subject to HST in 2022

The 2022 provincial budget makes all condominium and freehold (home/townhome) assignment agreements made after May 7, 2022 subject to HST.

Assignment transactions are common in pre-construction purchases. Before the 2022 budget, whether or not HST applied to an assignment transaction, depended on the intention of the original buyer at the time when the purchase was made. For instance, properties purchased for personal use were HST exempt. However, if the intention was deemed as a flip for profit, HST was applied.

As of May 7, 2022, HST or 13% must be applied to the first buyer’s (the assignor) profit of a pre-construction sale – not the property’s total sales price. The intention of the original purchaser whether for personal use or to re-sell for profit does not matter anymore.

The tax applies to all new assignment contracts dated before May 7, 2022 regardless of the original purchase date. For example, if you purchased a pre-construction condo in 2015 and you want to sell it as an assignment now, HST will be applicable ON TOP of the assignment purchase price.

However, HST is applicable only on PROFITS, while the original deposit paid to secure the purchase, may be HST exempt. In order to have your original deposit clear of HST, your Assignment Agreement should state in writing that part of the “Assignment Price” is attributable to the reimbursement of a deposit under the original purchase agreement.

If you are looking to sell an assignment, make sure you hire a professional to navigate your assignment agreement according to the new guidelines.

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HST on Assignments

By: Jayson Schwarz LLM and Hamza Ahmad JD

Many clients think that doing an assignment of a home purchase agreement is a simple transaction, but the reality is far different. It is an extremely complex transaction and if not handled properly can result in the loss of a lot of money.  This article describes two issues relating to HST that assignors (seller) and assignees (buyer) should consider when entering pre-construction freehold and condominium assignments.

HST on Assignment Fees

HST is payable on an assignment sale of an Agreement of Purchase and Sale (“APS”). Remember when you do an assignment you are not selling the house or property you are selling your APS. The issue is what you pay the HST on, who pays it and how much that will be. Generally the HST will be in addition to the price and paid for by the buyer.

Your assignment agreement must be clear to show what the profit is on the transaction, as it should only be the profit that is subject to HST.

The standard realtor’s form of an assignment agreement does not include sections on crucial issues regarding HST. It is important you get a lawyer to help carefully draft the assignment agreement to reduce the risk of future issues with CRA. In a resale home situation HST is payable on the profit only provided the assignment agreement is properly drafted.

As an interesting aside, most people would reasonably conclude that getting back your deposit is not subject to HST, but CRA takes the position it is, even after CRA lost in Court and the Court said there is no HST on deposit returns!!!!!!

HST New Housing Rebate

Adjustments on closing can surprise homebuyers new to pre-construction properties and assignments only add to the potential shock. The builder will want to collect the HST on closing of the original purchase where there has been an assignment sale and the buyer will need to get the HST back later.

Newly built properties are subject to HST but some or all the HST payable can be recovered immediately on closing through the HST New Housing Rebate (the “Rebate”). The Rebate has specific rules that may affect a purchaser whom’s circumstances change over time; the Rebate is provided if only the purchaser or an immediate family member resides at the property and if the builder accepts that this is correct and there has been no assignment outside that group.

In pre-construction condominium assignments with occupancy closings, an assignee must confirm whether the unit has ever been occupied. If a unit has been occupied then the assignee may not be eligible for the Rebate.

The moral of the story is that you really should retain an experienced lawyer to help you through these issues whether buying or selling. Realators are great but it is your lawyer who if hired to do so that will take the time to review everything properly and make sure you are protected and that there are no open questions.

Perhaps the most difficult part of writing these articles relates not the actual writing, but thinking of a topic to address. So help us!!! Mail, deliver or fax letters to the magazine or to us, use the web site ( www.schwarzlaw.ca ), email ( [email protected] ) and give us your questions, concerns, critiques and quandaries. We will try to deal with them in print or electronic form.

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Tax Insights: GST/HST issues relating to the assignment of agreements to purchase newly constructed condominiums

February 01, 2021

Issue 2021-03

The combination of rising home prices and the financial stress and uncertainty created by the COVID-19 pandemic is resulting in more condominium purchasers reconsidering their acquisition. While some buyers always planned to assign their agreements of purchase and sale (APS) to a third party, many other buyers that originally intended to lease or reside in their condominium units are also assigning their APS. There are a number of reasons for this, one of which is a reduction in the demand for rental condominiums in many Canadian cities. As discussed in a recent Tax Court of Canada decision, Chen Sun v. The Queen, 2020 TCC 112, there are many Goods and Services Tax/Harmonized Sales Tax (GST/HST) issues to consider when an APS is assigned to a third party, including whether:

• GST/HST is payable by the assignee on the assignment fee and the amount attributable to the deposit that was paid by the assignor to the builder of the property
• the assignee is eligible to claim the GST/HST new housing rebate
• the new housing rebate can be assigned to the builder and credited against the purchase price

Is the assignment of an APS a taxable supply

The assignment of an APS will constitute a taxable supply, unless it qualifies for an exemption. This is because “real property” is defined to include an interest in real property, and the making of a supply of real property (other than an exempt supply) is deemed to be made in the course of a “commercial activity.” The sale of an interest in a residential complex by a person that is not a “builder” is generally exempt; however, the sale of an interest in a new home or condominium is generally subject to GST/HST when the assignor is a “builder.”

A “builder” is defined in a manner which can potentially include someone that is merely entering into an APS with a builder. For example, subject to a specific exclusion that only applies to individuals, someone that acquires an interest in a home before it is occupied (or a condominium before it is registered) can be a builder if their primary purpose was to either:

• sell the home to any person
• lease the home to someone other than an individual for their personal use

Individuals are excluded from being a builder if they did not acquire their interest in the course of a business or an adventure or concern in the nature of trade, which is determined by considering the following factors:

• nature of the property sold
• length of period of ownership
• frequency or number of other similar transactions by the taxpayer
• work expended on or in connection with the property realized
• circumstances that were responsible for the sale of the property
• taxpayer’s motive or intention

To the extent that the assignor is a “builder,” GST/HST will be payable on the value of consideration that is paid by the assignee and the assignor will be required to collect GST/HST unless the assignee is registered for GST/HST.

The Canada Revenue Agency (CRA) considers an amount paid by an assignee on account of the assignor’s deposit to be part of the consideration paid for the assignment of an APS, and is therefore subject to GST/HST if the assignor is a builder. Accordingly, unless the assignment is restructured to result in the builder refunding the deposit to the assignor and receiving a replacement deposit from the assignee, the assignee may pay double tax on the deposit. It is also important to note that the Tax Court of Canada’s decision in Casa Blanca Homes Ltd. v. The Queen, 2013 TCC 338 contradicts the CRA’s view. In Casa Blanca Homes Ltd., the Tax Court of Canada held that the amount paid to the assignor relating to the deposit constituted an exempt supply of a financial service and would therefore not be subject to GST/HST.

Can the assignee claim the GST/HST new housing rebate

The assignment of an APS may also impact the assignee’s eligibility to claim the new housing rebate, as evidenced by the Tax Court of Canada’s recent decision in Chen Sun. The federal new housing rebate is equal to 36% of the federal component of GST/HST paid, up to a maximum of $6,300 (for homes valued at $350,000), with the rebate being gradually reduced and phased out when the value of the home reaches $450,000. For properties in Ontario, the provincial new housing rebate is equal to 75% of the provincial component of GST/HST paid, up to a maximum of $24,000 (for homes valued at $400,000 or higher).

For a purchaser to be eligible for the new housing rebate, the following conditions must be met:

• the purchaser must be an individual that is acquiring the home from a builder, as opposed to an assignor who may not be a builder
• at the time the individual becomes liable or assumes liability, they must acquire the home as their primary place of residence or that of a relation
• ownership of the property must be transferred to the individual after construction is substantially completed
• the first person to occupy the home must be the individual or a relation
• all persons named on the APS must meet the aforementioned conditions

When the purchaser qualifies for the new housing rebate, the builder is generally entitled to pay or credit the rebate amount to the purchaser pursuant to subsection 254(4) of the Excise Tax Act.

In situations where a third party is acquiring ownership of a home or condominium and they receive title directly from the builder, it does not necessarily mean that the APS has been assigned to the third party and that the builder has sold the condominium to the assignee. As argued by the Crown in Chen Sun, if the builder has not accepted the assignment, then the assignee may not be the person that is acquiring the condominium from the builder. Fortunately, in Chen Sun, the court ultimately held that the APS was in fact assigned on the basis that the builder, by its conduct, accepted the assignment and therefore the builder did sell the condominium directly to the assignee. Accordingly, the assignee was eligible to claim the new housing rebate (and the builder was entitled to credit the assignee with the rebate) because the assignee acquired the condominium from the builder and the other conditions to claim the rebate were satisfied.

How should builders deal with assignments

As the builder and purchaser are jointly and severally liable for housing rebates that have been claimed in error, it is important for builders to make sure that purchasers qualify for the rebate before they pay or credit the purchaser with the rebate. The CRA heavily scrutinizes rebate claims and, to the extent each and every condition to claim the rebate is not satisfied, the CRA will deny the rebate claim. In situations where an APS has been assigned, builders should consider whether:

• they should credit the assignee with the housing rebate or advise the assignee to file the rebate claim directly with the CRA
• it is easier to “tear” up the original APS and enter into a new APS with the assignee
• the assignment has been clearly documented so that there is no dispute that the assignee has become the purchaser under the APS, which may not be the case when only the title is transferred to the assignee at the assignor’s direction

The takeaway

All parties to a transaction in which an APS is being assigned and a housing rebate is being claimed should consider the GST/HST implications of the assignment. Failure to structure these assignments in an appropriate manner can significantly increase GST/HST costs for the respective parties, including:

• builders being assessed penalties for erroneously crediting the housing rebate to assignees
• assignors being assessed penalties for failing to collect tax on the assignments
• assignees paying GST/HST on the replacement deposits

PwC can help structure these assignments in a tax-efficient manner.

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Condo assignments – what you need to know about HST

Many people think that doing an assignment of a home purchase agreement is a simple transaction, but the reality is far different. It is an extremely complex transaction and, if not handled properly, can result in the loss of a lot of money. There are two issues relating to harmonized sales tax (HST) in Ontario that assignors (sellers) and assignees (buyers) should consider when entering pre-construction freehold and condominium assignments.

HST on assignment fees

In Ontario, HST is payable on an assignment sale of an Agreement of Purchase and Sale (APS). Remember, when you do an assignment, you are not selling the house or property – you are selling only your APS. The issue is what you pay the HST on, who pays it and how much that will be. Generally, the HST will be in addition to the price, and paid for by the buyer.

Your assignment agreement must be clear to show what the profit is on the transaction, as it should only be the profit that is subject to HST.

The standard realtor’s form of an assignment agreement does not include sections on crucial issues regarding HST. It is important you get a lawyer to help carefully draft the assignment agreement to reduce the risk of future issues with CRA. In a resale home situation, HST is payable on the profit only provided the assignment agreement is properly drafted.

As an interesting aside, most people would reasonably conclude that getting back your deposit is not subject to HST, but CRA takes the position that it is – even though CRA lost in a court ruling that said there is no HST on deposit returns.

HST new housing rebate

Adjustments on closing can surprise homebuyers new to pre-construction properties, and assignments only add to the potential shock. The builder will want to collect the HST on closing of the original purchase where there has been an assignment sale, and the buyer will need to get the HST back later.

Newly built properties are subject to HST, but some or all of the HST payable can be recovered immediately on closing through the HST New Housing Rebate (the Rebate). The Rebate has specific rules that may affect a purchaser whose circumstances change over time; the Rebate is provided only if the purchaser or an immediate family member resides at the property, and if the builder accepts that this is correct and there has been no assignment outside that group.

In pre-construction condominium assignments with occupancy closings, an assignee must confirm whether the unit has ever been occupied. If a unit has been occupied, then the assignee may not be eligible for the Rebate.

The moral of the story is that you really should retain an experienced lawyer to help you through these issues, whether buying or selling. Realtors provide an important service, but a lawyer will take the time to review everything properly and make sure you are protected, and that there are no open questions.

About Jayson Schwarz

Jayson Schwarz LL.M is a Toronto real estate lawyer and partner in the law firm Schwarz Law Partners LLP. Visit the website at schwarzlaw.ca or email your questions about real estate to [email protected]

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