August 17, 2022
By: Stanley Ndibe, Associate
Housing speculation has driven the real estate market in Ontario to all-time highs, preventing many Canadians from purchasing a home. Recent tax measures on so-called “assignment sales” seek to cool down the market and make it more accessible to middle-class Ontarians.
An Assignment Sale is a real estate transaction in which the original buyer of a property (usually a newly constructed condominium) sells its rights to the property to another buyer. The original buyer is the Assignor and the subsequent buyer, the Assignee. By purchasing the Assignor’s interest in the property, the Assignee essentially assumes the rights and obligations of the Assignor in the purchase contract.
Under the old rules, an Assignment Sale made by an individual was generally tax exempt if the Assignees intended to live in the property or did not intend to sell their interest in the property. Under the new rules, all Assignment Sales in respect of a single unit residential complex are subject to GST/HST.
The new rules further modified treatment of amount paid by the Assignor as a deposit to the builder. In computing the consideration received by the Assignor from the Assignee for the purpose of determining applicable GST/HST, the deposit initially paid by the Assignor to the builder is excluded. However, this exclusion will only apply if the Assignment Sales agreement indicates in writing that a portion of the consideration paid for the assignment is reimbursement of deposit paid.
A, an individual entered a purchase and sale agreement with Builder B for condo in Downtown Toronto in August 2020. The purchase price of the condo property was $1,000,000. A made a deposit of $200,000. The closing date for the purchase was scheduled for 1 July 2022. On March 1, 2022, prior to closing, A entered into an assignment agreement with C for the purchase of its interest in the property for a consideration of $1,200,000.
Under the old rules, the sale of A’s interest in the property may be taxable or tax-exempt for GST/HST purposes depending on whether it is determined that A’s original intention for purchasing the property was not to subsequently sell interest in the property. If A had an original intention to sell, the $1,200,000 received by A would be treated as a taxable supply and A will be responsible for applicable GST/HST on the $1,200,000. A will not be allowed to deduct the $200,000 deposit made on the property.
Under the new rules, A’s transaction with C is automatically treated as a taxable supply. However, A will be entitled to exclude the initial $200,000 deposit if A and C agreed in writing that a portion of the consideration (i.e., $200,000) is a reimbursement for A’s original deposit. In that case, A will be responsible for GST/HST applicable to $1,000,000.
Taxpayers interested in Assignment Sales of residential properties should be aware of the new applicable GST/HST rule.
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