Assignment Sales: New GST/HST Rules

Evelyn Jacks

Do you know of anyone who has assigned the purchase of a home to another person before moving into it? Perhaps you know of an investor in a new condo complex, who has put down a deposit with the hope of engaging a third party once the condo is built and the price goes up. If so, be sure they know about new tax rules for such “speculative sales”, which will render this type of transaction to GST/HST effective May 7, 2022, and could eliminate rights to capital gains treatment as well.    

What’s changed.  Generally speaking, if someone enters into a purchase and sales agreement with a builder for the construction and acquisition of a new or substantially renovated home, the builder is the one who must pay the GST/HST on the sale to the first purchaser.  Under old rules, should that purchaser sell or reassign the home to another, the transaction fell into one of two categories: a taxable or exempt scenario.  

The assignment was exempt from the GST/HST if the purchase was made primarily for someone to live in the property as a primary residence. But, it was taxable if the primarily purpose of the acquisition was to sell the interest in the property to a third party. The old rules left a gap the government has now closed. 

Effective for any assignment agreements entered into after May 6, 2022, all newly constructed and substantially renovated residential housing units will be taxable for GST/HST purposes in the hands of the first purchasers (assignor). If the assignor is a non-resident of Canada, the assignee must self-assess and pay the GST/HST to the CRA.

Status of Deposits.   For deposits made on the property, there are specific rules, as per Finance Canada:

• Where an assignment agreement is entered into before May 7, 2022, and the assignment sale is taxable, the total amount payable for the sale of the assignor’s interest to the assignee is subject to the GST/HST, including any amount the assignor paid as a deposit to the builder, whether or not such an amount is separately identified.
• Where an assignment agreement is entered into on or after May 7, 2022, and the assignment agreement indicates in writing that a part of the consideration is attributable to the reimbursement of a deposit paid by the assignor to the builder under the purchase and sale agreement, the amendment excludes the amount attributable to the deposit from the consideration for a taxable assignment sale.

Affect on Property Tax Rebates.   Because the deposit is excluded from all taxable assignment sales, there may be an impact on the amount of the new residential rental property rebate and GST/HST new housing rebate.

Income Tax Consequences, Down the Line.  There is more important news, with expensive tax implications later. Assignment sales themselves may be considered to be business income, not eligible for capital gains treatment, depending on the primary purpose of the acquisition.  CRA has noted that all relevant factors surrounding the purchase and sale agreement will be considered in determining the “primary purpose” in determining whether GST/HST must be paid on the acquisition of an interest in a new house.  Examples provided by the CRA include the following:

1. Where the purchaser offers to sell their interest in the house or takes other actions to attract buyers before, or while, the house is under construction.
2. Whether a short-term or open mortgage is taken rather than a long term one.
3. Whether financing of the home is beyond the person’s ability to pay and as a result the person is counting on an increase in the value and subsequent sale to finance the transaction.
4. Whether the home is suitable for the individual’s lifestyle; example a condo with one bedroom acquired by a family of four.
5. The fact that there is no attempt to live in the home, rent it or use it as a vacation property or that the sale was trigger by an unforeseen event.

Intention will have to be shown by the purchaser, and so detailed notes will be required.

What types of homes are affected? The new Section 192.1 will apply to a single unit residential complex or a residential condo unit and so could include:

• a detached or semi-detached house,
• townhouse,
• duplex,
• mobile home,
• modular home,
• floating home or
• a unit in a co-op housing corporation.

Before contemplating any assignment sales, real estate investors should discuss these new tax implications with their tax specialists.

For more information and explanation, these and other pertinent tax changes will be discussed in detail at the September CE Summits.