Due to current uncertainties such as vacancy tax, speculation tax, and financial pressure during the pandemic,
many developers and homebuyers wish to add clauses that allow them to delay closing or even walk away from a deal.
Many buyers are also looking to assign their purchase contracts to new buyers.
This practice is commonly referred to as the assignment of a pre-sale condo contract.

To clarify the tax implications of assigning a purchase contract, we will discuss:
the assignor’s personal income tax, GST/HST, and key CRA audit considerations.

Before we begin, let’s define the three parties involved in an assignment transaction:

• Assignor: The original purchaser who holds the purchase contract and transfers their rights to another party.
• Assignee: The new buyer who acquires the rights and obligations under the purchase contract from the assignor.
• Builder (Developer): The original seller of the property.

Definition of an assignment of a purchase contract:

In essence, an assignment occurs when the original purchaser of a new condo or home allows an assignee to assume the purchase contract,
with the builder’s consent. The assignee then becomes responsible for completing the purchase.
An assignment allows the original buyer (the assignor) to sell their interest in the property
before taking possession of it.

Impact on the assignor’s personal income tax:

For an assignment sale, the assignor must report the profit from the assignment.
This profit may be treated as business income, in which case it is fully taxable,
or as a capital gain, in which case only 50% of the gain is taxable.

Many taxpayers assume that any profit from real estate sales is automatically treated as a capital gain.
However, if the buyer’s intention at the time of purchase was to resell the property for profit,
then the profit will generally be treated as business income.
A capital gain is more likely where the property is held for a longer period and is used for personal occupancy
or long-term investment (for example, rental income).

The CRA usually considers profits from the assignment of a purchase contract to be
business income, because the time span of the transaction is often short
and the intention is to make a quick profit.

Furthermore, even if the taxpayer originally bought the pre-sale unit intending to live in it as a long-term residence,
once the purchase contract is assigned, the profit on that assignment does not qualify
for the principal residence exemption.
This is because the assignment occurs before the property closes and the taxpayer never actually occupies the home.
As a result, all of the assignment profit is generally treated as business income.

Tax implications for non-resident assignors:

If a non-resident of Canada disposes of or acquires Canadian real property,
they must notify the CRA within 10 days and apply for a clearance certificate.
Failure to notify the CRA can result in penalties of up to CAD $2,500
(and in some provinces, additional penalties may apply).

In addition, the purchaser is responsible for withholding
25% of the total purchase price of the assigned contract and remitting it to the CRA
if the seller is a non-resident.

GST/HST implications for the assignor:

The total amount received on an assignment usually includes:

• The refund of the original deposit paid to the builder; and
• The additional amount (markup) charged by the assignor to the assignee.

Where the assignor sells the purchase contract to the assignee,
the full assignment price is generally subject to GST/HST.

Example:

The first purchaser signs a pre-sale contract with the builder for a new unit and pays a deposit of CAD $10,000.
Later, the purchaser assigns the contract to a new buyer for CAD $15,000 in total (which includes the original $10,000 deposit plus a $5,000 markup).

In this case, the assignor must charge and remit GST/HST on the full $15,000,
even if the assignment agreement states that the $10,000 represents the original deposit paid to the builder.
GST/HST still applies to the entire assignment price.

In addition, the profit of $5,000 is reported as the assignor’s
business income for income tax purposes.

Recent CRA audit activity:

In the 2019 Federal Budget, the government announced that the CRA would allocate significant resources
to audit real estate transactions, because real estate remains a key area of concern and non-compliance.

This means that if you are involved in the assignment or resale of pre-sale units or new homes,
there is a high likelihood that your transactions may be reviewed by the CRA.
Taxpayers should therefore fully understand the income tax and GST/HST rules
related to assignment sales.

If your return is selected for review, the CRA may consider factors such as:

• The type of property sold
• How long you owned the property
• Your history of buying and selling similar properties
• Whether you substantially renovated the property
• Why you sold the property
• Your original intention when you purchased the property

If you are a professional builder, real estate investor, or provide home renovation or construction services,
the CRA will pay extra attention to your real estate transactions.

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