Income Tax on Assignment Sales:
The recent 2019 Federal Budget announced that CRA will be devoting significant resources to pursue and investigate real estate transactions as the Department of Finance feels that this is a significant area of non-compliance. What that means is that if you are involved in a pre-construction assignment sale, there is a high likelihood that you will be subject to CRA scrutiny, so it is important that taxpayers understand the rules for both income tax and HST relating to assignment sales.
Many taxpayers assume that the sale of real estate results in a capital gain, but what they don’t realize is that it is not the nature of the property, but the intent of the buyer at the time of purchase that determines if the property is capital or inventory. If it is determined that the intention of the taxpayer at the time of purchase was to resell the property for a profit, then the proceeds would be considered business income which has a 100% inclusion rate as opposed to a 50% inclusion rate for capital gains. CRA has been attacking assignment sales on the basis that they are short-term transactions that are often undertaken by individuals looking to make a quick profit on the “flip”. Taxpayers who have a history of flipping properties in a short time frame will have a difficult time justifying that their investment is capital property and will likely be reassessed quickly by CRA. If you plan to treat your assignment sale as a capital gain, you should ensure that the facts support your claim that you intended to hold on to the property long-term either as a personal use property or as an income producing property. There have been recent tax court cases where the judge dismissed the taxpayers claim that the real estate was capital property because the facts did not support their claim and they were assessed taxes on the sale as business income.
Some taxpayers also make the mistake of assuming that because they originally purchased a pre-construction unit with the intention of living in it as a principal residence, that it qualifies for the principal residence exemption (PRE) and therefore is not taxable. This is not the case in an assignment sale because the rights to the property have been sold prior to closing, so the property was never inhabited as a principal residence and therefore cannot qualify for the PRE. There have been several cases of CRA applying gross negligence penalties to unreported real estate transactions. So with the increased attention that assignment sales will be receiving, it is important to be getting proper tax advice on how to report these types of sales.
H.S.T. on Assignment Sales:
If the income tax implications of assignment sales were not enough to think about, you also have to think of HST on an assignment sale. Like income tax, much depends on the intent of the buyer at the time the contract was entered into. CRA’s position is that if a person buys a property for the primary purpose of selling the house or interest in the house then that person will be considered a Builder under the Income Tax Act. Yes, you read that right, the CRA will consider you a Builder under the Income Tax Act even if you have never built a home, if it concludes that you purchased a property for the primary purpose of selling it or an interest in it. Once you are considered a builder you must charge HST on the transaction. Believe it or not, the official position of CRA is that you must charge any applicable HST on the profit being made and the deposits. So, for example, if you had put down $50,000 in deposits on a property and made a further profit of $50,000 as an assignment fee, CRA’s position is that 13% HST is payable on $100,000 [this has been challenged successfully with HST being found to only apply to the assignment fee/profit, but CRA’s position remains that it is payable on the total of the profit plus deposits]. Under most contracts HST is included in the purchase price to the assignee/final buyer so this would have to be paid by the seller/assignor.
The link below sets it all out:
Get the right advice and use the right clauses:
The bottom line of all of this is that before you purchase the condo, you should think carefully about the possible tax implications, and make sure that you properly document the history and reasons for your purchase and use the appropriate clauses to minimize your tax implications. Consideration of tax implications is always part of our Assignment review. Please feel free to contact us and we can direct you in this regard.
Our firm focuses on Real Estate. We have been working with agents and brokers for over 20 years and have developed an efficient and responsive Real Estate practice. We also offer fixed purchase closing costs of $999.00* for all Fees & Disbursements, plus Title Insurance. *Plus H.S.T. For details, or with any questions, please feel free to call John Zinati at 416-321-8766, email at email@example.com or visit us at www.zinatikay.com.