As of May 7, 2022, changes introduced by the Federal Budget 2022 have amended Part IX of the Excise Tax Act (ETA), significantly impacting assignment sales related to newly constructed or substantially renovated single-unit residential homes and condominium units. Under the new rules, all such assignment sales are now subject to GST/HST.

What is an Assignment Sale?

In real estate, an assignment occurs when a buyer (the assignor) who entered into a Purchase and Sale Agreement with a builder transfers his rights and obligations under that agreement to another buyer (the assignee) before the property is completed or ownership is transferred. Essentially, the assignor is selling the contract, not the property itself.

This often happens in the pre-construction market, where buyers sign an agreement, pay deposits, and then decide to sell the contract before taking possession or legal ownership. While this may seem straightforward, there are important tax consequences for assignors.

GST/HST Now Applies to All Assignment Sales

Previously, whether GST/HST applied to an assignment depended on the assignor’s intentions, particularly whether the assignment was part of a business activity. Now, regardless of intent or GST/HST registration, the assignor is required to collect and remit GST/HST on the sale of the assignment if the transaction occurs on or after May 7, 2022.

If the assignor is a non-resident, the assignee must self-assess and remit the tax. The CRA’s approach eliminates prior ambiguity about whether individual assignors are engaging in a commercial activity.

CRA’s Interpretation of “Builder” and Tax Consequences

The Canada Revenue Agency (CRA) may consider assignors to be “builders” if their intent was not to personally occupy the property. This classification carries significant tax implications, as “builders” must charge GST/HST on the full value of the assignment.

Under subsection 123(1) of the Excise Tax Act, a “builder” is defined as someone who has an interest in real property and either personally undertakes or hires someone to carry out construction or substantial renovation of that property as part of a business or an activity resembling a business venture. Importantly, if the individual constructs or renovates a residential property solely for their own personal use, they are not considered a “builder” for GST/HST purposes.

Although the term “an adventure or concern in the nature of trade” is not explicitly defined in the Excise Tax Act, courts typically examine the following factors when determining whether a taxpayer’s activity qualifies as such:

  1. The nature of the property being sold,
  2. How long the property was held before being sold,
  3. The frequency of similar transactions by the taxpayer,
  4. The work or improvements done on the property,
  5. The reasons behind the sale,
  6. The taxpayer’s underlying motive.

While all these factors are considered, the taxpayer’s motive is generally given the most weight in judicial decisions.

Double Taxation Risks and Deposit Treatment

One major concern is the risk of double taxation. The CRA considers any amount paid by the assignee, including reimbursement of the assignor’s deposit to the builder, as part of the taxable consideration, unless properly structured.

To avoid double taxation, the assignment agreement must clearly state that part of the consideration is for reimbursing the assignor’s deposit. In such cases, only the amount above the deposit is subject to GST/HST.

  • For assignments signed on or after May 7, 2022: GST/HST does not apply to the deposit portion, if clearly stated in writing.
  • For assignments signed before May 7, 2022: GST/HST applies to the entire amount, including the deposit, regardless of how it is documented.

GST/HST Rebate Eligibility for Assignees

Assignment sales can also affect an assignee’s ability to claim the federal and provincial new housing rebates. To qualify:

  • The purchaser must acquire the home from a builder (not just from another individual).
  • The home must be intended as a primary place of residence for the purchaser or a relation.
  • The buyer must be the first to occupy the home after substantial completion.
  • All parties listed on the Purchase and Sale Agreement must meet these conditions.

Anti-flipping Rule

Budget 2022 further introduced that sales of residential properties owned for less than 12 months are deemed to generate business income under the Income Tax Act, subject to the following exceptions, including cases where the disposition of the housing unit can reasonably be considered to occur due to, or in anticipation of:

  • the death of the taxpayer (or a person “related” to the taxpayer);
  • the taxpayer or a related person is suffering from a serious disability or illness;
  • a related person joining the taxpayer’s household or the taxpayer joining a related person’s household (e.g., birth of a child, adoption, care of an elderly parent);
  • the breakdown of a marriage or common-law partnership of the taxpayer, where the taxpayer has been living separate and apart from a spouse or common-law partner for at least 90 days prior to the disposition;
  • a threat to the personal safety of the taxpayer or a related person (e.g., the threat of domestic violence);
  • an involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner;
  • an eligible relocation of the taxpayer or the taxpayer’s spouse or common-law partner (e.g., generally, a relocation that enables the taxpayer to carry on business, be employed or attend full-time post-secondary education);
  • the insolvency of the taxpayer; or
  • the destruction or expropriation of the property.

Additionally, subsection 12(14) of the Income Tax Act denies any losses from the disposition of a flipped property. In other words, if a property is sold for a loss within 365 days of acquiring ownership, and an exception does not apply, then any resulting loss cannot be claimed by the owner for tax purposes.

Pro Tax Tips – Consult with an Experienced Canadian Tax Lawyer Regarding the “Builder” Characterization

Even if an individual has never taken occupancy or simply intended to make a profit, he may be deemed a builder. Once that determination is made, the individual will be liable for GST/HST on the sale, and failing to collect it at the time of the assignment can result in back taxes, penalties, and interest. Therefore, it is highly recommended that taxpayers consult with an experienced Canadian tax lawyer to avoid any potential surprises from the CRA.

FAQ:

What is a builder under the Excise Tax Act?

Under subsection 123(1) of the Excise Tax Act, a “builder” is defined as someone who has an interest in real property and either personally undertakes or hires someone to carry out construction or substantial renovation of that property as part of a business or an activity resembling a business venture.

Is the deposit portion in an assignment sale subject to GST/HST?

To prevent double taxation, the assignment agreement must explicitly indicate that a portion of the payment is meant to reimburse the assignor’s original deposit. When this is clearly stated, only the amount exceeding the deposit is subject to GST/HST.

  • For assignments entered into on or after May 7, 2022: GST/HST does not apply to the deposit portion, provided the agreement clearly outlines this in writing.
  • For assignments entered into before May 7, 2022: GST/HST applies to the entire assignment amount, including the deposit, regardless of whether the deposit is separately identified.

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.