The New Proposed HST Treatment On Pre-Construction Assignment Of Sales

/ 1/17/2023

The New Proposed HST Treatment On Pre-Construction Assignment Of Sales

On June 23, 2022, Canada’s Bill C-19, Budget Implementation Act, 2022, No. 1, received Royal Assent and became enacted.

One of the provisions in the 2022 Federal Budget includes an amendment to Part IX of the Excise Tax Act (Canada) which now makes all assignment sales in respect of a newly constructed or substantially renovated single unit residential complex or residential condominium unit taxable and subject to GST/HST.

In other words, now all assignment agreements entered into after May 6, 2022, will be subject to the 13% HST in Ontario.

Previously, there were different tax treatments for assignment sales based on the assignor’s intended usage of the subject property, if you were an investor versus an end-user intending to purchase the property as a primary place of residence.

At the outset, it is appropriate to explain what an assignment of sale actually is. An assignment sale is a category of real estate transaction that focuses on pre-construction properties.

The original purchaser (the assignor) enters into an agreement of purchase and sale for a pre-construction property with a builder (the vendor), the assignor then transfers to another purchaser (the assignee) the original buyers’ rights and obligations pursuant to the pre-construction agreement that they have entered into with the builder.

The assignee will typically pay the assignor an “assignment fee” and repay the deposit funds paid by the assignor to the developer under the terms of the assignment agreement for the right to assume the assignor’s rights and obligations under the original pre-construction purchase agreement. Subsequently, the assignee in an assignment sale steps into the shoes of the original purchaser and closes the transaction with the builder/vendor directly.

It is important to note that assignment agreements entered into prior to May 7, 2022, will not be subject to the new taxation rules.

Assignment agreements entered into prior to May 7, 2022, may be either subject to, or exempt from the application of the GST/HST depending on the assignor’s circumstances and intentions when purchasing the real property.

An assignment sale made by an individual is generally taxable if the assignor had originally entered into the pre-construction agreement of purchase and sale with the builder for the primary purpose of investment, in other words, selling their interest in the property for a profit.

However, if the individual had originally entered into the pre-construction agreement for another primary purpose (for example, to occupy the property as a primary place of residence for the individual), the assignment sale is generally exempt from the application of GST/HST. However, with the passing of the 2022 budget, every individual assignor of residential real estate pursuant to an assignment agreement entered into on or after May 7, 2022, would have to collect GST/HST on their assignment and remit same to the Canada Revenue Agency in accordance with the provisions of section 192.1 of the Excise Tax Act (Canada) which reads as follows:

New housing — assignment of agreement

192.1 If a taxable supply by way of sale of a single unit residential complex (as defined in subsection 254(1)) or of a residential condominium unit is made in Canada under an agreement of purchase and sale (in this section referred to as the “purchase agreement”) entered into with a builder of the single unit residential complex or of the residential condominium unit and if another supply by way of assignment of the purchase agreement is made by a person (other than the builder) under another agreement, then the following rules apply for the purposes of this Part:

(a) the other supply is deemed to be a taxable supply, by way of sale, of real property that is an interest in the single unit residential complex or residential condominium unit; and

(b) the consideration for the other supply is deemed to be equal to the amount determined by the formula

A − B

where

A is the consideration for the other supply as otherwise determined for the purposes of this Part, and

B is

(i) if the other agreement indicates in writing that a part of the consideration for the other supply is attributable to the reimbursement of a deposit paid under the purchase agreement, the part of the consideration for the other supply, as otherwise determined for the purposes of this Part, that is solely attributable to the reimbursement of the deposit paid under the purchase agreement, and

(ii) in any other case, zero.

For assignment agreements entered into on or after May 7, 2022, the GST/HST will only apply to the “assignment fee” or profit portion of the assignment price and not the total assignment sale price set out in the assignment agreement, which often will include the repayment of any deposit previously paid by the assignor to the builder.

The repayment by the assignee to the assignor of the deposit funds previously paid by the assignor to the builder are not subject to GST/HST.

As an example, let’s look at the following scenario involving a condominium Unit:

Alireza entered into the pre-construction agreement with a builder in Ontario for a residential condominium unit with a purchase price of $500,000.00 and paid a $50,00.00 deposit to the builder under the terms of the agreement.

Alireza intended to eventually live in the unit, however, after four months, Alireza decides to buy a house instead of a condominium.

Therefore, he assigns the pre-construction agreement to Mina for an assignment sale price of $600,000.00 and makes a $100,00.00 profit. Based on current tax law, Alireza is liable to pay HST in the amount of $6,500.00 on the profit portion of the assignment. In this example, Alireza’s profits from the assignment are calculated as follows:

Assignment Sale Price – Original Sale Price – Deposits Paid to Builder = Alireza’s Profit

$600,000.00 - $500,000.00 - $50,000.00 = $50,000.00 x 13% = $6,500.00 HST payable