investing,  personal finance,  real estate

Take Caution When Selling or Purchasing a Condo Assignment – GST/HST issues

I’ve seen a few posts in online discussion forums and financial blogs these past few days from people either thinking about selling their condo pre-build or purchasing a condo pre-build via assignment.

My advice is to be wary of making any decision until you’ve consulted with a real estate lawyer and perhaps even a tax accountant.

I was recently in the market for a new home and considered buying a pre-build via assignment until I became familiar with potential snags, which I’ll describe as follows (I’m in Ontario, so I’ll use the term “HST”):

  1. If someone (let’s say a lady) purchases a pre-build with the intention of living there herself, she qualifies for a partial rebate of the HST she paid on her new home. What most people don’t understand is that the contract price includes both the 13% HST minus the HST Rebate. Here is a link to an online calculator that calculates the HST Rebate component of the purchase price.
  2. Therefore, on Closing Day, she only needs to pay the purchase price stated in the builder’s purchase agreement plus land transfer taxes, levies, lawyers fees, etc.
  3. Now if prior to Closing Day she changes her mind about living there, she can assign her pre-build. But naturally, CRA takes the position that she never had any intention of living there and therefore, she no longer qualifies for the HST Rebate on Closing Day. An Assignee of the purchase contract stands in the Assignor’s shoes. Therefore, if the Assignor no longer qualifies for the HST Rebate on Closing Day, then neither does the Assignee – irrespective of the fact that the Assignee will actually be residing there him or herself.

So the Assignee would have to pay the HST Rebate (which is $24,000 max) to the builder on Closing Day and then apply for a refund of the HST Rebate from the Canada Revenue Agency on his or her own. And there’s no guarantee that the Assignee will get this money back if he/she doesn’t provide the appropriate documentation.

But that’s not all…

  1. The Assignor is required to collect from the Assignee HST on the profit she made on the assignment. So if the contract price was for $300,000 and she assigned her purchase contract for $350,000, she would have to charge the Assignee an additional 13% on the $50,000 profit she made (13% x $50,000 = $6,500).
  2. Continuing the above example, let’s say that the original purchaser (i.e., the Assignor) gave to the builder a $60,000 deposit toward the purchase price. When the Assignee buys the purchase contract from the Assignor, the Assignee is implicitly returning to her the $60,000 deposit that she gave to the builder. Well, she has to charge HST on that $60,000 (13% x $60,000 = $7,800) as well.
  3. So in return for Assignor assigning her purchase contract to the Assignee, the Assignee has to pay the Assignor $350,000 + $6,500 + $7,800 = $364,300. And the Assignee isn’t going to get back that $14,300 in HST he/she pays – that’s an expense to the Assignee.

So if the original purchaser lists her pre-build for $350,000 on MLS, she’s actually going to have to collect $364,300 from the Assignee and the Assignee will have to pay an additional $24,000 on Closing Day for the HST Rebate; that is, an additional $38,300 over and above the $350,000 assignment price listed by the Assignor.

Why do these rules exist? Because the Canada Revenue Agency has taken this crazy position that an Assignor is deemed to be a “builder” because she’s supplying housing to the Assignee in exchange for money. Hence, the Assignor has to charge HST on her profit and on the deposit she’s getting back from the Assignee.

It’s CRA’s method of finally cracking down on real estate flippers who’ve been making a lot of money in the Toronto real estate market for years without paying any tax. They started enforcing this rule in 2011.

Bottom line: these HST rules greatly complicate sales negotiations between the Assignor and the Assignee. It makes assignments more difficult to sell and riskier to purchase. So be wary…

Victor is the President of Fong and Partners Inc. He is a Licensed Insolvency Trustee and Chartered Professional Accountant. With many years of experience in the insolvency field, Victor has been involved in both corporate and consumer insolvency engagements. Previously with a large national firm, Victor founded Fong and Partners Inc. so that he could dedicate his professional life to help people from all walks of life to deal with their debt.