Explore Assignment Rules 2022 – 2023
Effective May 7, 2022, new tax assignment rules 2022-2023 dictate that assignment sales are now subject to HST on the profit component of the final price. This HST, calculated at 13%, applies to the assignor’s profit when selling the contract to the assignee.
For example, if an initial buyer purchased a pre-construction condo for $600,000 in May 2020 and subsequently sold the contract for $700,000 in July 2022, the $100,000 profit is subject to the 13% HST.
What is an Assignment Sale?
Many people have asked, “What is an assignment sale?” To clarify, assignment sales involve a real estate transaction where the original buyer (assignor) transfers their purchase rights and obligations to another party (assignee) before the property’s closing.
This commonly occurs in pre-construction or new development scenarios where the original buyer signs a purchase agreement with the builder or developer.
- Profit Margin: The assignor typically makes a profit by selling the property at a higher price than the original purchase price.
- Legal and Financial Considerations: Assignment sales involve legal and financial complexities, including potential taxes such as HST (Harmonized Sales Tax) and capital gains tax.
- Marketing Restrictions: Many original purchase agreements include clauses restricting the advertising of assignment sales on public platforms.
Marketing Within Bounds
Marketing restrictions often limit advertising assignment sales on public platforms, including social media, MLS systems, and forums, with potential penalties ranging from fines to deposit forfeiture. Therefore, leveraging an experienced real estate agent with a private market network is advisable.
HST Rebate and Contract Amendments
Original purchasers (assignors) commonly include an HST clause in sale agreements. However, when assigning the contract, builders often remove this clause. Assignees may be required to pay the HST rebate (typically $24,000) to the builder on closing. The assignee can seek reimbursement by liaising directly with the Canada Revenue Agency (CRA) and their accountant.
In a straightforward example of an assignment transaction, imagine an assignor who initially purchased a pre-construction home or condo for $500,000. Subsequently, the assignor decides to sell the property through an assignment sale to an assignee for $600,000.
In this scenario, the assignee is required to pay 13% HST on the profit of $100,000 to the government. The intricacy of managing the HST component falls within the purview of legal professionals involved in the transaction.
Their responsibility is to ensure the proper remittance of the HST portion to the government, facilitating a compliant and transparent process for both the assignor and assignee.
This example underscores the importance of legal expertise in navigating the financial intricacies associated with assignment transactions in Canada real estate.
Maximizing Capital Gains in a Volatile Market
Profits from assignment sales are typically subject to capital gains tax. For example, if the original purchase price is $600,000, the assignment price is $700,000, and the tax rate is 25%, the capital gains tax would be calculated as $12,500.For assignment sales, a mortgage pre-approval is often required during the approval process with the builder.
Both the assignor and assignee should have an accepted agreement before submitting the assignment for builder approval, including the necessary pre-approval documentation.
Breaking Down the Assignment Sale: Does it Require a Mortgage Pre-Approval?
Yes, in many cases, a mortgage pre-approval is required for an assignment sale or real estate for sale. When an assignor and assignee have an accepted agreement, the assignment typically undergoes a review process with the builder for approval.
As part of this approval process, builders often request a mortgage pre-approval to ensure that the assignee has the financial capability to proceed with the transaction.
The mortgage pre-approval serves as evidence that the assignee has been qualified by a financial institution to secure the necessary funds for the property purchase. This step helps builders mitigate risks and ensures that the assignee has the financial means to fulfill the terms of the agreement.
Therefore, both assignors and assignees should secure a mortgage pre-approval before submitting the assignment for builder approval to facilitate a smoother transaction process.
New Tax Rules for Real Estate Assignments and Flipping
These new tax rules signify a shift in the regulatory landscape, emphasizing compliance and financial transparency in real estate assignments and flipping transactions. Staying informed and seeking professional advice is crucial for navigating these changes successfully.
It is recommended to consult with legal and financial experts to understand the specific implications of these rules based on individual circumstances and regional variations
How to Successfully Sell A Condo On Assignment?
Condo sale on assignment involves several steps to ensure a smooth and legally compliant transaction. Here’s a guide on how to sell a condo on assignment:
- Review Your Agreement: Carefully examine the terms of your original purchase agreement with the builder. Ensure that it allows for the assignment of the contract, and take note of any specific conditions or restrictions.
- Understand Legal Implications: Be aware of any legal and financial implications associated with selling the condo on assignment. This may include HST obligations, capital gains tax, and compliance with any marketing restrictions outlined in the agreement.
- Seek Professional Advice: Consult with a real estate lawyer and tax professional to understand the legal and financial aspects of the assignment sale. They can provide guidance on complying with regulations and help protect your interests.
- Market Research: Determine the fair market value of your condo by conducting research on similar properties in the area. Consider the current real estate market conditions, demand, and comparable sales.
- Work with a Real Estate Agent: Engage the services of an experienced real estate agent, preferably one with expertise in assignment sales. They can help market your condo, find potential buyers, and navigate the complexities of the process.
- Prepare Marketing Materials: Create compelling marketing materials, including high-quality photos, a detailed description of the property, and any unique selling points. Highlight the potential benefits for the buyer.
- Adhere to Marketing Restrictions: If there are restrictions on advertising the assignment sale in your original agreement, ensure compliance. Avoid public platforms such as MLS, social media, or forums if prohibited.
- Negotiate with Potential Buyers: Once you have interested parties, negotiate the terms of the assignment sale, including the sale price and any conditions. Keep in mind that the builder may need to approve the assignment.
- Builder Approval: Submit the assignment to the builder for approval. This process may involve providing documentation, such as the original agreement, details of the new buyer, and any required fees.
- Closing the Transaction: Work with your real estate lawyer to complete the necessary paperwork and finalize the assignment sale. Ensure that all legal and financial obligations are met.