Assignment sales have become popular in Canada’s real estate market, especially in high-demand urban areas. But what exactly is an assignment sale, and how does it impact buyers and sellers? In this blog, we’ll explore the concept of an assignment sale, illustrate it with an example, and break down the tax implications for sellers and buyers alike.
What is an Assignment Sale?
An assignment sale occurs when the original property buyer (known as the Assignor) sells their rights and obligations under the purchase agreement to a new buyer (the Assignee) before the property’s closing date. In simpler terms, it’s the sale of a purchase agreement rather than the physical property itself.
Assignment sales are common for properties that are still under construction or in pre-construction phases. They allow the original buyer to transfer their interest in the property to a new buyer without having to go through the entire closing process.
Understanding the Key Terms: Assignor and Assignee
- Assignor: The original buyer of the property who decides to transfer their rights to another party.
- Assignee: The new buyer who takes over the purchase agreement from the Assignor.
Example of an Assignment Sale
Let’s walk through a simple example to better understand the concept:
- John(the Assignor) purchased a property under construction on January 1, 2024, for $1,000,000 from a builder, and he paid a 20% down payment of $200,000.
- The closing date for the property is March 1, 2025.
- On January 1, 2025, John decides not to proceed with the purchase and opts to sell (or assign) the purchase agreement to Steve(the Assignee) before the closing date of March 1, 2025.
- At the time of assignment, the property’s value has increased, and Steve agrees to purchase the property from John for $1,200,000.
The assignment price is broken down as follows:
| Details | Amount |
| Assignment Price | $1,200,000 |
| Original Purchase Price | $1,000,000 |
| Profit from Assignment Sale | $200,000 |
It’s important to note that the $200,000 John paid as a deposit to the builder is not considered a profit. Instead, it is treated as a return of the deposit.
Tax Implications for the Assignor (Seller)
When the Assignor makes a profit from the assignment sale, it is subject to both the Goods and Services Tax/Harmonized Sales Tax (GST/HST) and personal income tax. Let’s break this down:
- HST on Assignment Sale Profit:
In our example, John made a profit of $200,000. Since John resides in Ontario, where HST is 13%, he must pay HST on the profit:- HST Payable @ 13%= $200,000 × 13% = $26,000
- Personal Income Tax on the Profit:
John’s profit of $200,000 is also subject to personal income tax. Assuming John is in the highest tax bracket with a marginal tax rate of 50%, his tax payable is:- Personal Income Tax Payable= $200,000 × 50% = $100,000
- Claimable Expenses:
John can claim certain expenses to reduce the taxable profit, such as:- Realtor commissions
- Legal fees
- Accounting fees
- Assignment fees are paid to the builder
Suppose John incurred a total of $50,000 in expenses. This would reduce his profit from $200,000 to $150,000, thus lowering his income tax:
- Profit After Selling Costs= $200,000 – $50,000 = $150,000
- Personal Income Tax Payable= $150,000 × 50% = $75,000
- HST Return Filing:
John must also file an HST return upon completing the assignment sale. Here’s how the HST return looks in this scenario:- Line 101(Total Sales) = $200,000
- Line 105(HST Collected/Payable) = $26,000
- Line 108(HST Paid/ITCs) = $50,000 × 13% = $6,500
Therefore, the Net HST Payable = $26,000 – $6,500 = $19,500.
HST Rebate Considerations for the Assignee (Buyer)
Purchasers of a newly constructed residential property may qualify for an HST rebate of up to $24,000 (depending on the province) if they intend to occupy the property as their primary residence. This rebate is generally included in the builder’s sale price.
However, when a purchase agreement is assigned to a new buyer (the Assignee), they may need to reimburse the builder for the Housing Rebate at the time of closing, which can come as an unexpected expense. The good news is that the Assignee can recover this amount by completing the GST/HST New Housing Rebate form (GST190), available on the CRA’s website.
Key Takeaways
- Assignment sales are the transfer of rights and obligations under a purchase agreement from the original buyer (Assignor) to a new buyer (Assignee) before closing.
- Assignors must pay HST on the profit and include the profit in their personal income tax.
- Certain expenses can be claimed to reduce the taxable profit, lowering the personal income tax payable.
- The Assignee may need to reimburse the builder for the HST Housing Rebate, which can be recovered by applying to the CRA.
How Tax Return Filers Ltd. Can Help
Navigating assignment sales and understanding the tax implications can be complex. At Tax Return Filers Ltd., our professional team is well-versed in real estate tax matters and can provide expert guidance. Whether you’re an Assignor looking to sell or an Assignee buying an assigned property, we’ll help you manage your tax obligations and secure any eligible rebates.
Contact us today to learn more about how we can assist you in your real estate transactions!