Real Estate Assignments: Comprehensive Tax Guidance

Posted on by Tax Partners
30
Dec

Introduction – What is a Real Estate Assignment?

In the Canadian real estate market, assignments are a popular form of transaction. An assignment refers to the sale of a contractual right to purchase a property before legal ownership of the property is transferred. For example, in the case of pre-construction condominiums, the buyer (the "assignor") may choose to sell their right to the property to another party (the "assignee") before the builder formally transfers ownership to the assignor.

This transaction involves transferring contractual rights rather than the property itself, which remains under the ownership of the builder throughout the assignment process.

Tax Implications of Real Estate Assignments

Two key tax issues arise for assignors involved in assignment sales:

  1. Determining the Nature of Profits (Business Income vs. Capital Gains): How the profits from the assignment sale are characterized impacts the tax rate.
  2. GST/HST Obligations: The assignor may be required to collect and remit GST/HST on the assignment sale.

The tax implications depend heavily on the specific circumstances of each transaction, and the Canada Revenue Agency (CRA) has been increasingly vigilant in auditing these transactions.

Taxable Capital Gains vs. Business Income

The determination of whether profits from an assignment sale are business income or taxable capital gains depends on the assignor’s intentions at the time of acquiring the property, as inferred from circumstantial evidence.

Key Factors Considered (Based on Case Law):

  1. Intent at the Time of Purchase:
    • If the property was purchased with the intent to resell at a profit, the income is likely to be characterized as business income.
    • If the intent was to hold the property as a long-term investment, it may be considered a capital gain.
  2. Conduct During Ownership:
    • Evidence of flipping multiple properties or engaging in similar transactions supports a business income characterization.
  3. Frequency of Transactions:
    • A higher frequency of real estate transactions suggests a business-like activity.
  4. Circumstances of the Sale:
    • External factors, such as financial difficulties, may indicate a capital gain rather than business income.

No single factor is determinative, and the CRA often uses these factors to infer intent, especially in audits.

GST/HST on Assignment Sales

The GST/HST treatment of assignment sales is clearer than the income tax treatment. Assignment sales often trigger GST/HST obligations because:

  1. Chose in Action as Property:
    • Under the Excise Tax Act, a chose in action (a legal right) qualifies as "property." Thus, the assignment of rights is considered a taxable supply.
  2. Assignor as Builder:
    • In some cases, the CRA may consider the assignor to be a “builder,” triggering additional GST/HST obligations.

Input Tax Credits:

Assignors may claim input tax credits (ITCs) for GST/HST paid on their initial purchase of assignment rights from the builder. However, there are strict deadlines and documentation requirements for claiming ITCs.

Key Deadlines for Input Tax Credits

Under subsection 225(5) of the Excise Tax Act, the assignor must claim ITCs within a specified timeframe, with limited extension options. Missing these deadlines can result in a loss of credits.

Pro Tax Tips for Real Estate Assignments

  1. Understand the Tax Implications:
    • Treat each assignment transaction as unique. A holistic review of circumstances is crucial for determining whether the income is business income or capital gain.
  2. Maintain Accurate Records:
    • Retain all documentation related to the property, including purchase agreements, contracts, and communications with the CRA or other parties.
  3. File Notices of Objection:
    • If audited by the CRA and disagreeing with their characterization of the income, file a timely notice of objection to preserve your rights.
  4. Seek Professional Advice:
    • Engage an experienced tax accountant to assess the specifics of your transaction, ensure compliance, and potentially defend against CRA reassessments.
  5. Plan for GST/HST Obligations:
    • Verify whether the assignment triggers GST/HST and prepare to collect and remit these amounts where required. Consult with a tax professional to maximize ITC claims.

Conclusion

Real estate assignment sales involve intricate tax implications that depend on the facts of each transaction. From determining the nature of profits to addressing GST/HST obligations, navigating these issues requires thorough knowledge and careful planning.

Given the CRA’s intensified scrutiny of assignment sales, it is imperative for assignors to maintain accurate records, understand their tax obligations, and seek professional tax guidance to optimize outcomes.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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