Federal Budget 2022: Taxation of Property Flipping, GST and Assignment Sales #548
CATEGORY: Legally Speaking
TAGS: Assignment Canada Revenue Agency (CRA) Contract of Purchase and Sale Federal Budget Goods and Services Tax (GST) Income Tax Act Tax Exemption Taxes
The proposed federal budget for 2022 has introduced a number of new rules relating to real estate, including new rules to dampen speculation in the Canadian real estate market (for a full list of the housing affordability measures announced, click here).
REALTORS® should be generally aware of these changes and where they may affect a client’s transaction, and accounting advice should generally be recommended prior to a binding contract being entered into. For Sellers, this advice often should occur at the time of listing unless a Seller’s subject conditions are going to be included in the contract of purchase and sale.
Residential Property Flipping Rule
A commonly held belief was that one had to hold a property for more than a year to obtain many of the tax benefits of the principal residence exemption. This requirement will now be codified into the Income Tax Act, and “property (a taxpayer has) held for fewer than 12 months (will) be subject to full taxation on profits as business income, applying to residential properties sold on or after January 1, 2023.”
There are certain “life event” exemptions proposed once effective (2023); however, Sellers who have held title to the property for a period of less than 12 months should be generally advised to obtain tax advice prior to listing. Remember that the date the title was initially transferred into the name of the Seller can be found on a Title Search next to the heading “Application Received” and this date may be very different than the date the contract was entered into--especially where the property was purchased as a pre-sale development.
GST on Residential Assignment Sales
GST will be now applicable on all assignment sales of new (or substantially renovated) housing (where GST is applicable to the Purchase Price). In the past, an Assignor may have argued that they did not have to pay GST on the Assignment Amount since they may have intended to reside in the property as their principal residence. This deeming provision now prevents the taxpayer from taking that position and makes GST payable by the Assignor on any Assignment Amount.
Section 5.18 of the BCREA Assignment of Contract of Purchase and Sale New Development standard form states that “The Assignment Amount is inclusive of any GST payable with respect to the Assignment Agreement and the Assignor shall remit any GST payable.” Importantly this means that the Assignor will be required to pay GST on the Assignment Amount (commonly called the lift).
Note that GST will not be payable by the Assignor on the Total Purchase Price (as the developer receives the GST on the Original Purchase Price portion and will be required to remit that), nor will GST be payable on the return of the Deposit amount (as this amount is not income). A similar requirement is contained in Section 4.14 of the BCREA Assignment Contract of Purchase and Sale Non-Developer standard form.
To illustrate this, let us consider how this would work for a residential pre-sale, with an original purchase price of $800,000 and an assignment purchase price of $900,000, between a Developer (who is likely a GST registrant) and an Assignor and Buyer (who are not GST registrants).
For the Buyer/Assignee, they would pay:
- Original Purchase Price: $800,000, plus
- GST on Purchase Price: $40,000, plus
- Assignment Amount: $100,000
For the Assignor, they would receive:
- Assignment Amount: $100,000, less:
- Brokerage Commission, as applicable; and
- GST on Assignment Amount and
- Income Tax on Assignment Amount
The result is that the Assignor is netting less than the amount of the profit in the assignment.
Assignors’ Payment to the Canada Revenue Agency
As most residential Assignors are not GST registrants or filers, this makes remittance of the GST amount on the Assignment Amount rather cumbersome. Additionally, most law firms who do residential conveyance do not file compliance filings with the Canada Revenue Agency, and this means that the Assignor, following receipt of the Assignment Amount (which will include both the GST and Income Tax portions payable), will need to engage an accounting firm to make such payment to Canada Revenue Agency within 30 days of the Completion Date of the transaction.
The GST Position in the BCREA Residential Contract of Purchase and Sale
Realtors should also remember that a GST position is not taken in the standard Contract of Purchase and Sale for residential sales. The contract simply provides in Section 11B that a GST certificate will be provided at closing, however no representation or warranty as to GST applicability is made.
Realtors should consider placing additional language in the contract which specifies whether or not GST is payable, or the property is GST exempt (note that the two most common exemptions are “used residential premises” and “sale of vacant land by an individual not in the course of business”).
While a full discussion of GST is beyond the scope of this article, resources and clauses for Realtors exist in the BCFSA Knowledge Base.
Advising Clients to Seek Professional Advice
Realtors should inform their clients early to investigate the possible tax implications upon their sale of property with accounting and tax professionals. Specialized tax advice is beyond the scope of a Realtor. However, it is incumbent on the Realtor to “red flag” the issues at an appropriate time when the client has an ample opportunity to seek out a professional tax advisor. For Sellers and Assignors of residential real estate, this recommendation to seek independent professional tax advice should occur at the time of listing the property and prior to any contract being entered into.
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