A clarification on the amount of HST to be applied to assignment sales after a confusing budget announcement.
Today’s good news is that pre-construction assignment sales are subject to HST — but only on the first buyer’s profit when the contract is sold to a second purchaser, and not on the total end price.
The bad news, however, is the same as the good news: assignment sales entered into after May 7, 2022 are now subject to HST on the profit portion of the final price.
In this column on April 30, I reported that assignment sales of pre-construction condominiums were going to be subject to HST on the entire end price, as of May 7, 2022.
That report was based on a 6,000-word budget summary document which simply states, “Budget 2022 proposes to make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST/HST purposes, effective May 7, 2022.”
That statement was, unfortunately, incomplete and highly misleading. Based on its plain meaning, it was reasonable at first blush to assume that 13 per cent HST would be applied to the full purchase price paid by the new buyer, including the underlying price to the builder.
In my column, I wrote, “an additional 13 per cent tax will be imposed on the entire price paid by the second buyer to the original buyer” and that “every new assignment sale … will be subject to tax of up to 26 per cent.”
It is now apparent that the tax will only be paid on the profit being made by the “flipper,” the first buyer who is selling the pre-construction contract to the second buyer.
This interpretation is based on a deep dive into documents which were not readily apparent — at least not to me and many other stakeholders — on budget day. They are called Tax Measures: Supplementary Information, and a Notice of Ways and Means Motion to amend the Excise Tax Act, and are the kind of turgid documents which only appeal to accountants and tax lawyers.
The new rules apply to what the government calls a single unit residential complex (although I’m not certain how a single unit can qualify as a “complex”).
Veteran Toronto real estate lawyer Stephen Shub explains it this way: “On a builder sale of $500,000 with deposits paid to the builder of $100,000 followed by an assignment sale after May 7 for $700,000, the 13 per cent HST will be 13 per cent of the price differential of $200,000, being an HST of $26,000.”
Toronto real estate and tax lawyer Trevor Kezwer notes that “Budget Chapter 1.4 Curbing Foreign Investment and Speculation … has a section dealing with Taxing Assignment Sales where it was not clear about how the government intended to apply HST on assignment sales. One had to look into the deep recesses of the budget in the Tax Measures: Supplementary Information (document) to see the actual plans and legislative changes to the Excise Tax Act.”
As interest rates rise and sales volumes soften, I am not optimistic about the impact of these HST changes on the real estate market.
My experience over many years as a real estate lawyer is that no good ever results when governments stick their legislative noses into the real estate business.