Tax Implications on Assignment of a Purchase Contract

Tax pitfalls to avoid when buying or selling a new-build contract

Thinking of selling that under-construction home or condo for a profit? Don’t forget to add tax to your calculations.

A boom in new-build sales has seen an increase in original buyers selling their contract with the builder to tap into a heated housing market. Called “assignment of purchase” agreements, such deals have tax implications for both the person who sells the contract and the person who buys it. 

Any profit realized from such assignment sales must be reported by the assignor and could have varying implications. These implications include the profit being treated as fully taxable business income or capital gains income. There are also indirect tax implications, i.e. the GST / HST. As a result of the challenges associated with them – including increased scrutiny from the Canada Revenue Agency (more on that below) – some builders are including “no assignment” clauses in their purchase agreements.

Definitions

To avoid confusion, let’s start by defining some concepts. When you buy a new home build or condo under construction, you sign a purchase agreement contract. If – with permission from the builder – you sell that purchase agreement to someone else before taking possession, that is called an assignment of purchase. You become the assignor and the buyer the assignee.

However, what might seem like a simple transaction becomes more complex when addressing the tax issues associated with the deal. Any profit made on the sale of the original contract is taxable; that’s a given. But how much tax and who pays what is debatable.

Capital gains income or business income?

The profit made from an assignment of purchase agreement will either be designated as business income, which is fully taxable, or as a capital gain, which is currently taxed at 50 percent. The tax treatment depends on the initial buyer’s intention on signing the contract on the new build.

If you’ve bought or sold a home or two, you might think the profit will automatically fall under income from capital gains and be taxed accordingly. For example, maybe you originally signed the agreement and paid the deposit with the intent of renting out the property once it is built. However, you changed your mind and sold the contract as an assignment of purchase when the market got hot. In that case, it is likely the CRA would consider the profit from the sale to be categorized as business income, even though your original intention was to hold it as a rental property. The CRA would argue these types of transactions are usually undertaken with the intention of making a profit and the time between when the contract was initially entered into and when it was sold was a very short period.

However, if you bought the property with the intention of using it as your principal residence but sold it before possession, you would not have lived in it yet. In that case, it doesn’t qualify for the principal residence exemption and the profit will be taxable. But you could argue it should be taxed as a capital gain rather than business income as your original intention was to occupy it as your personal home.

As in the previous example, the CRA would also be inclined to consider the profit from this assignment of purchase as business income due to the short period of time from acquisition to sale and would assume that it is a “flip” and that the buyer’s intention was to make a quick profit from the sale of the contract.