Article By: Jimmy Le-Tang, Chartered Professional Accountant
The assignment fee typically includes amounts that the assignor has paid to the developer (i.e. deposits) and that the assignor wants to recover from the assignee. One would think that GST is not applicable on the amounts considered as a recovery of deposits paid because the assignee will be paying GST on those amounts upon completion; however, GST is actually applicable on the full assignment fee where the assignor is a Builder as defined by the Excise Tax Act. A builder is not limited to the person who constructs the home.
This situation results in GST being paid twice in recovery of deposits that are included in the assignment fee. The CRA’s position as of 2011 is that the assignment of the purchase agreement to the assignee is considered to be a sale of the assignor’s interest in NEW Residential Property which is a GST-taxable event (again, where the assignor is a Builder.)
Normally, in real property transactions, the liability for collecting and remitting GST rests with the assignee who must self-assess the GST, thus, relieving the assignor of liability. However, the liability for collecting GST reverts to the assignor, when the assignee is an individual (i.e. not a corporation or other GST registrants except registered individuals) as is often the case.
CLIENT TIP when investing in pre-sale developments
For assignors, make sure that your client is aware of their GST compliance obligations. For assignees, ensure that they are aware that an experienced assignor will require them to pay GST on the full assignment fee.
All of the foregoing is irrelevant if the assignor’s primary purpose for buying the residential property was not for the purpose of resale. The CRA’s position is a rebuttable presumption; however, in tax law, you often have to prove yourself innocent.