pre sale assignment tax

Everything you need to know about Preconstruction Assignment Sales

Have you sold pre-construction homes before closing on assignments?

Have you wondered about what are the tax implications on selling pre-construction homes before closing?

We often advise our clients to not to sell their pre-construction homes before closing if possible. It can trigger a series of tax implications – HST and income tax implications.

Before the announcement of Budget 2022, CRA had adopted the policies that HST would be applicable on not just the assignment fees, but also the deposit.

This could be a huge tax cost that most investors weren’t aware of.

Now, let’s use an example to explain .

Say you agree to purchase a pre-construction home for $700,000. You sign the agreement of purchase and sale and pay a deposit of $100,000 to the builder.

The new home is expected to be completed a few years later.

You decided to sell the property on assignment before it’s ready for closing for an additional $50,000.

Scenario 1: When you signed the agreement of purchase and sale, you intended to move into the property and use it as your primary residence.

Life circumstances change. You now decided to sell the property before closing. You sold it on assignment before May 6, 2022 .

HST: As your intention was to move into the property as your primary residence, you had no HST liability obligation.

Again, intention is subjective. If you’re questioned in court, you would have to provide evidence to prove your own intention.

Most clients thought that the CRA would have to prove that they were wrong. The truth however is that the taxpayers are the one who have the responsibility to prove to CRA their own filing position.

Make sure your have documentation proving your initial intention.

Income Tax: Assuming you have strong documentation proving that you did intend to purchase this pre-construction home as your primary residence, the $50,000 assignment fees could be reported as capital gain.

Scenario 2: When you signed the agreement of purchase and sale, you intended to move into the property and use it as your primary residence.

Life circumstances change. You now decided to sell the property before closing. You sold it on assignment after May 6, 2022 .

Budget 2022 changed the rule. For all assignment sales happened after May 6, 2022, regardless of your intention, you’re required to pay HST on the assignment sales.

HST implication:

This means that the $50,000 collected is no longer all yours. This $50,000 collected, if you don’t charge HST on top, is inclusive of HST.

You must remit the HST to CRA on sale on assignment. In this case, it would have been $5.8K.

Presumably, you would also be able to claim Input Tax Credit, which is the HST you paid on services that you used to allow you to sell the property. This includes the HST you paid on your legal cost and HST you paid on brokerage fees.

The net amount can be remitted to CRA.

Income Tax Implication:

Budget 2022 also made some rule changes when it comes down to sale of property. The sale of a property within one year of ownership is considered on income account, meaning 100% of the profit you make is taxable, with some exceptions allowed, effective Jan 1, 2023.

When you apply this new rule to this scenario, it is unknown as to whether an assignment sale is considered a flipped property. It’s difficult to say whether this rule is applicable to assignment sale at this point.

Regardless, you still would need to keep proper and relevant documentation supporting your intention that you were trying to move into the property as your primary residence. With proper documentation, you could still report the net income from assignment sale on capital account, meaning only 50% of the profit you make is taxable.

In our example, assuming client didn’t incur other cost of selling, the client would be reporting $44K of capital gain, 50% of which would be taxable.

Scenario 3: When you signed the agreement of purchase and sale, you intended to rent out your property.

Interest rate changed. You now decided to sell the property before closing. You sold it on assignment before May 6, 2022 .

Your intent was never to move into the property as your primary residence or have any of your family members moving in, as a result HST is applicable on assignment sale.

Assignment fees are subject to HST. $50,000 assignment fees you collected are subjected to HST.

CRA also adopted the position that the deposits $100K are also subject to HST as well. Ouch!

You thought you made $50,000 – but after considering the HST on assignment fees $5.8K and HST on deposits $11.5K, you really only net $33K.

This calculation hasn’t considered the brokerage fees as well as the lawyer fees yet. Yikes!

Income Tax implication:

The net amount profit of $33K (assuming there’s no brokerage fees or lawyer fees, if you have, the net profit is lower) would likely have to be reported as income, 100% of it is taxable.

If you own the property in your personal name, the entire amount is added to your job income or whatever income you have in your personal name. You’re taxed at the respective marginal tax rates, which can be as high as 53.5% in Ontario.

Triple Yikes!

If you own the property in the corporation, the profit is taxed as regular business income, most likely at 12.2% for qualified small businesses.

Scenario 4: When you signed the agreement of purchase and sale, you intended to rent out your property.

Interest rate changed. You now decided to sell the property before closing. You sold it on assignment AFTER May 12, 2022 .

The Government also recognized that charging HST on deposits were not right. Budget 2022 specified that HST would no longer be charged on deposits .

Assignment fees are subject to HST but deposits are not subject to HST anymore to avoid double taxation.

Assignment fees are reported as income 100% taxable.

So continuing with the same example, HST is applicable on the $50,000 assignment fees, meaning that you would incur HST liability of $5.8K as calculated above.

Again, you could offset the HST liability with the HST you pay on realtor commission as well as lawyer fees on closing.

The net amount would have to be paid to CRA.

The net profit of $44K (assuming there’s no brokerage fees or lawyer fees, if you have, the net profit is lower) would likely have to be reported as income, 100% of it is taxable.

Similar to Scenario 3, if you own the property in your personal name, the entire amount is added to your job income or whatever income you have in your personal name. You’re taxed at the respective marginal tax rates, which can be as high as 53.5% in Ontario.

Now that we’ve gone through the assignment sales tax implication in details – Are you still planning to sell your properties on assignment?

Let us know below.

Lastly, our team has been working tirelessly to prepare for the upcoming Wealth Hacker Conference on preparing everyone for the upcoming recession. We have experts such as Dalia sharing her insights on how to protect your portfolio and grow from this recession. If you are lost, join us at the upcoming Wealth Hacker Conference.

Visit WealthHacker.ca now to get your tickets.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

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Assigning Property and the GST/HST Implications

June 7, 2024

Industry News

The Federal Budget for 2022 has made amendments to Part IX of the Excise Tax Act (“ETA”). Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated single unit residential complexes or residential condominium units are taxable.

For clarity, with respect to residential housing transactions, the purchaser (assignor) enters into an agreement of Purchase and Sale with the builder and then sells (assigns) their “rights and obligations” in the agreement of Purchase and Sale to another person (assignee).

Assigning a property is selling the property before you even own it. So you are just selling the contract which contains the right to close on the property. You purchased a property pre-construction condominium with a builder, signed the contract, gave your deposit cheques, and then sold the property before gaining title. For the assignor (the person selling the property), there can be serious tax implications.

Typically, the closing date for a pre-constructions residential property can take several months or even years. During this time, purchasers may decide to assign their rights outlined in the Purchase and Sale agreement to an assignee. The Federal Budget for 2022 now imposes GST/HST tax obligations on assignors and assignees. Essentially, an individual assignor of residential real estate now must collect GST/HST remit it to the CRA. This rule is applicable even to those who do not have a GST/HST number and believe that they are not purchasing and assigning in the course of commercial activity. In cases where the assignor is a non-resident, the assignee is obligated to self-assess the GST/HST. Prior to this amendment, the GST/HST liability depended on whether an individual purchased and assigned their rights in the course of commercial activity and if the purchaser’s true intentions were to live in and use the property, then there would be no GST/HST liability.

Assigning a property and the CRA

Upon detecting an assignment, the Canada Revenue Agency (CRA) will decide whether or not you should be considered a “builder” of the property. The test the CRA uses is subjective: they try to determine what your intention were when you purchased the property and why you’re selling. They ask questions like:

Did the seller ever intend to live there; and
Was this transaction intended to generate profit?

More often than not, in our experience the CRA considers assignors builders if they never took occupancy of the property. And if you are found to be a builder by the CRA, they hold you liable for HST on the sale.

A “builder” is defined in a manner which can potentially include someone that is merely entering into an APS with a builder. For example, subject to a specific exclusion that only applies to individuals, someone that acquires an interest in a home before it is occupied (or a condominium before it is registered) can be a builder if their primary purpose was to either:

sell the home to any person
lease the home to someone other than an individual for their personal use

Individuals are excluded from being a builder if they did not acquire their interest in the course of a business or an adventure or concern in the nature of trade, which is determined by considering the following factors:

nature of the property sold
length of period of ownership
frequency or number of other similar transactions by the taxpayer
work expended on or in connection with the property realized
circumstances that were responsible for the sale of the property
taxpayer’s motive or intention

To the extent that the assignor is a “builder,” GST/HST will be payable on the value of consideration that is paid by the assignee and the assignor will be required to collect GST/HST unless the assignee is registered for GST/HST.

The Canada Revenue Agency (CRA) considers an amount paid by an assignee on account of the assignor’s deposit to be part of the consideration paid for the assignment of an APS, and is therefore subject to GST/HST if the assignor is a builder. Accordingly, unless the assignment is restructured to result in the builder refunding the deposit to the assignor and receiving a replacement deposit from the assignee, the assignee may pay double tax on the deposit.

Assigning a property and the GST/HST implications

If the CRA considers you to be a builder, they expect you to charge and remit sales tax (GST/HST) on the full sales price. The problem becomes almost no one does this on the original sale. Only once CRA has come and audited do they determine you to be a builder, and rule that GST/HST should have been charged.

Because this normally happens after the fact, most “builders” are unable to collect the GST/HST from the purchaser, and are now liable for the amount owing plus penalties and interest. This is typically where most people will file notices of objection, arguing that they are not “builders” and should not be responsible for GST/HST.

Can the assignee claim the GST/HST new housing rebate

The assignment of an APS may also impact the assignee’s eligibility to claim the new housing rebate, as evidenced by the Tax Court of Canada’s recent decision in Chen Sun. The federal new housing rebate is equal to 36% of the federal component of GST/HST paid, up to a maximum of $6,300 (for homes valued at $350,000), with the rebate being gradually reduced and phased out when the value of the home reaches $450,000. For properties in Ontario, the provincial new housing rebate is equal to 75% of the provincial component of GST/HST paid, up to a maximum of $24,000 (for homes valued at $400,000 or higher).

For a purchaser to be eligible for the new housing rebate, the following conditions must be met:

the purchaser must be an individual that is acquiring the home from a builder, as opposed to an assignor who may not be a builder
at the time the individual becomes liable or assumes liability, they must acquire the home as their primary place of residence or that of a relation
ownership of the property must be transferred to the individual after construction is substantially completed
the first person to occupy the home must be the individual or a relation
all persons named on the APS must meet the aforementioned conditions

When the purchaser qualifies for the new housing rebate, the builder is generally entitled to pay or credit the rebate amount to the purchaser pursuant to subsection 254(4) of the Excise Tax Act.

In situations where a third party is acquiring ownership of a home or condominium and they receive title directly from the builder, it does not necessarily mean that the APS has been assigned to the third party and that the builder has sold the condominium to the assignee. As argued by the Crown in Chen Sun, if the builder has not accepted the assignment, then the assignee may not be the person that is acquiring the condominium from the builder. Fortunately, in Chen Sun, the court ultimately held that the APS was in fact assigned on the basis that the builder, by its conduct, accepted the assignment and therefore the builder did sell the condominium directly to the assignee. Accordingly, the assignee was eligible to claim the new housing rebate (and the builder was entitled to credit the assignee with the rebate) because the assignee acquired the condominium from the builder and the other conditions to claim the rebate were satisfied.

Deposit portion of assignments

Where an assignment agreement is entered into on or after May 7, 2022, the Budget confirms that GST/HST would not be applicable to the deposit portion of the assignment price. However, it must be indicated in writing that a part of the consideration is attributable to the reimbursement of a deposit paid by the assignor to the builder under the Purchase and Sale agreement. This means that an assignor would only be liable for GST/HST on the amount above the deposit. This also eliminates double taxation.

Where an assignment agreement is entered into before May 7, 2022, and the assignment sale is taxable, the total amount payable for the sale is subject to the GST/HST, this includes any amount paid by the assignor as a deposit to the builder, whether or not this amount is separately identified.

Additionally, once the CRA comes and audits you for one sale, they will review your entire history of buying and selling properties to see if they can determine that you are selling property as a business, and are therefore running a property selling business. They would further audit you to see if any use of the principal residence exemption was correct, if you are entitled to capital gains, or if you should have been claiming business income. Again, the issue with CRA determining that you should be claiming business income is that there are GST/HST implications as above.

How should builders deal with assignments

As the builder and purchaser are jointly and severally liable for housing rebates that have been claimed in error, it is important for builders to make sure that purchasers qualify for the rebate before they pay or credit the purchaser with the rebate. The CRA heavily scrutinizes rebate claims and, to the extent each and every condition to claim the rebate is not satisfied, the CRA will deny the rebate claim. In situations where an APS has been assigned, builders should consider whether:

they should credit the assignee with the housing rebate or advise the assignee to file the rebate claim directly with the CRA
it is easier to “tear” up the original APS and enter into a new APS with the assignee
the assignment has been clearly documented so that there is no dispute that the assignee has become the purchaser under the APS, which may not be the case when only the title is transferred to the assignee at the assignor’s direction

The takeaway

All parties to a transaction in which an APS is being assigned and a housing rebate is being claimed should consider the GST/HST implications of the assignment. Failure to structure these assignments in an appropriate manner can significantly increase GST/HST costs for the respective parties, including:

builders being assessed penalties for erroneously crediting the housing rebate to assignees
assignors being assessed penalties for failing to collect tax on the assignments
assignees paying GST/HST on the replacement deposits

“Anti-flipping” Rule

Budget 2022 further introduced that sales of residential properties owned for less than 12 months are deemed to generate business income under the Income Tax Act (“ITA”). These are subject to limited exceptions such as divorce, or relocation for employment purposes. For more information see our previous blog discussing this .

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal or tax questions, you should consult a tax accountant or lawyer.

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Real Estate Assignment Sales – New Tax Rules

The Federal Budget for 2022 has made amendments to Part IX of the Excise Tax Act (“ETA”). Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated single unit residential complexes or residential condominium units are taxable.

Deposit Portion of Assignments

“Anti-flipping” Rule

Budget 2022 further proposes that sales of residential properties owned for less than 12 months are deemed to generate business income under the Income Tax Act (“ITA”). These are subject to limited exceptions such as divorce, or relocation for employment purposes. In terms of assignment sales, it has not yet been determined whether the proposed “anti-flipping” rules would apply since taxpayers do not technically “own” the properties. Tax practitioners are carefully monitoring this. For more information see our previous blog discussing this .

If you have questions about the new rules contact us today !

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Withholding Tax for Non-Residents on Real Estate Sales
Assigning Property and the GST/HST Implications
How Real Estate Agents can Incorporate a Company
Capital Gains – Canadians Selling U.S. Real Estate
Business Expenses for Real Estate Agents

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Tax implications of a real estate assignment: a tax exposure calculator.

This article provides an overview of GST/HST and Income Tax rules (current and proposed by the Federal Budget 2022) as they apply to real estate assignments sales.

In order to illustrate the points we discuss in the article, we have created a fun and interactive Assignment Tax Exposure Calculator for real estate assignments in Ontario (HST rate 13%) that result in business income for Income Tax purposes . If your assignment sale results in capital gain for Income Tax purposes, this calculator won't work for you (we might create one for our readers, if there is enough interest). Talk to your tax advisor to determine whether your assignment sale would result in business income or in capital gain.

We hope that our readers enjoy testing their business strategies with our Tax Exposure Calculator as they plan their assignment sales, but we caution them not to rely on the calculator in lieu of professional tax, legal or accounting advice.

Federal Budget 2022

A typical purchase agreement for a pre-construction residential property has a closing date scheduled months, often years in advance. As purchasers wait for the construction to complete/the transaction to close, some choose to assign their rights under the purchase agreement for the property for a fee. Federal Budget 2022 proposes new tax rules that will affect both such assignors and assignees.

Take, for example, Rebecca who purchased a pre-construction condominium in Downtown Toronto in 2017 for $300,000 (including HST) with a November 2022 tentative closing date. She provided a deposit of $60,000 to the builder. At the time of purchase, Rebecca’s intention was to live in the condo. As years went by, Rebecca changed her mind about living in Downtown; she decided to live in the suburbs instead. Lucky for Rebecca, the market value of her pre-construction condo surged to $500,000. In June 2022, Rebecca assigns her rights under the purchase agreement for the condo to a new purchaser who is willing to pay $260,000 ($60,000 to reimburse her for the deposit she made + $200,000 on account of the increase in price). Rebecca thinks she made an impressive profit of $200,000 but she did not consider taxes.

If you are like Rebecca, Federal Budget 2022 has some good news and some bad news for you (but mostly bad).

GST/HST to Apply on All Assignment Sales

The bad news is that effective May 7, 2022, under the Excise Tax Act (Canada) (“ETA”) every individual assignor of residential real estate would have to collect GST/HST on their assignment profit and remit it to the CRA. The rule will apply even to those who believe they are unrelated to the business of real estate and did not have a GST/HST number. Where an assignor is a non-resident, the assignee would be required to self-assess and pay the GST/HST to the CRA. In my example, Rebecca would have to remit 13% HST included in the $200,000 assignment profit ($23,008) directly to the CRA.

Before the Budget proposal, Rebecca’s HST liability depended on whether or not she purchased and assigned a condo in the course of a commercial activity. If Rebecca’s true intentions were to live in the condo, she would have been exempt from HST.

Income from Assignment: Business Income or Capital Gain?

Another element of bad news does not directly follow from the proposals, but raises concerns. Some commentators believe that, as an indirect effect of the Budget, we may see more assignment sales treated as business income (taxed at full rates) as opposed to capital gain (taxed at half rates) under the Income Tax Act (Canada) (“ITA”).

First, if all assignments are “taxable supplies” subject to GST/HST under the ETA, it generally implies the existence of a “commercial activity.” In its turn, a commercial activity generally implies business income treatment under the ITA. Granted, if an activity is deemed to be a “taxable supply” under the ETA, the deeming rule should not extend to a different Act, the ITA, but tax practitioners are watching carefully.

Second, Budget 2022 includes a new “anti-flipping” rule, which deems sales of residential properties owned for less than 12 months to generate business income under the ITA, subject to limited “life events” exceptions, such as a divorce or a job relocation. It is unclear whether the proposed “anti-flipping” rule would apply to assignments when taxpayers technically do not “own” the properties. Stay tuned.

In any event, the new “acceptable” list of life events replaces the current capital vs. income legal test entirely. Instead of determining whether the condo was Rebecca’s capital property or inventory, the focus shifts to merely checking whether her reason to sell/assign was on the list of the “acceptable” ones.

If Rebecca’s assignment profit is treated as business income for income tax purposes, her highest marginal tax rate would be 53.53% in Ontario. In very rough terms, Rebecca should budget well over 50% of her assignment profits for HST remittances and income tax. Depending on her marginal tax rate, she may be able to only keep about $88,000 of her original $200,000 assignment profit.

Before the Budget proposal, Rebecca’s intentions for the property (business or personal) would have been a question of fact. If she could prove that she intended to live in the condo, she would pay no HST and pay tax on capital gain. Her total tax liability would have been approximately $50,000 (25% of the $200,000 assignment profit).

No HST On Deposit Portion of Assignment Price

But there is also good news: the Budget proposes to exclude deposits from consideration for taxable supplies by assignment for GST/HST purposes. This means that GST/HST will only apply on the profit portion of the assignment price (in Rebecca’s case, $200,000), and not on the entire assignment price, which includes the deposit ($260,000). This is a welcome change that eliminates double taxation and is consistent with current caselaw ( Casa Blanca Homes Ltd. v. The Queen , 2013 TCC 338).

To generally estimate Income Tax and HST (Ontario) implications of an assignment that results in a business income, check out the Assignment Tax Exposure Calculator on our website .

IMPORTANT: Always speak to your tax professional to estimate or determine tax consequences applicable to your specific situation. DO NOT rely on our calculator for an accurate estimation of your tax liability. Nothing in this article constitutes legal advice and no solicitor-client relationship is created. If you require legal advice pertaining to your specific situation, please contact our tax lawyer .

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Tax on Assignment Sales: What You Need to Know

Real estate assignment sales and flipping pre-construction condos have become popular strategies for investors looking to make a quick return. And CRA has noticed. In this blog, I will explain two ways CRA is cracking down on pre-construction investors and what you can do to minimize your tax paid on assignment sales.

#1 – CRA May Tax Assignment Sales as Business Income

Similar to selling a resale home, you are required to report an assignment sale on your tax return and pay the necessary tax. Many real estate investors are quick to assume that the profit from an assignment sale is a capital gain.

However, CRA may tax assignment sales in two ways:

Capital gain – where only 50% of the profit is taxable
Business income – where 100% of the profit is taxable

To make its determination, CRA will consider factors such as:

What was your motive or intention in buying the property?
How long did you hold the property before selling?
Do you have a history of similar transactions?
What is your reason for selling?

Based on past court cases, we know that CRA will generally consider the profit from assignment sales to be business income unless you have a compelling explanation.

With the potential to double its tax collection, you can bet that CRA is watching this closely!

#2 – CRA May Assess GST/HST on Assignment Sales

This is probably one of the most overlooked tax implications when it comes to assignment sales.

While resale homes are generally exempt from GST/HST, you may be surprised to learn that this may not be the case with assignments.

Similar to income tax, CRA will look at your intentions in buying the property to determine whether GST/HST applies to you.

For example, you are likely considered a “builder” and will have to charge GST/HST if you assign a pre-construction unit that you bought for the purpose of flipping to make a quick profit.

And it gets worse:

Not only do you have to charge GST/HST on your profit, you also have to charge GST/HST on the deposit you recoup from the buyer!

Since most real estate contracts embed GST/HST into the sales price, this cost will likely be borne by the assignor.

Let’s look at an example:

Scenario Luca purchased a pre-construction condo unit for $450,000 a couple of years ago. He paid a deposit of $90,000 to the builder. The unit is currently worth $575,000. Luca had always planned to buy this unit as an investment and assign it for a profit. He has a personal tax rate of 50%.

On the surface, it looks like Luca stands to make a great profit. But, let’s see how that holds up:

What Can You Do to Save Tax on Assignment Sales?

Firstly, if you are unsure whether you have a capital gain or business income, you should reach out to a tax professional for advice.

Secondly, if the profit on your assignment sale is in fact business income because of the factors discussed above, then you should consider incorporating.

The benefit here is that business income is usually taxed at low rates inside a corporation (about 12.2% in Ontario and 11% in British Columbia). This is much lower than the the top tax rate of 53% paid by individuals.

Now be warned:

Setting up a corporation for real estate investing is not for everyone. Be sure to consult with a tax professional before implementing this strategy.

Lastly, it is important to work with an experienced real estate lawyer to discuss your GST/HST options. In my experience, it may be possible to restructure an assignment sale to reduce the GST/HST you pay as an assignor.

In Luca’s case, with the right professionals on his team, he was able to restructure the deal to reduce his taxes by about 38% (50% less 12.2%), pay less GST/HST and put this money into his next real estate project.

Have qu estions about flipping pre-construction real estate? Contact us for a consultation.

The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.

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What Is an Assignment Sale? Understanding the Ins and Outs of This Real Estate Process

An assignment sale occurs when the original buyer of a property (the assignor) transfers their rights and obligations of the property contract to another buyer (the assignee) before the official closing of the sale.

This process allows the assignee to step into the original purchaser's shoes, taking on the commitments of the property purchase, which could be a pre-construction condo, house, or any other form of real estate.

Now, let's delve deeper into understanding how assignment sales work, their intricacies, and what they mean for buyers and sellers in the real estate market.

Demystifying the Elements of an Assignment Sale

Embarking on a real estate journey often introduces many terms and processes that may seem complex at first glance, with 'assignment sales' leading the pack in complexity and confusion.

Whether you're the original buyer looking to navigate away from closing costs or a savvy purchaser hunting for a valuable investment, understanding the nuts and bolts of assignment sales is an invaluable asset in the dynamic landscape of real estate.

How Assignment Sales Work

Assignment sales introduce a unique dynamic in real estate transactions, particularly in bustling markets like Vancouver Island and the Sunshine Coast .

When you buy a pre-construction unit, the property is yours, albeit not immediately ready for occupation. Life changes or financial circumstances sometimes evolve between the original purchase agreement and the final closing, necessitating a shift in plan.

Here's where assignment sales come into play. The original buyer can sell their interest in the property before the final sale, sidestepping typical hurdles like mortgage payments or land transfer taxes that come with a regular sale. This method provides a strategic avenue for purchasers to hand over their contractual obligations to another party without waiting for the property's completion.

The Assignment Clause: A Vital Cog in the Wheel

The assignment clause in the original contract is central to these types of transactions. This clause allows the transfer of the buyer's rights and responsibilities to another person.

It's crucial to understand that not all pre-construction sales agreements have an assignment clause, and most builders or developers might impose restrictions or require consent before any assignment deal can proceed.

Understanding the Financials: Costs and Fees

Engaging in assignment sales tends to involve several costs that both the buyer and seller must anticipate.

These include the assignment fee charged by the developer, legal fees for contract transfer, and possibly higher legal fees due to the complexity compared to a resale property. There could also be tax implications depending on the nature of the transaction and the parties involved.

Navigating Through the Interim Occupancy Period

A common scenario in assignment sales, especially in pre-construction condos, is dealing with the interim occupancy period.

This period arises when the assignee can take possession (though not ownership) of the unit while the property is not officially registered. During this phase, the assignee pays occupancy fees, akin to rent, which don't go towards mortgage payments.

Understanding this period helps both parties make an informed decision and prepare for the financial responsibilities it entails.

The Pros and Cons of Assignment Sales

Navigating assignment sales requires a balanced understanding of its advantages and drawbacks. While these transactions open avenues for lucrative deals and flexible arrangements, they also carry inherent risks and complexities that can impact buyers and sellers.

This exploration will provide clear insights, aiding your decision-making in the vibrant real estate market.

The Bright Side: Benefits of Assignment Sales

Less Competition, More Opportunities: One advantage that makes assignment sales attractive, particularly in areas prone to bidding wars like Vancouver Island , is less competition. Fewer buyers are willing or informed about engaging in this kind of sales transaction, reducing the frenzy often seen in hot real estate markets. This situation can present a more favourable buying environment for those ready and willing to proceed with an assignment purchase.
Potential for a Better Deal: For buyers, assignment sales sometimes offer the opportunity to get into a brand-new unit at a potentially lower cost. Since the assignee is stepping into an existing agreement, they might benefit from the original purchase price, which could be lower than current market rates, especially in fast-growing communities.
Flexibility for the Original Buyer: For the original buyer, an assignment sale offers a way out, potentially recouping the deposit paid and avoiding financial penalties that might come with breaking a purchase agreement. This strategy can be particularly advantageous if the purchaser's circumstances change and needs to free up cash or avoid taking on a mortgage.

The Flip Side: Challenges and Risks of Assignment Sales

Complexity and Higher Legal Fees: Assignment sales are not your straightforward real estate transaction. They require additional steps, such as securing the developer's consent, and the legal process is more complex than purchasing resale properties. As a result, both parties might incur higher legal fees to facilitate the transaction.
Financial Overheads and Closing Costs: For the assignee, the initial cost outlay can be substantial for the assignee. They must reimburse the original buyer's deposit, pay the assignment fee, cover land transfer taxes, and prepare for other closing costs. These expenses require careful consideration and financial planning.
Uncertainties and Marketing Restrictions: In some cases, developers impose marketing restrictions, making it challenging to advertise the assignment sale. Additionally, the assignee, now the new buyer, takes on certain risks like development charges or changes in market conditions, which could affect the property's value upon final closing.

Making the Move: Deciding If an Assignment Sale Is Right for You

Deciding to engage in an assignment sale is a pivotal moment, requiring a blend of financial foresight and market understanding.

As we delve into this decision-making process, we'll consider critical personal and economic factors that ensure you're making a choice that aligns with your real estate ambitions and lifestyle aspirations.

Conduct Due Diligence: Know What You're Getting Into

Involving real estate agents experienced in assignment sales is a prudent step for guidance through the intricacies of these transactions.

Also, consulting with a real estate lawyer ensures you understand the legalities, your rights, and any potential liabilities you might be assuming.

Consider Your Financial Standing and Long-Term Goals

Reflect on your current financial health and future plans.

For original buyers, if life changes dictate a change in your real estate investments, an assignment sale could be a viable exit. For potential assignees, consider whether this buying pathway aligns with your investment strategy and if you're comfortable with the associated risks.

Stay Informed About Market Conditions

Market dynamics greatly influence real estate valuations. A clear picture of current trends, especially in your buying area (like Fort St John or cities in the Okanagan ), helps make an informed decision.

Understanding these trends could offer insights into whether you're setting yourself up for a profitable investment or a potential financial misstep.

Bringing It All Home with LoyalHomes.ca

Navigating the world of assignment sales can be a complex journey, laden with opportunities and pitfalls. Whether you're considering selling your contractual rights or stepping into an existing purchase agreement, the route is layered with legal, financial, and market considerations.

At Loyal Homes, we understand that your real estate journey is more than just a transaction; it's a pivotal chapter in your life story. We're here to guide you through each step, ensuring you're equipped with the local, accurate, and relevant information to make decisions confidently. Our team is committed to providing a service that stands a notch above the rest, focusing on relationships and community at its core.

Ready to take the next step in your real estate adventure in British Columbia? Whether it's finding the perfect neighbourhood, exploring investment opportunities, or seeking your dream home, we're here to assist.

For a personalized experience tailored to your unique needs, consider our Personalized Home Search . If you're on the selling side and need to understand your property's current market standing, request a Free Home Valuation . Or, for any other inquiries or guidance, feel free to contact us . Your journey to a successful real estate experience in British Columbia starts with LoyalHomes.ca, where your peace of mind is our highest priority.

Frequently Asked Questions

Is it good to buy an assignment sale.

Buying an assignment sale can be advantageous, offering lower purchase prices compared to current market rates for similar properties, especially in hot real estate markets. However, this venture also requires thorough due diligence to ensure that the agreement terms, property details, and financial implications align with your investment goals.

Can You Make Money on an Assignment Sale?

Yes, there is a potential to make money on an assignment sale, particularly if the property's value has increased since the original purchase date. This profit occurs due to appreciation over the period, especially in high-demand areas, but it's crucial to factor in any assignment fees, legal costs, and tax implications to understand the net gainfully.

What Are the Risks of Buying an Assignment Sale?

The risks include a lack of guarantees on the final product as specifications might change, potential delays in construction, and complexities in financing, often requiring a more substantial initial deposit. These elements underscore the importance of legal counsel to navigate contract specifics and to prepare for any contingencies or additional costs.

How Do I Sell My Pre-Construction Assignment?

Selling a pre-construction assignment involves marketing to potential buyers, typically requiring the developer's consent and possibly entailing a fee. Engaging with a real estate professional who understands the local market nuances and legalities of assignment sales is essential to ensure a smooth, compliant transaction.

Do I Pay Tax on Assignment Sale?

Tax implications on assignment sales can be multifaceted, potentially involving income tax on profits and GST/HST on the purchase, depending on factors like the property type and the seller's tax status. It's advisable to consult with a tax professional to accurately determine specific obligations and strategize for tax efficiency based on your circumstances.

What Is the Difference Between a Transfer and an Assignment?

A transfer and an assignment differ significantly; a transfer involves changing property ownership after a project's completion, whereas an assignment sells one's interest in a property before it's finished. Understanding this distinction is crucial as it affects the contractual obligations, rights transferred to the new buyer, and the legal and financial processes involved in the transaction.

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Photo: @ AndreyPopov via Canva.com
Photo: @ putilich via Canva.com

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10 Essential Things to Know About Real Estate Assignment Sales (for Sellers)

What’s an assignment?

An assignment is when a Seller sells their interest in a property before they take possession – in other words, they sell the contract they have with the Builder to a new purchaser. When a Seller assigns a property, they aren’t actually selling the property (because they don’t own it yet) – they are selling their promise to purchase it, along with the rights and obligations of their Agreement of Purchase and Sale contract. The Buyer of an assignment is essentially stepping into the shoes of the original purchaser.

The original purchaser is considered to be the Assignor; the new Buyer is the Assignee. The Assignee is the one who will complete the final sale with the Builder.

Do assignments only happen with pre-construction condos?

It’s possible to assign any type of property, pre-construction or resale, provided there aren’t restrictions against assignment in the original contract. An assignment allows a Buyer of a any kind of home to sell their interest in that property before they take possession of it.

Why would someone want to assign a condo?

Often with pre-construction sales, there’s a long time lag between when the original contract is entered into, when the Buyer can move in (the interim occupancy period) and the final closing. It’s not uncommon for a Buyer’s circumstances to change during that time…new job out of the city, new husband or wife, new set of twins, etc. What worked for a Buyer’s lifestyle 4 years ago doesn’t always work come closing time.

Another common reason why people want to assign a contract is financial. Sometimes, the original purchaser doesn’t have the funds or can’t get the financing to complete the sale, and it’s cheaper to assign the contract to a new purchaser, than it is to renege on the sale.

Lastly, assignment sales are also common with speculative investors who buy pre-construction properties with no intention of closing on them. In these cases, the investors are banking on quick price appreciation and are eager to lock in a profit now, vs. waiting for the original closing date.

What can be negotiated in an assignment sale?

Because the Assignee is taking over the original purchaser’s contract, they can’t renegotiate the price or terms of the contract with the Builder – they are simply taking over the contract as it already exists, and as you negotiated it.

In most cases, the Assignee will mirror the deposit that you made to the Builder…so if you made a 20% deposit, you can expect the new purchaser to do the same.

Most Sellers of assignments are looking to make a profit, and part of an assignment sale negotiation is agreeing on price. Your real estate agent can guide you on price, which will determine your profit (or loss).

Builder Approval and Fees

Remember that huge legal document you signed when you made an offer to buy a pre-construction condo? It’s time to take it out and actually read it.

Your Agreement of Purchase & Sale stipulated your rights to assign the contract. While most builders allow assignments, there is usually an assignment fee that must be paid to the Builder (we’ve seen everything from $750 to $7,000).

There may be additional requirements as well, the most common being that the Builder has to approve the assignment.

Marketing Restrictions

Most pre-construction Agreements of Purchase & Sale from Toronto Builders do not allow the marketing of an assignment…so while the Builder may give you the right to assign your contract, they restrict you from posting it to the MLS or advertising it online. This makes selling an assignment extremely difficult…if people don’t know it’s available for sale, how they can possibly buy it?

While it may be very tempting to flout the no-marketing rule, BE VERY CAREFUL. Buyers guilty of marketing an assignment against the rules can be considered to have breached the Agreement, and the Builder can cancel your contract and keep your deposit.

We don’t recommend advertising an assignment for sale if it’s against the rules in your contract.

So how the heck can I find a Buyer?

There are REALTORS who specialize in assignment sales and have a database of potential Buyers and investors looking for assignments. If you want to be connected with an agent who knows the ins and outs of assignment sales, get in touch…we know some of the best assignment agents in Toronto.

What are the tax implications of real estate assignment?

Always get tax advice from a certified accountant, not from the internet (lol).

But in general, any profit made from an assignment is taxable (and any loss can be written off). The new Buyer or Assignee will be responsible for paying land transfer taxes and any HST that might be due.

How much does it cost to assign a pre-construction condo?

In addition to the Builder assignment fees, you will likely have to pay a real estate commission (unless you find the Buyer yourself) and legal fees. Because assignments are more complicated, you can expect to pay higher legal fees than you would for a resale property.

How does the closing of an assignment work?

With assignment sales, there are essentially 2 closings: the closing between the Assignor and the Assignee, and the closing between the Assignee and the Builder. With the first closing (the assignment closing) the original purchaser receives their deposit + any profit (or their deposit less any loss) from the Assignee. On the second closing (between the Builder and the Assignee), the Assignee pays the remaining amount to the Builder (usually with the help of a mortgage), and pays land transfer taxes. Title of the property transfers from the Builder to the Assignee at this point.

I suppose it could be said that there is a third closing too, when the Buyer takes possession of the property but doesn’t yet own it…this is known as the interim occupancy period. The interim occupancy occurs when the unit is ready to be occupied, but not ready to be registered with the city. Interim occupancy periods in Toronto range from a few months to a few years. During the interim occupancy period, the Buyer occupies the unit and pays the Builder an amount roughly equal to what their mortgage payment + condo fees + taxes would be. The timing of the assignment will dictate who completes the interim occupancy.

Assignments vs. Resale: Which is Better?

We often get calls from people who are debating whether they should assign a condo they bought, or wait for the building to register and then sell it as a typical resale condo.

Pros of Assigning vs. Waiting

Get your deposit back and lock in your profit sooner
Avoid paying land transfer taxes
Avoid paying HST
Maximize your return if prices are declining and you expect them to continue to decline
Lifestyle – sometimes it just makes sense to move on

Cons of Assigning vs Waiting

The pool of Buyers for assignment sales is much smaller than the pool of Buyers for resale properties, which could result in the sale taking a long time, getting a lower price than you would if you waited, or both.
Marketing restrictions are annoying and reduce the chances of finding a Buyer
Price – What is market value? If the condo building hasn’t registered and there haven’t been any resales yet, it can be difficult to determine how much the property is now worth. Assignment sales tend to sell for less than resale.
Assignment sales can be complicated, so you want to make sure that you’re working with an agent who is experienced with assignment sales, and a good lawyer.

Still thinking of assignment your condo or house ? Get in touch and we’ll connect you with someone who specializes in assignment sales and can take you through the process.

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Raj Singh says:

What can be things to look for, especially determining market value for an assigned condo? I’m the assignee.

Sydonia Moton says:

Y would u need a lawyer when u buy a assignment property

Gideon Gyohannes says:

Good clear information!

Who pays the assignment fee to the developer? Assignor or Assignee?

Thanks Gideon 416 4591919

Melanie Piche says:

It’s almost always the Seller (though I suppose could be a point of negotiation).

Fiona Rourke says:

If there are 2 names on the agreement and 1 wants to leave and the other wants to remain… does the removing of 1 purchaser constitute an assignment

Brendan Powell says:

An assignment is one way to add or remove people from a contract, but not the only way…and not the simplest. Speak to your lawyer for advice on what makes the most sense for your specific situation. For a straightforward resale purchase you could probably just do an amendment signed by all parties. If it’s a preconstruction purchase with various deposits paid, etc it could be more complicated.

Katerina says:

Depends on the Developer. Some of them remove names via assignments only.

Haroon says:

Is there any difference in transaction process If assigner or seller of a pre constructio condo is a non resident ? Is seller required to get a clearance certificate from cRA to complete the transaction ?

Nathalie says:

Hello , i would like to know the exact steps for reassignment property please.

Amazing info. Thanks team. I may just touch base with you when my property in Stoney Creek is completed in. 2020. I may need to reassign it to someone Thanks

Victoria Bachlowa says:

If an assignor renegs on the deal and refuses to close because they figured out they could get more money and the assignment was already approved by the builder and all conditions fulfilled what can the Assignee do. I have $33,000 dollars in trust in the real estate’s trust fund. They sent me a mutual release which I have not signed. The interim occupancy is Feb. 1 and the closing is schedule for Mar. 1, 2019. I have financing in place, was ready to move in Feb. 1 and I have no where to live.

Definitely talk to your lawyer right away. They’ll want to look at your agreement of purchase and sale and will be able to advise you.

With assignment sales, there are essentially 2 closings: the closing between the Assignor and the Assignee, and the closing between the Assignee and the Builder. With the first closing (the assignment closing) the original purchaser receives their deposit + any profit (or their deposit less any loss) from the Assignee. Can I assume that these closing happen at the same time? I’m not sure how and when I would be paid as the Assignor.

What happens to the deposits or any profits already paid if the developer cancels the project after an assignment?

Hi, Did you get answer to this? I did an assignment sale last year and now the builder is not completing apparently and they are asking for their money back. Can they do that? After legal transactions, the lawyer simply said “the deal didn’t go through”. Apparently builder and the person who assumed the assignment agreed on taking out the deal. What do I have to pay back after it was done a year ago

This is definitely a question for your lawyer – as realtors we are not involved in that part of the transaction. I would expect that just as the builder would have to refund your deposits, you would likely need to do the same…but talk to your lawyer. As to whether the builder can cancel a project, yes they always reserve that right (but the details of how and under what circumstances would be in your original purchase agreement). It’s one of the annoying risks in buying preconstruction!

I completed the sale of my assignment in Dec 2015 however the CRA says I should be reporting the capital income in 2016 when the assignee closed his deal with the developer in July 2016. That makes no sense to me since I got all my money in Dec 2015. Can you supply any clarification on that CRA policy please?

You’d have to talk to the CRA or an accountant – we’re real estate agents,so we can’t give tax advice.

Hassan says:

Hello, You said that there are two closings. The first one between the assignor and the assignee and the second one between the builder and the new buyer (assignee). My question is that in the first closing does the assignee have to pay the assignor the deposit they have paid and any profit in cash or will the bank add this to the assignee’s mortgage?

The person doing the assigning usually gets their money at the first closing.

Kathy says:

What is the typical real estate free to assign your contract with the builder ?

Hi Kathy While we do few assignments (as they are rarely successful, and builders do not make it easy), in past we have charged more or less the same as we do for a typical resale listing. While there are elements to assignments that should be easier than a resale (eg staging), many other aspects of assignments are much MORE time-consuming, and the risk much higher since attempts to find a buyer for assignments are often unsuccessful. It’s also important to note that due to the extra complication, lawyer’s fees to assign are typically higher than resale as well–although more $ for the purchase side vs the sale side.

Mitul Patel says:

If assignee has paid small amount of deposit plus the original 25% deposit that the assignor has paid to the builder and gets the Keys to the unit since interim possession has been completed, when the condo registration is done and assignee is getting mortgage from the Bank or Pays the remaining balance to the Builder using his savings and decides not to pay the Balance of the Profit amount to Assignor, what are the possibilities in this kind of scenario?

You’d need to talk to a lawyer to find out the options.

David says:

How much exactly do brokers get paid at sale of Assignment? i.e. Would the broker’s fee be a % of your assignment selling price or your home’s selling price? I’m really looking for a clear answer.

I am using this website’s calculator associated with selling your home in Ontario. But there is no information on selling assignments. https://wowa.ca/calculators/commission-calculator-ontario

Realtors set their own commission, so there is no set fee- that website is likely the commission that that agent offers. We often see commissions of 4-5% for assignments. The fee is a % of the price of the assignment – for example, you originally bought for $500K; you’re now assigning for $600K – commission would be payable on the $600K.

Candace says:

Question: if i bought a pre construction condo, can i sell it as soon as it closes or do i have to live in it for 1 year after closing in order to avoid capital gains taxes?

Or does the 1 year start as soon as you move in?

I would suggest you talk to your accountant re: HST credit implications and capital gains, but if you sell it for more than you paid for it, capital gains usually apply.

You mention avoid paying HST when you assign your property. What is the HST based on? It’s not a commercial property that you would pay HST. Explain. Thanks.

HST and assignments are complex and this question is best answered specific to your situation by your accountant and real estate lawyer. In some cases HST is applicable on assignment profits – more details can be found on the CRA website here:

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/gi-120/assignment-a-purchase-sale-agreement-a-new-house-condominium-unit.html

If you are a podcast listener, the true condos podcast is also a great resource.

https://truecondos.com/cra-cracking-down-on-assignments/

heres one for your comment, purchase pre construction from builder beginning of 2021, to be finished end of 2021, (semi detached) here we are end of 2022, both units are now ready. Had one assigned but because builder didnt accept within certain time frame(they also had a 90 day clause wherein we couldnt assign prior to 90 less firm closing date (WHICH MOVED 4 TIMES). Anyrate now we have a new assinor but the builder says we are in default from the first one and wants 50k to do the assignment (the agreement lists the possibility of assigning for 12k) Also this deal would include us loosing our whole deposit and paying the 12k(plus fees) would be in addition too the 130k we are already loosing. The second property we are trying to close but interest rates are riducous, together with closing costs(currently mortgage company is asking that my wife be added to that one, afraid to even ask this builder. Any advice on how to deal with this asshole greedy builder? We are simply asking for assignment as per contract and a small extension for the new buyer(week or two) Appreciate any advice. Thank you

Dealing with builders/developers can be extremely painful, much worse than resale transactions in our experience. Their contracts are written to protect THEM. Unfortunately all I can say is follow the advice of your lawyer.

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NAEPC Webinars ( See All ):

Wednesday, december 11, 2024 at 3:00pm - 4:00pm et - the best practices in social security and medicare planning, speaker(s): julie a. welch, cpa/pfs, cfp®, aep® (distinguished) & randy gardner, jd, llm, cpa/pfs, cfp®, aep® (distinguished), tuesday, december 17, 2024 at 11:00am - 12:00pm et - some reasonable estate planning steps for the middle tier family - complimentary holiday program, speaker(s): jonathan g. blattmachr, esq., aep® (distinguished), issue 43 – december, 2023, five lessons from recent pre-sale planning cases.

By Mark R. Parthemer, JD, AEP®, ACTEC Fellow

“It does not do to leave a live dragon out of your calculations, if you live near one.” J.R.R. Tolkien

For some estate and gift tax advisors counseling clients on succession planning, that dragon is the IRS. Many clients look to minimize the tax costs of business succession when selling to a third party, employees, other shareholders, or transitioning within the family. It may seem the IRS thwarts attempts to do so that are outside the lines of accepted planning and tax rules. This article examines five lessons to be learned from three recent cases and one Chief Counsel Advisory (CCA) in which the IRS challenged pre-sale planning techniques.

I. Assignment of Income

Assignment of income is the shifting of taxation from one party to another, a concept that has long been recognized in the Internal Revenue Code (IRC). Specifically, IRC Section 61 tells us that income from whatever source is to be taxed to the person or entity that earned it (Helvering v. Horst, 311 U.S. 112 (1940)). To shift income to another taxpayer, the shift must occur before the income is earned.

For those seeking to sell their business, the shift of ownership of some or all of one’s entity interests often is discussed. One strategy is to minimize the seller’s overall tax cost by contributing interests to others.

One often used technique is to transfer some of the owner’s ownership interests to a tax-exempt organization. The recipient tax-exempt entity (TEE) could be a public charity, private foundation or donor advised fund (DAF). There are two reasons that this technique can reduce the tax cost: (1) tax-exempt entities do not need to pay capital gains tax on the gains allocable to the shares it owns, and (2) a charitable contribution deduction can be generated by a contribution to the exempt entity. For now, let us focus on the first.

For example, imagine a taxpayer is about to sell her company through a stock sale for $10 million. Her basis is $2 million. Were she to sell all of her stock directly or indirectly (e.g., shares in a grantor trust), she would experience an $8 million gain. If she successfully contributed 25% to a TEE, and assuming no discounting, 25% of the gain would shift, reducing her taxable gain to $6 million – and in fact, no tax owed on the shares held by the tax-exempt entity.

A variation is to spread the taxable gain among more than one taxpayer. Similar to a charitable contribution, this approach entails transferring to others, such as children or grandchildren, or into non-grantor trusts for them. This can shift some of the gain to those with lower effective tax rates, or even if neutral on tax rates, spread the gain among others.

To be effective in implementing either variation or technique of this strategy, the transfers must be made before the income is earned, that is, before the company is sold. But according to a recent case, when the company is sold for assignment of income purposes is a gray area that can be a conundrum for taxpayers and their advisors. While it is clear that a company is sold no later than the date upon which the buyers furnish payment, for assignment of income tax purposes, the sale can be deemed to occur on an earlier date. That date is the one on which the sale is virtually certain or practically certain to occur.

Imagine that a business owner receives an unsolicited offer from an unknow party to purchase the company for $x. If the owner says yes, has the deal become certain? Typically, it has not because after the parties come to an understanding, there can be non-binding letters of intent, purchase agreement documentation, due diligence, inspections, and more. So long as the buyer can walk away without a breach (e.g., no funds forfeited), we would conclude the sale likely has not become a “done deal.” The Tax Court focuses on the realities of the transaction, not on formalities or hypotheticals, such as the hypothetical possibility of abandonment.

On the other hand, the mere anticipation or expectation of income at the time of the gift does not establish that a donor’s right to income is fixed. Instead, the Tax Court looks to several other factors that bear upon whether the sale of shares was virtually certain to occur at the time of a purported gift as part of the same transaction. Relevant factors may include (1) any legal obligation to sell by the donee, (2) the actions already taken by the parties to effect the transaction, (3) the remaining unresolved transactional contingencies, and (4) the status of the corporate formalities required to finalize the transaction. See Jones v. United States , 531 F.2d 1343, 1345 (6th Cir. 1976); Allen v. Commissioner , 66 T.C. 340, 346 (1976).

In a 2023 case, some of the relevant facts can be summarized in this timeline:

Day 1: Company board of directors approves sale of company and approves shareholder contributing some shares to a DAF
Days 2+: Sale of company successfully negotiated, but not closed
Day 32: DAF receives stock certificate; seller pays over $10 million in bonuses and dividends to sweep all cash out of the company
Day 33: Sales agreement modified to reflect shares at DAF
Day 34: Sale of company completed

One of the issues in the case resulted from the donor/shareholder not reporting capital gains on the shares contributed to the DAF. In Tax Court, the IRS successfully argued that all gains were to be taxed to the donor due to acts that suggested the sale was a virtual certainty. One of the key points the Court made was that it was considered highly improbable that the sellers would have emptied the company of its working capital if the transaction had even a small risk of not consummating ( Estate of Hoensheid v. Comm ., T.C. Memo. 2023-34).

The lesson to be learned from Hoensheid on assignment of income is that transfers, whether to a tax-exempt entity or other taxpayer, will be effective when executed while there is still a meaningful possibility that the contemplated sale will not take place. While we know that some clients wish only to transfer once they are certain the deal will close, the advice to them is that likely by such time, it is too late.

II. Charitable Deduction Substantiation Requirements

Continuing on with Hoensheid, we add these facts:

Day 150: DAF sends letter acknowledging receipt of the shares on Day 1
Day 200: Investment banking firm provided, for free, an unsigned letter valuing the shares donated to the charity – but reflected the wrong date.

On his tax return, Mr. Hoensheid took a $3.2 million charitable contribution deduction. The IRS successfully denied the deduction. This was not based on virtual certainty of the deal, but on his failure to comply with the Section 178(f)(8) substantiation requirements (see callout box). Given the size of the purported deduction, requirements set for in number 5 applied. The IRS argued that the contemporaneous written acknowledgment from the DAF was ineffective. Although the Court stated that it applies the rules strictly and that the doctrine of substantial compliance is inapplicable, it held that the IRS was wrong, and the acknowledgment was in compliance.

The IRS also argued that the valuation by the representative of the investment banking firm did not constitute a qualified appraisal, as required. On this issue, the Tax Court flipped and described the qualifications as directory not mandatory, but ironically found for the IRS nonetheless. Among the issues were that the individual who did the valuation was not a credentialed appraiser, regularly providing reports for fees, and that the appraisal itself contained errors that even if it had been prepared by an individual with the appropriate bona fides, the product itself was insufficient. Thus, no charitable contribution deduction was allowed.

One could question the jurisprudence of punishing a donor so significantly for what could be characterized as a minor technicality. After all, the shares were valued based on the purchase price, so what better indication of the “willing buyer/willing seller” test? However, these tax rules, now codified in the statute, were established after Congress was made aware of significant abuse stemming from the overvaluation of property contributed to charities. See Abusive Tax Shelters: Hearing Before the S. Subcomm. On Oversight of the Internal Revenue Serv. of the S. Comm. on Fin. , 98th Cong. 71 (1983) (statement of Robert G. Woodward, Acting Tax Legis. Couns., Dep’t of Treasury)

The result is the rules as we now have them, and the Court was correct in its application. The lesson here is that taxpayers, their advisors, and tax preparers should be careful to abide by the rules.

TRIPLE WHAMMY: In this case, we have seen a double whammy – the income on the donated shares was taxed to Mr. Hoensheid, and his income tax deduction on the donation was denied, but there is another shoe to drop. Under state law, the transfer to his DAF was effective, so not only did he have to pay tax on the proceeds relative to those shares with no deduction, he also didn’t get the proceeds. They rightfully belong to his DAF.

IRC Section 170(f)(8) – Substantiation Requirements

Less than $250. Must keep adequate records to substantiate the contribution. If the contribution is in cash, you must have a bank record or a receipt from the charity identifying the name of the charity, the date of the contribution, and the amount of the contribution.
Between $250 – $500. Must keep adequate records and obtain a receipt, called a Contemporaneous Written Acknowledgment (CWA)*, from the charity.
Greater than $500, but less than $5,000. All substantiation previously stated plus additional information as the Treasury may require. This essentially means meeting the requirements of the specific IRS form for income tax reporting and its instructions. For example, Form 8283 provides taxpayers with instructions on the information that must be provided for property donations, including basis in the property, and dates when the property was acquired and donated, and the method used to determine the fair market value. There are also specific substantiation requirements for vehicle, boat and airplane donations that are above $500, including a CWA and a 1098-C, if sold by the charity.
Greater than $5,000. All substantiation previously stated as well as a qualified appraisal that supports the value claimed for the donated property. Generally, the taxpayer must provide a summary of the appraisal.
Greater than $500,000 ($20,000 for artwork). Must attach a qualified appraisal and obtain the signature of an authorized official of the charity on Form 8283.

Note: An appraisal must be attached for a gift of a qualified conservation easement regardless of value.

* Indicates the amount of the cash and a description of any property other than cash contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. It must be received by the earlier of the filing of the tax return or the due date for the return, including extensions.

III. Setting Share Value in a Buy-Sell Agreement that Binds the IRS

Two brothers, Thomas and Michael Connelley, owned a company and established a buy-sell agreement. Two of its key provisions, both common, play a key role in this case. First, the agreement provided that at the death of one of the shareholders, the surviving brother had the option to purchase the shares. To the extent not invoked, the company was obligated to redeem all of the (remaining) shares of the deceased shareholder.

For pricing, the agreement provided two methodologies for establishing the shares’ value. First, it would be at the value that the shareholders annually agree and set forth on the agreement’s schedule. Second, the shareholders were authorized to hire two or more appraisers, and average their valuations.

As is often the case in such matters, neither method was utilized. Thomas, who owned 77.18% of the shares, passed with no set valuation. Michael did not purchase the shares, so the company did. Thomas’ son, Michael’s nephew, was executor of the estate, and he and Michael agreed to a redemption value of $3 million, without any support such as of an appraisal. The company had purchased life insurance with a death benefit of $3.5 million: $500,000 was added to operating capital, and the remaining $3 million used to purchase the shares from Thomas’ estate.

It is possible to fix value for estate tax purposes under Section 2703. To do so, the following requirements must be met:

Three statutory requirements (i) must be a bona fide business arrangement, (ii) the agreement must not be a device to transfer property to the family for less than full adequate consideration, and (iii) the agreement must be comparable to similar agreements negotiated at arm’s length between unrelated parties.
There must be a fixed and determinable offering price, the agreement must be binding both during life and after death.
There must be a bona fide business reason.
There must not be a testamentary disposition for less than full and adequate consideration.

The first issue for the court was whether the agreement by the estate and surviving brother satisfied these requirements and thus bind the IRS. The court found in favor of the IRS that the buy-sell agreement was ineffective to fix the price as, among other things, the price was not fixed and determinable. Fixed would have been set; determinable would have been based on a formula ( Connelly v. United States , No. 21-3683 (8th Cir. 2023)).

IV. Valuing a Company that Owns Life Insurance to Redeem Shares

We are not done learning from the above discussed Connelly case but getting to perhaps the more important issue to the IRS, the valuation of a company that owns life insurance to fund a mandatory stock redemption.

The IRS appraiser valued Thomas Connelley’s shares at slightly less than $3 million excluding $500,000 of the insurance death benefit because these funds were used for capital to operate the company. At trial, the parties to a $3.1 million valuation of the shares in the estate and proceeded on the merits of the insurance. Both also agreed that the $500,000 added to capital increased the value of the company, but disagreed on whether the balance of the death benefit did. The positions were set: the taxpayer argued no, so the company was worth $3.86 million; the IRS said yes, so the company was worth $6.86 million.

The taxpayer had several precedents from other Federal circuit courts as support.

In 2005, the 11th Circuit Court (Alabama, Florida, and Georgia) held insurance owned by company is an asset that is offset dollar-for-dollar by the contractual liability to redeem the shares, zeroing it out ( Estate of Blount , 428 F.3d 1338 (11th Cir. 2005)).

In 1999, the 9th Circuit Court (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) determined that the purchase of a deceased’s stock in an incorporated law firm was an offset by the obligation (the rest was deemed compensation based on the terms of the agreement). Estate of Cartwright , 183 F 2d 1035.

But in 2023, the 8th Circuit Court (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) in Connelly rejected that argument and included the death benefit in valuing the company with no offsetting liability. This was a victory for the IRS.

This leaves a split in the Federal circuits, which is one of the pathways to the U.S. Supreme Court. Of course, we do not see a significant number of Supreme Court cases in the estate, tax and trust planning field, so this is a topic perhaps worthy of monitoring as well as the more relevant lesson that of the IRS position and willingness to litigate their stance.

V. Appraisal Frugality Doesn’t Pay

In planning, one can be “penny wise but pound foolish,” and this rings especially true when it comes to valuations. It is understandable that business owners can be hesitant to embrace the need for an additional appraisal and its concomitant effort and expense. In fact, those companies with a non-qualified deferred compensation plan, known as a 409A plan, already are required to obtain an annual appraisal. It can be difficult to appreciate the nuance between appraisals and valuations for different purposes, let alone different tax purposes. Thus, it can be tempting for a business owner to seek to use one valuation for both purposes, but as this CCA demonstrates yet again, this is a mistake that can be tax costly.

Just as in the charitable deduction cases, the need for a proper gift tax valuation is unavoidable and applies when implementing estate tax planning techniques. In this matter, the Chief Counsel focused on the failure to obtain a proper appraisal.

Some relevant facts:

December 31, Yr 1: Company obtains annual 409A valuation.
January – July, Yr 2: Actively looking to sell, Company hires investment bankers and receives tender offers from five potential buyers.
July, Year 2: Three days after receiving the offers, shareholder funds a GRAT using Year 1 409A value.
Dec. 31, Year 2: 409A value doubled.
Pre closing: Taxpayer funded a charitable remainder trust and used valuation based on the tender offer price.
Year 4: Merger closed at four times Year 1 409A valuation.

The IRS audited the GRAT and argued that the shareholder did not use a proper gift tax valuation when funding shares into a GRAT. Seeking internal guidance, the matter was referred to the Chief Counsel’s office. Guidance from the office, referred to as a Chief Counsel Advisory (CCA), is not dispositive of the matter nor is it binding precedent. However, it provides the auditor and the taxpayer of the position the IRS likely would take should the matter be litigated.

The Chief Counsel was impressed, to the detriment of the taxpayer, by the position that no separate valuation was needed because, according to the taxpayer, business operations had not meaningfully changed in the seven months between the 409A valuation and the funding of the GRAT. The CCA notes, however, that much had changed. The company had hired two investment bankers to market the firm and three days before funding the GRAT, the company had received offers from five different potential buyers, each in the multi-billion dollar range.

Generally, when advisors contemplate valuation issues for GRATs, they have a sense of confidence in the regulations that suggest if a value is inaccurate, the annuity simply is adjust to reflect the proper valuation. The trust is to pay to the recipient, in the case of an undervaluation, or be repaid by the recipient, in the case of an overvaluation, an amount equal to the difference between the amount the trust should have paid if the correct value were used and the amount the trust actually distributed (Treas. Reg. 1.664-2(a)(iii)). In fact, GRAT regulations require language in the GRAT trust agreement to this effect (Treas. Reg. 25-2702(c)(2)).

A valuation of property for Federal transfer tax purposes generally is made as of the valuation date without regard to events happening after that date ( Ithaca Trust Co. v. United States , 279 U.S. 151 (1929)). While the company eventually was sold to one of the offering firms, closing did not occur until after the GRAT term had expired. Still, the IRS seemed displeased that the ultimate price was billions of dollars and more than four times the original value. It concluded that the 409A valuation was outdated and misleading. Because the annuity was “34 cents on the dollar” and held back “tens of millions,” the CCA said the annuity did not qualify under Section 2702. The resulting operational failure caused the entire funding value of the shares transferred into the GRAT to be fully gift tax taxable. This is known as the Atkinson rationale[ 1 ] (CCA 202152018 (Dec. 30, 2021)).

Pre-sale planning can be powerful in furthering clients toward achieve their financial, tax and estate planning goals. However, as we have seen, despite the rules in this area not materially changing in years, mistakes still occur. From them, we can learn about assigning income, substantiating charitable deductions, binding the IRS with a buy-sell agreement, valuing the company that owns life insurance to fund a redemption, and not being frugal when it comes to obtaining appraisals.

Armed with this knowledge, we can see the legal context for the early and careful counsel. Perhaps an insight from Edward Gibbon may apply, “Vicissitudes of fortune, which spares neither man nor the proudest of his works, which buries empires and cities in a common grave.”[ 2 ] In the meantime, if the IRS dragon is lurking outside the door, do not pretend it isn’t there.

This article is provided solely for informational purposes and is not intended to provide financial, investment, tax, legal, or other advice. It contains information and opinions which may change after the date of publication. The author takes sole responsibility for the views expressed herein, and these views do not necessarily reflect the views of the author’s employer or any other organization, group, or individual. Information obtained from third-party sources is assumed to be reliable and has not been verified. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Readers should consult with their own financial, tax, legal, or other advisors to seek advice on their individual circumstances.

[ 1] In Atkinson v. Commissioner, 115 T.C. 26, 32 (2000), aff’d, 309 F.3d 1290 (11th Cir. 2002), the Court treated as non-qualifying a charitable remainder annuity trust when no payments were actually made to the donor during the two-year period between the creation of the trust and the donor’s death. [ 2] Edward Gibbon, “The History of the Decline and Fall of the Roman Empire,” W. Strahan and T. Cadell, in the Strand, 1776.

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COMMENTS

Everything you need to know about Preconstruction Assignment Sales
Assignment fees are subject to HST. $50,000 assignment fees you collected are subjected to HST. CRA also adopted the position that the deposits $100K are also subject to HST as well. Ouch! You thought you made $50,000 - but after considering the HST on assignment fees $5.8K and HST on deposits $11.5K, you really only net $33K.
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The Federal Budget for 2022 has made amendments to Part IX of the Excise Tax Act ("ETA"). Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated single unit residential complexes or residential condominium units are taxable. For clarity, with respect to residential housing transactions, the purchaser (assignor) enters into […]
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Tax Implications of a Real Estate Assignment: a Tax Exposure CalculatorThis article provides an overview of GST/HST and Income Tax rules (current and proposed by the Federal Budget 2022) as they apply to real estate assignments sales. In order to illustrate the points we discuss in the article, we have created a fun and interactive Assignment Tax Exposure Calculator for real estate assignments ...
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Luca's Profit Without Tax Planning At Luca's tax rate of 50%, half of his $125,000 profit will go towards income tax. This leaves him with $62,500. Luca also owes GST/HST on his profit of $125,000 and on the $90,000 deposit. Assuming a 13% GST/HST rate, this leaves Luca with about $35,000 in net profits on the assignment sale.
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Tax implications on assignment sales can be multifaceted, potentially involving income tax on profits and GST/HST on the purchase, depending on factors like the property type and the seller's tax status. It's advisable to consult with a tax professional to accurately determine specific obligations and strategize for tax efficiency based on your ...
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This article examines five lessons to be learned from three recent cases and one Chief Counsel Advisory (CCA) in which the IRS challenged pre-sale planning techniques. I. Assignment of Income. Assignment of income is the shifting of taxation from one party to another, a concept that has long been recognized in the Internal Revenue Code (IRC).
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Everything you need to know about Preconstruction Assignment Sales

Scenario 1: When you signed the agreement of purchase and sale, you intended to move into the property and use it as your primary residence.

Scenario 2: When you signed the agreement of purchase and sale, you intended to move into the property and use it as your primary residence.

Scenario 3: When you signed the agreement of purchase and sale, you intended to rent out your property.

Scenario 4: When you signed the agreement of purchase and sale, you intended to rent out your property.

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