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With Ontario property prices on the rise and a shortage of homes, more people are wondering how they can buy a new home for less. Condominiums seem like the perfect solution.
Builders and condominium corporations are taking advantage of the demand for housing by building condominiums. Condos are space-saving, relatively quick to build, and tens to hundreds of condos can be built in a single building. They seem like the perfect solution for Ontario’s housing demand.
The steep competition for property paired with the promise of an increasing market value has caused many people to purchase a condo before construction is completed. But what many people don’t know is that you cannot buy a condo before construction is finished. An Agreement of Sale and Purchase (APS) is one of the only contracts that can be signed before final closing can occur.
If someone’s financial situation changes or the closing costs rise, buyers may need to sell their rights to a property purchase or sale. This transaction is done through an assignment agreement.
An assignment agreement is a complicated transaction that can cost you a great deal of money if it is not handled correctly.
An Assignment Is A Legal Assignment of Rights
An assignment agreement (also called an assignment clause or a free assignment) is a legal contract where one party to an existing contract transfers the rights of real estate property to another person or party. The assignment clause is a common law practice for people agreeing to take over the purchase of pre-construction condos.
The assignment contract can confuse many people because they believe they are buying the property. In reality, the assignor can only assign the rights to the purchase or sale of the property. As a result, the other party will have the right to either buy the property or sell it to a new buyer.
How Does The Contract Work?
- Assignor: They assign the rights of the contract they have to another party. They were the original contract holders.
- Assignee: The one party or person that is receiving the contractual rights over the property from the assignor.
- Builder: The original seller of the property.
Someone interested in taking over the purchase of a property before the construction has finished will enter into an assignment agreement with the original purchaser. The agreement sale will transfer rights and obligations to the Agreement of Purchase and Sale (APS) to the assignees (the buyers).
It’s important to note that the assignor does not have the immediate right to assign the ASP contract to another party. The builder will need to provide consent to transfer the APS to the other party. Once the builder gives their consent, the assignment contract can legally be put in place.
Assignments may sound straightforward, but they are not. Assignment contracts have their own rights and obligations—including HST.
Assignment Agreement & Ontario Taxation
In Ontario, HST is payable for all financial transactions, including assignments. Both parties—the assignor and the assignee—can expect to pay a tax for the assignment contract. The assignor pays tax on the income made from the contract sale. The assignee pays a 13% sales tax on top of the patent rights to the Agreement of Purchase and Sale.
In addition to the APS assignment contract, the assignee will also need to pay tax on the purchase price of their property.
Assignments & The New Housing Rebate
Just like any other piece of real estate, newly-built properties in Ontario are subject to HST. Buyers can expect to pay an 8% provincial tax and a 5% federal tax on any amount greater than the original purchase price. The additional tax on top of the closing costs can put a financial strain on new buyers.
The GST/HST New Housing Rebate is a rebate designed to make purchasing a home more affordable.
Buyers can receive up to $24,000 from the GST/HST New Residential Housing Rebate if they qualify. Usually, it is relatively easy to qualify as long as you meet the standard requirements:
- You are in good standing with the law and Canada Revenue Agency (CRA)
- The residence should be your personal property. In other words, you or your family member must be the original tenant of your residence at the same time of application.
- You file your application form within two years of closing.
- You purchased a pre-construction or newly built home from a builder.
Assignments & property Transfers can disrupt your rebate application
In most construction agreements, the assignor will qualify for the GST/HST New Housing Rebate and the assignment is usually passed on to the assignee. This rebate may be included in the purchase price if they expect to use the real estate property as their primary residence. If it is not, the assignee will need to apply to the CRA to claim the rebate.
Once a sale assignment contract is signed, the assignor loses their eligibility for the rebate because they are no longer taking on the title of the home upon closing.
Securing Your Rebate With An Assignment Contract
You may still be able to secure your rebate despite your assignment contract.
Some builders may not include the rebate in their contract, meaning your assignment agreement does not influence your application. If this is the case, assignees should apply directly to the Canada Revenue Agency. We recommend that you speak to a rebate specialist who can help you apply. They have the knowledge and experience to help you receive your rebate.
If the builder was supposed to apply for the rebate on behalf of the assignee, you would arrange with the builder to have the rebate amount credited to you. In this situation, contracts should be drawn up to prove that you meet the obligations and intend to abide by the law.
Legal fees may dissuade you from seeking legal advice, but it is a worthwhile investment. A contract will protect both you and your builder, ensuring that you are not liable if the other disobeys the law. We recommend seeking out the help of a law firm to draw up a contract.
Get Your Money Back Despite Your Assignment Contract
Your assignment contract should not stop you from receiving your New Housing Rebate.
Sproule + Associates’ tax experts can help people with assignments apply for their rebates. Our knowledge, dedication and years of experience can help you get the tax rebate you deserve. Contact us today to learn about how we can help you. We are also happy to answer any questions you may have about the New Housing Rebate application.
