Assignment Sales in Canada: The Tax, Legal, and Financing Risks Nobody Warns You About

Assignment sales have exploded in Canada's condo markets, but the CRA, lenders, and lawyers all treat them differently — here's what to know before you buy or sell.

What is an assignment sale?

An assignment sale occurs when a buyer of a pre-construction condo sells their purchase contract to another buyer before the building is completed. This process allows the original buyer (the assignor) to transfer their rights and obligations under the agreement of purchase and sale to the new buyer (the assignee). Assignment sales have become increasingly popular in Canada's hot real estate markets, particularly in cities like Toronto and Vancouver.

Why do people use assignment sales?

There are several reasons why buyers might choose to engage in an assignment sale:

• The original buyer may need to relocate or face financial difficulties.
• The buyer may have purchased the pre-construction unit as an investment and wants to sell before completion for a profit.
• The buyer may no longer want the property due to changes in personal circumstances, such as family size or job location.

Tax implications of assignment sales

When it comes to CRA assignment tax, the Canada Revenue Agency (CRA) considers the profit from an assignment sale as business income, not capital gains. This means the profit is fully taxable and subject to self-employment taxes.

Legal considerations for assignment sales

The legal aspects of assignment mortgage Canada can be complex. Here are some key points to consider:

• The original purchase agreement must allow for assignments. Some developers prohibit or restrict assignments.
• The assignor is typically responsible for any outstanding deposits and may need to pay a transfer fee to the developer.
• The assignee should conduct their own due diligence, including reviewing the purchase agreement and any relevant documents.

Financing risks in assignment sales

Lenders view assignment mortgage Canada differently than traditional mortgages. Here are some financing risks to be aware of:

• Lenders may require a larger down payment for assignment sales, sometimes up to 35% or more.
• The interest rate on the mortgage may be higher due to the perceived risk.
• Some lenders may not approve mortgages for assignment sales at all.

Here's a comparison of typical financing requirements for traditional purchases versus assignment sales:

Risks for buyers in assignment sales

Buyers involved in pre-construction assignment should be aware of several risks:

• The original buyer may have made changes to the purchase agreement that are not in the assignee's best interest.
• The developer may have financial difficulties or delays in construction, which could affect the completion date and the final product.
• The market conditions at the time of assignment may differ from those at the time of completion, potentially affecting the property's value.

Risks for sellers in assignment sales

Sellers involved in selling pre-construction contract should also consider the following risks:

• The assignee may default on the agreement, leaving the assignor responsible for the outstanding payments.
• The developer may have restrictions or penalties for assignments, which could result in additional costs for the assignor.
• The tax implications of the assignment sale can be significant, as discussed earlier.

Bottom Line: Key Takeaways

Assignment sales can be a viable option for both buyers and sellers in Canada's pre-construction condo market. However, it's crucial to understand the tax, legal, and financing risks involved.

1. Consult with a tax professional to understand your CRA assignment tax obligations.
2. Review the purchase agreement carefully and seek legal advice if necessary.
3. Be prepared for higher down payments and interest rates when applying for an assignment mortgage Canada.
4. Conduct thorough due diligence to protect your interests, whether you're buying or selling a pre-construction contract.

By being informed and proactive, you can navigate the complexities of assignment sales more confidently.