Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 206211
Dear [Client]:
Subject: GST/HST INTERPRETATION
Assignment of an agreement of purchase and sale of a condominium unit
Thank you for your fax of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to the assignment of a right to purchase a residential condominium unit. We apologize for the delay in the response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that your client (the Assignor), a non-resident of Canada, entered into an Agreement of Purchase and Sale (the APS) to purchase a pre-construction condominium unit (the Unit) for investment purposes in the form of a long-term residential rental. The Assignor purchased the condo approximately [#] years ago ([yyyy]).
The Office of the Superintendent of Financial Institutions published the final revised Guideline B-20: Residential Mortgage Underwriting Practices and Procedures (the Revised Guidelines) related to Federally-Regulated Financial Institutions (FRFIs), which became effective on January 1, 2018 (Footnote 1) . The Revised Guidelines had a negative impact on the Assignor’s ability to qualify for financing in Canada.
The Assignor decided to sell the Unit in [yyyy], and therefore, entered into an Assignment of Contract of purchase and sale (the Assignment Agreement) with respect to the Unit, which generated $[…] in proceeds for the Assignor.
A copy of the Assignment Agreement was not provided, therefore, there is no indication as to whether the assignment amount was inclusive of any GST/HST payable with respect to the Assignor’s assignment of their rights in the APS, nor which party would be responsible to remit any GST/HST payable.
INTERPRETATION REQUESTED
You would like to know:
1. The GST/HST implications of your client’s assignment of a right to purchase a residential condominium unit, and more specifically, if the proceeds of the assignment sale are taxable; and
2. Should the assignment sale be taxable, how the [GST/HST] is to be remitted to the CRA since the Assignor is not registered for GST/HST purposes.
You also enquired about whether the proceeds of the sale should be included as capital gains or business income, and we referred you to the Income Tax Rulings Directorate since it is a matter that relates to the Income Tax Act.
INTERPRETATION GIVEN
1. Should the stated primary purpose for the purchase of the interest in the Unit be sufficiently proven with supporting outward indicators, then the negative impact of the Revised Regulations may be considered an unforeseen event. Consequently, the Assignor would not be a builder under paragraph (d) of the definition of “builder” in subsection 123(1) and the Assignor’s assignment of their rights in the APS would be an exempt supply under Section 2 of Part I of Schedule V.
2. A non-registrant vendor must use Form GST62, Goods and Services Tax/Harmonized Sales Tax (GST/HST) Return, to remit the GST/HST payable on the sale of real property.
EXPLANATION
[EXPLANATION – INTERPRETATION #1]
1. GST/HST implications of an assignment of a right to purchase a residential condominium unit
Primary purpose for entering into the APS
The term “builder” is defined in subsection 123(1). Generally, paragraph (d) of the definition provides that a person is a builder of a residential complex (for example, a residential condominium unit) where the person acquires an interest in the complex
(i) in the case of a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium, or
(ii) in any case, before it has been occupied by an individual as a place of residence or lodging,
for the primary purpose of
(iii) making one or more supplies of the complex or parts thereof or interests therein by way of sale, or
(iv) making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons (other than to individuals who are acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade).
However, a person that meets the conditions in paragraph (d) of the definition of “builder” might nonetheless be excluded from the definition if the person meets the conditions set out in subparagraph (f)(iii). Generally, subparagraph (f)(iii) of the definition provides that a person is not a builder of a residential complex if the person is an individual who acquires the complex or interest in it, otherwise than in the course of a business or an adventure or concern in the nature of trade.
The matter of whether an individual is a builder of a residential complex under paragraph (d) of the definition of “builder” in subsection 123(1) depends, in part, on the primary purpose for which the individual acquires an interest in the complex. The primary purpose for which the individual acquires the interest in the complex is a question of fact that can only be judged by outward indicators (that is, the presence or absence of physical actions and/or evidence).
Generally, if an individual acquires an interest in a residential complex (that is, acquires the interest in the complex before it has been occupied by an individual as a place of residence or lodging) and sells the interest before or while the complex is under construction, then the action of selling the interest is viewed strongly as evidence that the individual acquired the interest in the complex for the primary purpose of selling the interest in the course of a business or an adventure or concern in the nature of trade. However, if the individual asserts that they acquired the interest in the complex for the primary purpose of (i) using the residential complex as a place of residence either for themselves or a relation or (ii) to lease the Unit to an individual as a place of residence, then outward indicators must support the asserted primary purpose in order for it to be proven true. Practically, this means that the onus is on the individual to prove two things.
First, the individual must prove that the primary purpose for which they assert that they acquired the interest in the residential complex was a firm, fixed and settled intention that was not likely to change. Put differently, the asserted primary purpose of (i) using the Unit as a place of residence for the individual or a relation or (ii) leasing the Unit to an individual as a place of residence, must have been more than a tentative, provisional or exploratory contemplation and must not have been conditional or dependent on future events occurring.
Second, the individual must prove that, objectively, they had reasonable prospects of bringing the primary purpose for which they assert that they acquired the interest in the residential complex to fruition or fulfillment within a reasonable time. Put differently, the individual must have the means and resources necessary to acquire the complex prior to the change in financial regulations.
Unforeseen event
There has been a tendency to focus on the unforeseen event without first having considered the individual’s primary purpose for acquiring the interest in the residential complex, as described above. However, it is only after first proving, with the support of outward indicators, that the Assignor’s primary purpose for acquiring the interest in the residential complex was either (i) to use the residential complex as a place of residence for the individual or a relation or (ii) to lease the residential complex to an individual as a place of residence, that the unforeseen event can be considered. The unforeseen event needs to have occurred between the time the individual acquired the interest in the residential complex and the time they entered into the assignment agreement.
The Assignor must present considerable and credible evidence surrounding the event and the event must meet three tests:
1. the event was not one that the individual could reasonably have anticipated before entering into the APS (that is, the event was unforeseeable);
2. the event was not one that the individual could reasonably control (that is, the event was uncontrollable); and
3. objectively, the event changed the individual’s firm, fixed and settled intention with respect to entering into the agreement of purchase and sale (that is, as a result of the event, the individual had no real choice but to abandon their original primary purpose and make the assignment sale).
As previously stated, the Revised Guidelines came into effect in January 2018. Under the Revised Guidelines, particularly Principle 3, FRFIs should adequately assess the borrower’s capacity to service his/her debt obligations on a timely basis, makes income verification for non-residents more rigorous. More specifically, it states “Borrowers relying on income from sources outside of Canada pose a particular challenge for income verification, and lenders should conduct thorough due diligence in this regard. Income that cannot be verified by reliable, well-documented sources should be treated cautiously when assessing the ability of a borrower to service debt obligations”. In this same principle, it states “In addition to income and debt service coverage, FRFIs should take into consideration, as appropriate, other factors that are relevant for assessing credit risk, such as the borrower’s assets and liabilities (net worth), other living expenses, recurring payment obligations, and alternate sources for loan repayment”. With respect to the borrowers assets, it further explains that “from an operational risk perspective, obtaining recourse to a borrower’s foreign assets, in the event of default, may be more challenging for FRFIs.”
The Revised Guidelines resulted in FRFIs having more stringent requirements for proof of foreign income as well as for the overall credit risk assessment for foreign borrowers, which in turn, makes it more difficult for foreign buyers to secure a Canadian mortgage.
Based on the very limited details provided, the Revised Guidelines may be an acceptable “unforeseen event” as it would pass the three tests stated above:
1. The changes to the Financial Regulations occurred between the time the Assignor entered into the APS and the time the Assignor entered into the Assignment Agreement.
2. The updated Financial Regulations were beyond the Assignor’s control.
3. The Assignor could no longer secure financing as a result of the event, therefore, the Assignor had no real choice, but to abandon their original primary purpose and make the assignment sale.
As previously explained, the Assignor would first need to provide proof/outward indicators of their stated purpose to rent the Unit to an individual as a place of residence before any unforeseen event could be considered. If the primary purpose is sufficiently supported, then the Assignor would need to provide more details to support the facts surrounding the unforeseen event, such as copies of the APS and the Assignment Agreement as well as a pre-approval for financing when the Assignor entered into the APS, prior to the implementation of the Revised Guidelines.
[EXPLANATION – INTERPRETATION #2]
2. [GST/HST] remittance for non-registrants
After careful consideration of the facts surrounding the sale and the information provided above, should it be determined that the assignment sale is a taxable sale of real property, then the [GST/HST] will need to be remitted to the CRA.
A non-registrant vendor must use Form GST62, Goods and Services Tax/Harmonized Sales Tax (GST/HST) Return, to remit the GST/HST payable on the sale of real property. However, in some cases, it is the purchaser who has to remit the tax directly to the CRA.
It is important to note that a non-resident of Canada who makes a taxable supply of real property by way of sale is not required to collect tax payable by the purchaser. It is the purchaser’s responsibility to remit the tax directly to the CRA. However, if the Assignor has already collected or withheld the [GST/HST], then they are required to remit the tax to the CRA.
For more information on who remits the tax for a taxable sale of real property and how to do so, please consult RC4022, General Information for GST/HST Registrants at: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4022.html
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 506-349-7596. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Nicole Collins
Real Property Unit 2
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
FOOTNOTES
1 Office of the Superintendent of Financial Institutions website: http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b20_dft_let.aspx, June 2019
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