27 June 2000 GST/HST Interpretation 25236 - Assignment of Agreement to Purchase a Condominium

I refer to the your memorandum of XXXXX and various communications concerning an actual situation where a prospective purchaser of a residential condominium assigned his rights, benefits and obligations under a purchase agreement to another buyer. Thank you for providing to us copies of all the agreements together with additional information obtained from your conversations with the actual purchaser's lawyer.

Our understanding of the situation is as follows:

Original Purchase Agreement (PA)

1. Pursuant to an agreement dated XXXXX (A) agreed to purchase unit XXXXX condominium development in XXXXX (Condominium) from XXXXX (Vendor) for a purchase price of $XXXXX.

XXXXX ("The Registered Owner") held the subject condominium in trust for the Vendor.

3. Pursuant to XXXXX of the PA, A paid the Vendor a sum of $XXXXX prior to the completion of the Condominium consisting of two deposits of $XXXXX (10% of the purchase price) each and another deposit of $XXXXX (5% of the purchase price). The balance of the purchase price would have been payable at the time of completion and transfer of title of the Condominium.

4. XXXXX of the PA states that "The Purchaser" may assign his rights, benefits and obligations under the Agreement to a person other than a Related Individual (the "Third Party") provided that:

a) an assignment fee equal to one-half of one percent (0.5%) of the Purchase Price plus GST is paid by the Purchaser to the Vendor; and

b) the Third Party and the Purchaser enter into an assignment agreement and concept agreement, the forms of which are to be obtained from the Vendor, wherein:

i) the Third Party agrees to assume all the obligations of the Purchaser under the Agreement (PA); and

ii) the Deposit is assigned to and deemed to belong to the Third Party as if the Deposit was paid by the Third Party to the Vendor under this Offer and the Agreement,

and a copy of each agreement is delivered to the Vendor.

5. XXXXX of the PA (Liability of the Purchaser) indicates that "In the event of an assignment in accordance with either XXXXX, the Purchaser will remain fully liable under the Agreement and such assignment will not in any way relieve the Purchaser of its obligations under the Agreement."

Assignment Agreement (AA)

6. On XXXXX, A assigned his "rights, title, interest, obligations and benefits under the PA" to XXXXX (B)[.]

7. XXXXX of the AA indicates that the Assignor was assigning the following to the Assignee:

a) the right to purchase the Condominium;

b) the exclusive rights to use a parking stall and a locker; and

c) the aggregate deposit of $XXXXX.

8. B agreed to pay to A the sum of $XXXXX in consideration of the assignment. XXXXX of the AA states that "The assignment payment will be forfeited to the Assignor in the event that the Assignee fails to complete the purchase of the XXXXX in accordance with the Purchase Agreement."

9. XXXXX of the AA indicates that "The Assignor hereby irrevocably authorizes and directs the Vendor (XXXXX) or its agents to transfer the Deposit ($XXXXX) to the account of the Assignee so that from and as of the date hereof, the Vendor or its agents shall hold the Deposit for the account of the Assignee as if the Assignee had made the Deposit."

10. The Vendor consented to the AA on the day of the assignment.

11. On XXXXX, the Vendor and B entered into a Modification Agreement (MA) whereby a storage locker at the underground parking level was added to the Condominium, increasing the purchase price for the Condominium from $XXXXX.

12. XXXXX of the AA indicates that "The Assignor agrees to pay the Assignment fee to the Vendor." This is one of the requirements for validity of the AA. It is in XXXXX of the PA where the assignment fee is set at 0.5% of the Purchase Price under the PA.

"Purchase Price" and "Market Value"

XXXXX XXXXX XXXXX = XXXXX.

14. In the freehold transfer document, registered at the Land Title Office of XXXXX / XXXXX, XXXXX, the "market value" of the condominium is recorded at $XXXXX, while the "consideration" is recorded at $XXXXX.

15. B's lawyer claims that his client is liable for the GST on the amount that B is liable to pay, (i.e. $XXXXX - $XXXXX = $XXXXX). Accordingly, he also claims that the GST New Housing Rebate (GST NHR) that his client may claim should be based on the purchase price of $XXXXX (before GST).

Issues

1. What is the consideration for the supply of the condominium (from the Vendor to B) on which the GST would be calculated?

2. Would B be entitled to a GST NHR under section 254 of the Excise Tax Act (ETA)?

3. What is the application of the GST to the assignment of A's rights, benefits and obligations under the PA to B pursuant to the AA?

Response

Based on our understanding of the situation outlined above, our response is as follows:

1. The consideration, on which the GST would be calculated, for the supply of the Condominium from the Vendor to B is $XXXXX.

2. B will be entitled to a GST NHR if all the conditions of section 254 of the ETA are met.

3. The assignment of A's rights, benefits and obligations under the PA to B is a supply of an interest in a residential complex, which would qualify for exemption from GST under section 2 of Part I of Schedule V to the ETA provided A is not considered to be a builder for purposes of the definition of "builder" in subsection 123(1) of the Act.

Explanation

Consideration For The Supply Of The Condominium From The Vendor To B

The $XXXXX was not an amount paid or forfeited "as a consequence of the breach, modification or termination of an agreement for the making of a taxable supply" by A to the Vendor "otherwise than as consideration for the supply". The amount remains a deposit under section 6 of AA, for the account of the new Purchaser, B. Accordingly, section 182 of the ETA does not apply to the Vendor's transfer of this amount to the account of B under the conditions set in the AA. The AA was entered into under the framework of specific provisions XXXXX in the original PA, and A had several choices at his disposal when he decided not to go forward with buying a condominium. He could have forfeited the deposit to the Vendor, or he could find another buyer willing to take his place to try to recover part of his deposit. A chose the latter and recovered $XXXXX ($XXXXX ^[ix]iv 4) from his deposit of $XXXXX.

A's assignment of all his rights and liabilities under the PA for $XXXXX (the "assignment payment") to B is considered a supply of an interest in a residential complex for consideration equal to $XXXXX. B assumed all the rights, benefits and responsibilities of the Purchaser under the PA. Accordingly, XXXXX is the recipient of the supply of the condominium by the Vendor, and "consideration" "includes any amount that is payable for a supply by operation of law:" ^[x]v XXXXX The amount payable under the PA in conjunction with the MA of XXXXX is $XXXXX as indicated in XXXXX of the MA.

B's Eligibility To Claim A GST NHR

Based on our understanding of the situation, B satisfies the condition found in paragraph 254(2)(c) of the ETA, namely, that the consideration for the Condominium is less than $450,000. B will be entitled to claim a GST NHR if all other conditions under section 254 of the ETA are met.

Application of the GST to the Assignment from A to B

The supply by A to B of an interest in the condominium by way of assignment is a supply of an interest in a residential complex. The supply may be exempt from GST pursuant to section 2 of Part I of Schedule V to the ETA, as a sale of a residential complex, provided A is not a builder as defined in subsection 123(1) of the ETA. However, if A entered into the PA with the primary intention of reselling the Condominium (or an interest thereof) in the course of a business or an adventure or concern in the nature of trade ^[xi]vi XXXXX, A would be considered a builder under paragraph (c) of the definition of "builder" in subsection 123(1) of the Act. The result would be that the supply from A to B would be outside the scope of section 2 of Part I of Schedule V to the ETA.

Thank you for bringing this case to our attention. If you have any questions on the foregoing, please contact me at (613) 952-9587 or via E-mail.

Bao Tran
Real Property Unit
Financial Institutions and Real Property Division
Excise GST/HST Rulings Directorate