20 January 2023 External T.I. 2014-0547171E5 - Assignment of pre-sale agreement of a condo unit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Whether a non-resident's assignment of a pre-sale agreement to purchase a condo in Ontario is subject to the section 116 regime. 2. Whether the property assigned is "treaty protected property".

Position: 1. Yes. 2. No.

Reasons: The two questions are interrelated. The property disposed of is not a treaty-protected property and therefore the disposition of which is subject to the section 116 regime.

XXXXXXXXXX									Grace Tu, CPA CA
										2014-054717

January 20, 2023

Dear XXXXXXXXXX:

Re: Assignment of pre-sale agreement of a condo unit

We are writing in response to your email wherein you requested our comments regarding the hypothetical situation described below. We apologize for the length of time it has taken for us to respond.

Unless specified otherwise, all statutory references herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”).

In your correspondence, you described the following hypothetical situation:

• X, a United States resident individual who is not a resident of Canada, enters into an Agreement of Purchase and Sale (pre-sale agreement) to buy a condominium in Ontario that is still to be built at the time of entering into the contract. Purchase price for the condominium is $300,000 and X pays the developer $30,000, which is 10 percent of the purchase price, upon signing of the contract. The pre-sale agreement is assignable with the developer’s consent.
• Two years later, before the condominium is ready for occupancy and before the closing of the pre-sale agreement, X sells his rights under the pre-sale agreement to Y, a Canadian resident individual, for $50,000. The price of $50,000 reflects that the completed condominium value has gone up from $300,000 to $320,000. The developer consents to the assignment and the contractual relationship under the pre-sale agreement becomes that between Y and the developer.

You asked the following two questions:

1. In the absence of a section 116 certificate, does Y have to withhold 25% of the $50,000 purchase price?

2. Is the property being sold “treaty-protected property”?

Our comments

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

Where a non-resident person disposes of or proposes to dispose of taxable Canadian property (TCP) as defined in subsection 248(1), the section 116 regime becomes relevant. For the purposes of the Act, a “disposition” includes any transaction or event entitling a taxpayer to proceeds of disposition of the property (endnote 1) . In the hypothetical situation described, we understand that X is entitled to the proceeds of $50,000 from disposing of his rights under the pre-sale agreement. Thus, there is a disposition from X to Y.

X’s rights under the pre-sale agreement would be TCP if they are an “option in respect of, or an interest in” real property situated in Canada, as described in paragraph (f) of the TCP definition. The determination of whether such rights are an “option in respect of, or an interest in” the condominium will depend on the actual terms of the pre-sale agreement and the governing provincial law. For the purpose of this interpretation, we have assumed that such rights under the pre-sale agreement give X an equity interest in real property situated in Canada and therefore constitute TCP. If it were an option in respect of real property, the result would be substantially the same. The fact that the condominium is still to be built at the time when the pre-sale agreement is entered into should not prevent the definition from applying given the specific language “whether or not the property exists” in paragraph (f) of the TCP definition. Therefore, the section 116 regime is relevant unless it can be established that X’s rights under the pre-sale agreement are “treaty-protected property”.

Whether X’s rights under the pre-sale agreement are “treaty-protected property” depends on whether X’s capital gain from the disposition of such rights is exempted from Part I tax as a result of application of provisions under the Canada-United States Tax Convention (endnote 2) (Treaty).

In this regard, Article XIII(1) of the Treaty specifically states that gains derived by a resident of the United States from the alienation of real property situated in Canada may be taxed in Canada. Thus, if X’s rights under the pre-sale agreement are considered real property situated in Canada under Article XIII(1), the gain from the disposition of such rights is not exempted from Part I tax and therefore such rights would not be treaty-protected property.

For the purpose of the Treaty, the term “real property” is defined under Article VI(2) to have the meaning it has under the taxation laws of the Contracting State in which the property in question is situated (in this case, Canada) and it includes any option or similar right in respect of real property situated in the State.

As noted above, we have assumed that X’s rights under the pre-sale agreement give X an equity interest in real property situated in Canada. As such, X’s rights under the pre-sale agreement are real property for the purposes of the Treaty under Article VI(2) and “real property situated in the other Contracting State” under Article XIII(3) which includes real property referred to in Article VI. It follows that such rights may be taxable in Canada under Article XIII(1) and not only in the United States under Article XIII(4) and that Y must withhold 25% of the $50,000 purchase price in the absence of a section 116 certificate.

We trust our comments will be of assistance.

Yours truly,

Nicolas Bilodeau
For Division Director
International Division
Income Tax Rulings Directorate

ENDNOTES

1 Paragraph (a) of the definition of “disposition” under subsection 248(1)

2 Convention Between Canada and The United States of America With Respect to Taxes on Income and on Capital Signed on September 26, 1980.