Original Article by – Marg. Bruineman – for the Law Times – with Quote from Martin Rumack.
The provincial government warns that the practice of skirting taxes on the appreciation of property when the purchase and sale agreement is assigned to another buyer is on its radar.
Assignment agreements have often been used as a way to get out of a residential real estate deal or as a means to profit in heated markets.
But both governments and condominium developers — with which assignments are most commonly associated in Ontario — are increasingly aware of their use and have been clamping down on them.
“An assignment agreement is basically an agreement between two parties to say: ‘I’m going to sell you this agreement I entered into with someone else for a profit,’” explains Barrie, Ont. real estate lawyer Andrew Ain of Ain Whitehead LLP.
Assigning the sale of a property, he says, is usually associated with overheated residential markets. In the two years since the purchaser signed the deal, for instance, the value of the property jumped. So the purchaser may look to assign their deal to another buyer and reap the appreciation.
The practice of assigning sales agreements to another purchaser came to the fore during Vancouver’s extremely hot market when residential property values increased almost daily, bringing national attention to “shadow flipping” or “paper flipping.”
A purchaser, often a real estate agent, would agree to purchase a house for a fixed price. In the period after signing the agreement of purchase and sale but before the closing date, the purchaser would find another buyer willing to pay more for the house and would then assign their agreement to the new purchaser, all without the knowledge of the original seller.
Because that first purchaser assigning the property was never registered on title, they were able to pocket the difference between what they agreed to pay the seller and what they sold it for to the next buyer without paying any taxes.
British Columbia then introduced legislation that essentially closed that loophole.
Earlier this year, the Ontario government highlighted assignments as an area where it might focus some attention. In the Ontario Fair Housing Plan’s actions to protect homebuyers, the province indicated it would “tackle practices that may be contributing to tax avoidance and excessive speculation” in the assigning of home sales.
“Ontario is working with the federal government to explore more comprehensive tax-reporting requirements,” says Scott Blodgett, spokesman for the province’s Ministry of Finance in an email.
“This would better enable the Ontario Ministry of Finance and the Canada Revenue Agency to ensure that the correct federal and provincial taxes, including income and sales taxes, are paid on purchases and sales of real estate in Ontario.”
Much of the use of assignments in Ontario has been with new condominiums, says Toronto real estate lawyer Martin Rumack.
“I think part of that is because of the timeline,” says Rumack.
A condominium complex often takes a few years to plan and build. A buyer often agrees to purchase a unit based on the plans and designs of a project, but it may be two to five years before they expect to take occupancy of a unit.
In that time, says Rumack, a lot could happen. The family situation could undergo change, such as marriage, divorce or a job transfer.
Recent developments include the inability to secure financing.
“The assignments I’ve seen in Ontario are very limited,” says Andrew Fortis, who leads Hummingbird Lawyers LLP’s real estate and corporate/commercial practices. “In the context in which I did see it, it was the addition of another family member to go on title for the purposes of financing.”
People who agreed to purchase homes earlier in the year are now subject to new financing rules as well as higher interest rates. Some have discovered they are no longer able to access the same amount of money through a mortgage or loan for which they thought they would qualify.
If their offer was firm with no conditions, they might be stuck and consider assigning their agreement to purchase to someone else.
Fortis says one solution was to add a family member to the title to secure the financing.
He recently had a young couple buying a house who couldn’t secure the mortgage on their own, so they added a parent through an assignment contract to the title. That allowed them to get the financing, he says.
“It would be partial assignment of your rights under the contract to include your parents,” explains Fortis. “You would assign part of your interest within that contract to add your parents on to title.”
The more common historical use of assignments involves new builds.
By assigning their agreement to purchase prior to occupancy, the investor sometimes makes a tidy profit, often without paying taxes.
Rumack recalls first seeing assignments during previous hot real estate markets.
“It’s been out there for a long time,” he says, as a result of price increases “when there’s a strong market and prices are shooting up.”
Often, he adds, those assigning the sales didn’t declare their gains because the assignments aren’t registered on title. But, more recently, real estate sales have become the subject of some Canada Revenue Agency audits, he says.
The lawyers also warn their clients who are considering assigning their agreement that there is a risk. The original buyer can remain liable if the new buyer doesn’t fulfil their obligations.
Ain says the profit earned in an assignment should be subject to harmonized sales tax, although capital gains and land transfer taxes might be a different issue.
“You never really owned it, so that’s the skirting. It gets around land transfer tax, it gets around capital gains, but, in theory, it should be subject to HST,” he says.
It could theoretically be subject to all three, he adds.
Certainly, condo developers have been cognizant of the use of assignments and try to control them or at least try to get a cut of the profits.
Ain, who often acts for land developers and builders, ensures that developers are kept in the loop by including a reference to assignments in the sales agreement.
“[In] almost all the agreements of purchase and sale that we prepare and we act for, condo developers have a strict prohibition against assignments,” he says. “It’s very common. And many developers will negotiate a fee to allow for assignments.
“Others will say absolutely no. Some of the builders I act for in general say no because they don’t want people competing against other products they’re selling. If people are busy buying agreements they’ve already sold, they’re not busy buying other products out there.”
Every developer is different, as is every situation.
Some, Ain adds, may allow assignments if the project is close to being sold out. But they’ll want a cut of the profits. They might demand a fee, say $7,500, if the sale is assigned to another purchaser.
“The question is how many are done without consent,” says Ain
See original article here – http://www.lawtimesnews.com/author/marg-bruineman/assignment-agreements-under-scrutiny-governments-and-developers-clamping-down-14848/