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Beware HST issues in new condo flips

Condo flippers should be prepared for HST issues when they assign purchase contracts for newly constructed units to a third party, says Toronto real estate lawyer Daniel Bernstein.

Bernstein, a lawyer with Weltman Bernstein, tells AdvocateDaily.com that Toronto’s red-hot housing market means purchasers of brand new condos could see a steep rise in the value of their property between the time they agree to buy it and when the deal actually closes.

But he says those who are tempted to take advantage by assigning a condo to a new buyer may need a lawyer to guide them through the HST minefield they are walking into.

There are three main issues that come up with a condo flip, resulting from the increased vigilance of the Canada Revenue Agency (CRA) over the property market, Bernstein explains.

“The CRA is really cracking down,” he says.  

The first arises out of the fact that HST is usually included in the purchase price of a new condo. The tax is typically charged at a lower rate because builders assume that the buyer qualifies for a rebate due on new residential homes to be occupied by the owner or a family member.

However, when the purchaser assigns to a new buyer, Bernstein says builders are usually unwilling to provide the HST rebate directly to the third party, even if they qualify. Instead, builders tend to provide the money to the CRA, leaving the new buyer to claim the rebate themselves after closing.  

While the money can be recovered later, Bernstein says the rebate application process can be time-consuming and onerous.   

“It also adds an extra cash expense that you have to come up with on closing, which some buyers aren’t anticipating,” he says.

Bernstein says some builders are even skittish about providing the rebate to original buyers because they could be placing themselves a risk if it turns out they didn’t qualify.  

“The CRA is really going after buyers who say they are going to live in the property, but then actually rent it out or flip it,” he says. “If a builder sells a unit and absorbs the rebate for the benefit of the buyer, and it turns out they don’t, in fact, live in the unit, then CRA can chase the builders for payment of the equivalent of the rebate.”

The second issue for assignors looking to capitalize on a flip ahead of closing is that they have to pay HST on the higher assignment price charged to the new buyer.

“Many are unaware of that,” Bernstein says. “Any profit will also be subject to income tax.”

Finally, Bernstein says an additional complication arises when the assignor of the purchase agreement is a non-resident of Canada. In that case, he says tax rules require the new buyer to withhold whatever HST the assignor owes on the transaction.

“Otherwise, the CRA is going to come after the assignee to get their money,” he says.

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