Assignment sale, what’s involve

An assignment sale occurs when a buyer (Buyer A) who bought a property, sold the original purchase of sale contract to a second buyer (Buyer B). Buyer A (Assignor) has assigned the original purchase of sale contract to Buyer B (assignee). The assigned price can be the original purchase price or for a profit or loss. The assignee would complete the sale with the original seller. An assignment clause is inserted in the agreement of purchase of sale, allowing the buyer to sell before taking possession. Assignments are legal. From the time an agreement to purchase is signed and possession is given, the buyer circumstances might change, such as job relocation, financing or family structure. Assignment sale offers a way out where the original buyer can salvage her deposit and the new buyer closes the deal.

An assignment sale can be for any purchase; resale or newly built. It is most common in new condo sale. With the high demand for housing, some newly built condos double in price before they are ready for occupancy and many speculators cashed in. Eric bought a pre-constructed condo for $300,000. During the time lag between purchase and completion, the price shot up to $500,000. Eric sold his contract to Jane for $500,000. He had paid the builder 20% or $60,000 as a down payment. Jane paid Eric $260,000 which represents Eric’s down payment and profit. Jane now owes the builder $240,000 and would complete the sale with the builder. Eric more than triple his deposit money and paying closing cost such as land transfer tax, since that is done only on completing the sale. Most builders allow assignments, subject to approval. There is an assignment fee imposed by the builder and the fee varies. 

An Assignment sale involves three parties, the seller, the assignor and the assignee. There are two transaction, first between the assignor and the assignee and later, between the assignee and the original seller. Jane invested $260,0000, a deposit of $60,000 and a profit of $200,000. If she had bought directly from the builder for $500,000, with 20% down, she would have invested only $100,000. Most builders do not allow buyers to advertise assignment sale properties. Buyer caught advertising, is in breach, and depends on the sale contract, the builder can cancel the transaction and forfeit the deposit. 

With strong demands for housing and endless bidding wars for resale properties, assignment sales are becoming increasingly popular, allowing the buyer to purchase a contract without the bidding frenzy. Assignments sale are beneficial to both parties. The seller can sell their unit before it is completed, and the new buyers can save by offering a lesser price compared to the builder’s current price. Another hidden advantage is that the lag time is shorter because most assignment sales occur just before occupancy. The new buyer may be able to choose some of their finishes if the unit is not completed by then. In the above example, if Jane cannot complete the sale with the builder, Eric is still obligated. If the market has declined, then Eric would be in trouble, risking his $60,000 and a potential lawsuit from the builder.  Assignment sale is a boon in a hot market but a boom in a declining one. It is risky business.

There are tax implications for the assignor and assignee. Jane in our story paid $200,000 for the assignment and a rebate of $60,000 for the deposit. However, if the sale is subject to HST, then it is calculated on the full amount, $260,000.00. Eric must declare his profit as business income in the year the assignment took place.

Some builders would credit the buyers on HST by adjusting the sale price. If the buyer (Assignor) assigns the property to another buyer (Assignee) and since it is a new property, CRA considers the assignor as a second builder. The Assignor owes CRA the HST rebate for the first purchase. Since the assignor is considered as the second builder, HST is due on the assignment sale as well. In such case, the HST is added to the assignment sale price and the assignee can apply for HST rebate directly through Revenue Canada. 

When planning an assignment sale, it is best to complete one project at a time. Some tries to maximize their profit by purchasing many properties. With all of the uncertainties and tax implications, we are on thin ice; be careful.