Assigning Property and the Income Tax Implications
Assignment is when you purchase a pre-construction home or property, and sell the property before it is built and before you gain title to it. In other words, you are assigning your purchased rights to a home to another person.
Property Assignment and the Income Tax Implications
When you assign a property, you typically earn a profit from the difference in the amount that you originally purchased the property for and the amount that you sold your rights to the property for. This profit needs to be reported to the Canada Revenue Agency (CRA). This is done by including the profit as income for the year in which the assignment occurred.
Property Assignment – Income or Capital Gains?
Most people assume that the income earned from property assignment should be reported as capital gains and therefore only 50% of the profit is taxable. However, there are circumstances under which the CRA considers the profits as business income and therefore 100% of the profit is taxable.
It is the intent of the buyer, and not the nature of the property the determines whether the property was capital or inventory. If the CRA concludes that the property is capital, then its assignment (or disposition) would result in a capital gain. If the CRA concludes that the property is inventory, then the disposition of that inventory would result in business income.
The intent of the buyer is the key factor because if the CRA determines that the intention of the taxpayer at the time of purchase was to resell the property for a profit (or “flip it”), then they will classify the transaction as a business transaction and the profit as business income.
Property Assignment – What Factors does the CRA Consider?
There is no specific provision in the Income Tax Act that outlines the circumstances under which the proceeds from a sale of property must be reported as either business income or capital gain.
However, a review of court decisions shows that the courts have historically focused on several key factors in determining how to classify sales of property.
These are some of the factors that the courts have looked at:
- Individuals’ stated or deduced intention with respect to the property at the time of purchase and the feasibility of those intentions;
- Extent to which this intention was actively carried out by the seller;
- Geographical location and zoning restrictions of the property;
- Nature of the business/profession that the seller is involved in;
- The extent to which borrowed money was used to finance the real estate acquisition, including the terms of the financing;
- The length of time the property was held by the seller;
- Whether or not there were other individuals who shared an interest in the property;
- The factors involved in the sale of the property; and
- Evidence that the individual and/or their associates have previously dealt with real estate.
Taken together, these factors are used by the courts to determine whether the intention at the time of purchase was to resell the property for a profit.
Property Assignment and Other Tax Implications
Property assignment can also result in GST/HST implications. For more information on those implications, please review this article.
The CRA has been actively pursuing and investigating real estate transactions due to the fact that this is a significant area of non-compliance.
If you have recently assigned a property, or have been assessed for the assignment or sale of a home/property in the course of a business, contact our firm for a free consultation. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.