Canadian real estate investors should pay close attention to a new rule in the budget. The Government of Canada (GoC) 2022 budget proposes to apply a sales tax to assignments for new homes. Hitting assignments with a sales tax will make reseller units much less attractive. If implemented, this can drastically change investor demand for pre-construction housing.
Assignments and Pre-Construction Home Buying
Between buying a pre-construction home and when it’s delivered, a buyer doesn’t have a home. They have an Agreement of Purchase and Sale, a contract agreeing to the sale. If the buyer changes their mind before it’s completed, they can have it assigned. An assignment is a contract allowing a buyer (assignee) to assume the rights and obligations of the seller (assignor).
An assignment was originally offered as a handy feature for home buyers. When buying a home you won’t possess for years, you might have reservations. What if you move to a new city? What if you lose your job, or have a change of circumstance? Assignments allow these buyers to dispose of the property in that case, they just have to find a buyer. There are logical reasons for assignments to exist — they’re a tool for prospective home buyers.
The Canadian Real Estate Bubble Turned Assignments Into A Speculation Tool
In high-flying real estate markets, the tool is ideal for real estate speculators. Since home prices are rising so fast, the value of the unbuilt home can soar while waiting. The unique deposit structure to help buyers also doubles as speculator leverage. A deposit of 20% is needed, but not all at once. A common deposit structure looks like this:
- $5,000 with the offer
- 5% of the purchase price minus deposit with the offer within 30 days
- 5% within 60 to 90 days
- 5% within 90 180 days
- 5% at occupancy when it transfers
In bubbly markets like, um.. all of Canada, speculators have taken advantage of it. Unlike an existing home buyer, you don’t need to qualify for a mortgage first — just make payments on time. Crafty speculators often put down a minimal amount and try to sell for a mark up ASAP. The faster a market rises, the less you need to put down.
Assignments Are Often Sold Overseas To Control Liquidity and Price of Projects
The system is also often exploited to manage liquidity by selling projects overseas. It’s hard to sell a lot of expensive homes, all at the same time. If a buyer sees a discount though, they might be upset and it can kill domestic demand. The solution is to sell “excess” inventory in a place they won’t see it, such as overseas.
Overseas buyers receive a discount and are then expected to sell it later. Sometimes the process is done entirely by one or two specialists, acting as a bond-like tool. They get a discount on the pre-sale, demand is restricted, and they can sell it later for the full price (or more). It’s the perfect combination for controlled liquidity, and raising prices. The price mechanic is known as massification, and we’ve talked about it in more detail before.
An overseas Canadian pre-construction housing seller adverting units priced lower than Canadians would pay. Source: Better Dwelling.
Foreign buyer taxes should solve that, right? Not exactly. Remember, the seller is using an assignment because they don’t own a home — they have an agreement for one. A tax on non-residents doesn’t apply until the project is complete and registered as an address. Sad trombone.
Budget 2022 Wants A Sales Tax To Reduce The Chance of Profit For Profitability
Canada’s 2022 budget proposes hitting all assignments with a sales tax (GST/HST). The existing system should hit assignment sellers, since it’s sold as a good. Generous exemptions allow many to claim it was personal use, they just changed their mind… a few times a year, in some cases. The new rule would apply to all assignments, making their unit less attractive. An assignment with a sales tax would become more expensive than market housing, or the assignor would have to eat the cost.
The sales tax is in addition to those already paid on the profit of assignment sales, taxed as income. An assignment sales tax isn’t just on profits, though, but the unit’s price. Having to eat the cost of a sales tax would amplify losses in a downturn.
A low or negative price growth environment is already precarious for home buyers. In some cases, the property may be appraised lower than thought, threatening financing. This occurred in Toronto in 2017, leaving buyers to come up with more cash or risk default. If a sales tax was introduced as well, assignment buyers would have the additional risk of the sales tax too. Caveat Emptor.
Canadian money supply charts on the Bank of Canada’s website:
https://www.bankofcanada.ca/rates/indicators/key-variables/monetary-aggregates/
Operative phrase: “PROPOSES to apply a sales tax to assignments for new homes” I’ll believe it when I see it. Until then, Canada’s Real Estate Association (CREA) in Ottawa will whine like a shot dog. It’s not uncommon for Realtors to look the other way when buyers present unknown sources of money – aka Willful Blindness.
Proposes because a budget can be voted down in confidence. The CPC said they’ll vote against it but the NDP said they would support it, so it’s likely to go through. The cost/revenue from these proposals are a part of the budget.
Dear god don’t let the government read this.
If they find out their cash-grab tax scheme inadvertently lowers home prices they might pull it back.
The government should not be allowing ANY profits on house flipping. In other words, a 100% tax unless people can prove they can’t close it because of moving far away , death or otherwise uncontrollable circumstances.
Foreign buyers , as stated in this article, have been doing this year’s in effect jacking up prices artificially.
Profits on flipping should be zero.
So now I can buy a condo under a corporation and pay less on my lift/profit.
This budget and all the housing plan is a joke.
Let’s dissect this.
Foreign buyer ban. Most likely doesn’t apply to presales. Coz anyone can buy a presale condo which doesn’t get registered with land title office at the time of purchase. It gets registered at the time of completion. BIG LOOPHOLE. If govt says they don’t know about this, it would be a terrible excuse coz they know how completions work with real estate.
2nd. First time buyer tax saving plan.
What a joke…! You are only allowing first time buyers to save upto $40,000? Do let’s say this is 5%.
5% of $500,000 = $25,000
10% of 150,000 = $15,000.
Total is $650,000.
Average townhomes sell for $850,000
Average condos 2 beds are at $600,000.
By the time a first time buyer saves $40,000 these prices will even climb by 3% per year minimum.
My point is a family who has two kids and grandparents living together, you want them to live in a two bedroom condo? Coz that’s all they can afford?
Why not stop charging first time buyers no PTT and GST?
Make flat 5% down with no cmhc fee.?
3. Ban to foreign buyers. But only for two years. What a joke..!
4. Housing tax credit from 5k to 10k. This savings is a family’s grocery bill.
5. Flipping tax. Sounds very scary. But guys this is much easier to avoid by opening a corporation and paying 9% to 11% tax on profit.
6. 100,000 new units coming on the market by govt. So now govt is getting into development. Do you think govt wants housing market to go down? I don’t think so.
This is another bandage job by the govt. no real solution to tame our housing problems.
Builders should not be allowed to take offers from corporations. All sales should be transparent.
The true buyer must be shown. It must include a person or persons name and they must be able to qualify. If the persons are non residents the sale cannot go through.
This will take some work but it can be done.
As I mentioned previously, there should be no profits allowed on flipping.
I agree with your assessment that the policies are a joke and will have next to no effect on house prices. I don’t agree with your solutions though. Government should be even more aggressive and ban foreign buyers for a decade at a minimum. Ban corporate ownership of residential real estate. Limit ownership of real estate to 2 properties max. Tax equity take out from investment properties or tax unrealized capital gains from investment properties. You need to scare he crap out of speculators to get them out of this market or else they will just continue to shrug these policy changes off. Also need tighter rent controls. No one is talking enough about the rental crisis which is causing homelessness.
Re “The sales tax is in addition to those already paid on the profit of assignment sales, taxed as income. An assignment sales tax isn’t just on profits, though, but the unit’s price. Having to eat the cost of a sales tax would amplify losses in a downturn.”
I think what more likely to be the correct interpretation on how GST/HST would be applied on assignment sales, would be the tax will be applied on the “assignment amount”, (not the unit’s price) which includes the initial deposit paid + the lift (ie, the profit, if any). Some professional info on this topic here: https://www.pwc.com/ca/en/services/tax/publications/tax-insights/gst-hst-issues-related-assignment-agreements-condominiums-2021.html