assignment of contract tax implications

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Apr 28, 2019

Are Assignments of Contracts In PA Subject to Additional Transfer Tax

The simple answer is YES. The Pennsylvania Department of Revenue issued a Realty Transfer Tax Bulletin titled 2008-01 which was in accord with the Rule in BAEHR BROS , (61 PA.Code 91.170). The bulletin sets out several real estate transfer scenarios and describes the tax implications of each one. It can be found at www.revenue.pa.gov.

The pertinent information for Wholesellers is Assignment of Agreements of Sale are subject to double taxation. When a party assigns a Contract of Sale to a business entity prior to closing, the assignment and the Deed from the original owners are considered to be "two separate transactions" each subject to realty transfer tax. Prior to this amendment, only the actual Deed transfer was taxed. So currently, even though there be no consideration for the assignment, the double tax will be based on the property's actual monetary value

The example provided by the PA Department of Revenue follows:

S and B enter into a Contract for the sale of real estate for $1,000,000. B gets certain approvals and then assigns the Contract to C for $2,000,000 for a total purchase price to C of $3,000,000. C gets approvals and then assigns the Contract to D for $5,000,000. for a total purchase price of $6,000,000. In this scenario, S ultimately sells the property to D and only receives $1,000,000, and the Realty Transfer Tax was only assessed on that amount. Under the new amended rules, each assignment will be subject to Realty Transfer Tax, resulting in tax being imposed on (a) the $1,000,000 transfer from S to D, (b) the $3,000,000 transfer from B to C and (c ) the $6,000,000 assignment from C to D.

Here Are The Important Dates You Need To Know Regarding Recent Changes

Individuals : Federal & Quebec

Self-employed, trusts with a tax year end of dec 31, 2021, corporations, canadians with us tax filing.

Posted on 15 January 2024

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Contract for deed income tax implications, reporting & capital gains on property or home

Tax Laws for the Seller of a Contract for Deed:

1. can i deduct interest on a rent-to-own contract for deed when selling a home.

In cases where qualified buyers are scarce, selling a home through a contract for deed can make sense. Homeowners might sell homes using contracts for deed because they want regular income streams rather than lump sum payments. Selling a home using a contract for deed does come with certain tax implications for sellers. For example, contract for deed sellers usually lose any property tax deductions to their buyers.

2. Property Tax Deductions

Also known as land contracts, contracts for deed are installment sales pertaining to homes. A homeowner selling a home in a contract for deed retains ownership until the installment sale contract is fulfilled. However, the IRS gives the right to claim property tax credit to the buyer, not the home’s actual owner. In other words, if you sell your home through a contract for deed, you usually can’t deduct its property taxes.

3. Seller Tax Benefits & irs rules on land contracts

The IRS allows contract for deed home sellers to control how their capital gains is reported. Capital gains resulting from a contract for deed home sale can be reported over the years you receive principal payments from your buyer. Additionally, any interest income you receive from your contract for deed buyer can be declared as ordinary income. You report your contract for deed installment sale income annually to the IRS.

4. Contract for deed income tax implications, reporting & capital gains reporting requirements

Generally, contract for deed sellers use IRS Form 6252 to report installment sales in the year in which they take place. You also use Form 6252 during each year you receive income from your contract for deed. Attach Form 6252 to your Form 1040 and Schedule D, “Capital Gains and Losses.” First-year installment sales are reported on Form 6252 on lines 1 through 4, Parts I and II; and lines 1 through 4, Part II in later years.

5. A word if caution regarding deed contracts of property such as a home

Smart contract for deed sellers always craft thorough sale contracts covering buyer contract forfeiture circumstances. In contracts for deed purchases, buyers receive what’s called “equitable title rights” to their properties. In certain states, it can be difficult to get a defaulting contract for deed buyer out of a property if that buyer claims an equitable interest in it. Lastly, if you sell a mortgaged home through a contract for deed, the lender could foreclose if it finds out.

Click here to speak directly with a real estate attorney regaring income tax implications, contract for deed, and capital gains reporting on a property or home.

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Tax implications on assignment of a purchase contract

With the extreme financial uncertainty created by COVID-19, residential homebuilders and buyers are seeing an uptick with incomplete purchase contracts. Buyers are adding clauses that allow them to postpone closings or back out of them entirely. Others are assigning their purchase contracts to new buyers (informally known as "flipping the contract") regularly without careful examination of the tax implications.

To bring some clarity to the tax implications on the assignment of a purchase contract, we will discuss the key income tax, GST/HST, and CRA audit considerations for both contracting parties. Before we get started, let's review the role of the three parties involved in this type of transaction: the assignor, the assignee, and the builder.

Assignment of a purchase contract defined

At its core, an assignment of a purchase contract occurs when an original buyer of a new home, condominium unit, or a single purpose dwelling, allows someone else (i.e., an assignee) to take over the purchase contract. With permission from the builder, the assignee assumes the liability for purchasing that piece of property. Assigning a contract allows the original buyer (i.e., the assignor) to sell their interest in that property before taking possession of it and potentially making a profit.

Income tax implications for the assignor

With an assignment sale, the assignor must report any profit realized from an assignment sale in the tax year in which the right is assigned. The profit will either be treated as fully taxable business income, which is fully taxable, or income from a capital gain, only 50% of which is taxable.

Many taxpayers assume that any profit related to the sale of real estate will be regarded as income from capital gains. However, it is not the nature of the property that determines whether the profit is treated as business income or income from capital gains. Instead, it is the intention of the buyer at the time of the purchase of the property. If the buyer intends to resell it for a profit, the income realized on the sale of the property is business income. Capital gains treatment generally occurs where the acquired property was held for some time and used personally or to generate revenue.

The CRA generally considers that any profit on an assignment sale is business income because the entire transaction typically lasts for a short period and is undertaken with the intention to make a quick profit.

Furthermore, where taxpayers purchase a pre-construction property intending to live in it as a principal residence, the profit will not qualify for the principal residence exemption where there is an assignment sale. This is because the rights to the property would typically have been sold prior to closing. The property was not inhabited as a principal residence and therefore cannot qualify for the principal residence exemption. Thus, any profit would be taxable and treated as business income.

Tax implications for assignors who are non-residents of Canada

When a non-resident of Canada sells Canadian real estate or an option to acquire Canadian real estate, there is a requirement to notify the CRA of such transactions within ten days. Failure to inform the CRA can result in a penalty of up to $2,500 (additional penalties may also be applicable in certain provinces). Furthermore, the purchaser may be liable to withhold 25% of the gross proceeds and remit this to the federal authorities.

GST/HST implications for the assignor

Determining whether the assignor's proceeds are subject to GST/HST is subject to review by the CRA. The issue is whether the assignor meets the definition of a "builder" for GST/HST purposes and whether the assignor intended to purchase the property for business purposes. In many cases, the assignor of the property may be deemed to be a builder under the Excise Tax Act.

If the assignor can demonstrate to the CRA that their intention when they put in the offer to buy the property was to use it as a primary place of residence, then when they assign the contract, they will be exempt from paying GST/HST on the consideration received for the assignment of the contract. If, on the other hand, they entered the contract with the intention of leasing or reselling the property at a profit, then they will be required to collect and remit tax on the total amount charged to the assignee, which includes any mark-up earned through the assignment.

GST/HST implications for the assignee

Under most new construction agreements, the assignor will qualify for the GST/HST New Residential Housing Rebate, which is typically included in the purchase price, as long as the assignor intends to use the home as a place of residence. However, once the purchase contract is assigned, that eligibility is forfeited because the assignor is no longer taking title to the home on closing. It is also worth noting that there can only be one New Residential Housing Rebate application filed per dwelling.

Therefore, it will be incumbent upon the assignee to determine whether the New Residential Housing Rebate opportunity still exists. They will need to meet the stipulated legislated requirements, and they may have to apply directly to the CRA or arrange with the builder to have the rebate amount credited at closing. It is advisable that the assignee provide a declaration to the builder that they meet the requirements for the rebate (i.e., they will use the property as a place of residence) and obtain a commitment in writing from the builder that the New Residential Housing Rebate will be credited to them upon closing.

The builder should ascertain what the buyer's property intentions are before closing because having a New Residential Housing Rebate assigned by a buyer who intends to rent the property will have many potential negative consequences for all parties. The assignee may be eligible to apply for the New Residential Rental Housing Rebate directly with the CRA, where the assignee intends to purchase the property for long-term rental as a place of residence. In addition, the amount due on closing under the original purchase contract may need to increase since the new purchaser cannot assign the New Residential Housing Rebate to the builder.

Recent CRA audit activity

The CRA has increased its compliance efforts in the real estate sector , particularly in areas where speculative activity has increased.

The recent 2019 Federal Budget announced that CRA would be devoting significant resources to pursue and investigate real estate transactions as the government feels that this is a substantial area of non-compliance.

This means that if you are involved in a pre-construction assignment sale, the likelihood that you will be subject to CRA scrutiny will be high, so taxpayers must understand the rules for both income tax and GST/HST relating to assignment sales.

If your return is selected for audit, the CRA will consider the following factors when determining whether you correctly reported a real estate sale:

The type of property sold
How long you owned it
Your history of selling similar properties
Whether you did any work on the property
Why you sold the property
Your intention in buying the property

If you are a professional contractor or renovator, a speculator or middle investor, or an individual renovator, the CRA will be paying close attention to your property sales.

How BDO can help

Are you concerned about how to close your real estate transaction during self-isolation? Do you need help calculating the GST/HST on a newly constructed property? Talk with your BDO advisor today for all your real estate and construction needs.

Jameson Bouffard , Partner, National Real Estate and Construction Leader

Linda McCracken , Senior Manager, Indirect Tax

The information in this publication is current as of June 22, 2020.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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GAINS & LOSSES

A Road Map of Tax Consequences of Modifying Debt

Individual Income Taxation

	EXECUTIVE SUMMARY

The economy is still struggling to emerge from the “great recession.” According to a congressional panel overseeing Treasury’s Troubled Asset Relief Program (TARP), about $1.4 trillion worth of commercial real estate loans will come due in the next four years. Nearly half of the commercial real estate assets secured by these loans are now worth less than the outstanding debt. 1 Outside of some key U.S. markets (e.g., New York City, Washington, D.C.), the U.S. commercial real estate market has been sluggish, mirroring job growth.

For many borrowers who purchased real estate in the 2006–2008 period, the sale of the real estate asset is not economically feasible since the property is most likely still underwater. Often, distressed borrowers with liquidity issues cannot generate enough cash to service their debt, or they do not have enough equity in the property to refinance. Many of these borrowers rely on a debt restructuring transaction, in the form of debt modifications, to help them de-lever the property and work out existing debt.

On the other side of the market from distressed borrowers are the purchasers of distressed debt. There was much discussion and speculation last year about “green shoots” in the economy and the opportunities in the emerging asset class of “distressed debt.” A flurry of activity is starting to hit the marketplace now as these investments have become a viable asset class as evidenced by new “distressed debt funds” being raised in the market.

Debt restructurings are not limited only to owners of real estate loans, but they are also occurring across all industry lines and all types of taxpayers. When the market was at its peak, there were many leveraged buyouts (LBOs) of companies where excessive use of leverage was quite common. Other types of typical financing transactions include loans such as syndicated bank loans and any unsecured debt in general. The recession, coupled with steep declines in revenue, has required a portion of the debt to be restructured to avoid liquidity issues.

This article examines the potential tax consequences to lenders, borrowers, and purchasers of debt in connection with modifications of debt instruments, as well as a discussion of recent proposed and final regulations in the area of debt modifications.

A modification of a debt instrument may result in a deemed taxable exchange of the old debt instrument for a new debt instrument. Deemed exchanges could, in turn, trigger the recognition of cancellation of debt (COD) 2 income and the accrual of original issue discount (OID) 3 deductions over the remaining term of the debt to the borrower and immediate gain/loss recognition and OID income to the lender. Interest limitations may also affect the deductibility of the OID. A two-step analysis determines whether a deemed exchange has occurred. First, were the terms of the debt instrument modified? Second, was the modification significant? If the modification was significant, what are the tax consequences to the borrower and lender?

A road map of these steps in debt modification is provided in the exhibit .

The IRS issued the current debt modification regulations under Regs. Sec. 1.1001-3 in 1996 in response to the Supreme Court’s decision in Cottage Savings . 4 In Cottage Savings , a savings and loan institution sold interests in an underlying pool of mortgages and purchased comparable interests in a different pool of mortgages from a different lender. The purchased mortgages were relatively close in value to those in the original pool, but had different obligors and collateral. The institution recognized a loss on the exchange for tax purposes, but not for financial purposes. The IRS challenged the institution’s claimed loss.

The Court held that the exchange of mortgage portfolios by two savings and loan companies was a taxable event even though the overall portfolios had virtually identical economic characteristics. The Court said the mortgage loans were materially different because they had different obligors and were secured by different properties. Regs. Sec. 1.1001-3, which was amended in 2011, lays out the rules under which the alteration of terms of the old debt instrument will be deemed a taxable exchange.

With some careful planning and a full understanding of the debt modification rules, the tax adviser can plan for and optimize the tax consequences of debt restructurings.

Two-Part Test

Step one: has a modification occurred.

“Modification” is broadly defined in the regulations. In general, a modification means any alteration, including any deletion or addition, in whole or in part, of a legal right or obligation of the issuer or a holder of a debt instrument, whether the alteration is evidenced by an express agreement (oral or written), conduct of the parties, or otherwise. A modification can occur from amending the terms of a debt instrument or through exchanging one debt instrument for another. 5

There are three main exceptions to the broad definition of a modification:

Terms of a debt instrument: An alteration of a legal right or obligation that occurs by operation of the terms of a debt instrument is not a modification (e.g., an annual resetting of the interest rate based on the value of an index). 6 Certain alterations, however, would constitute a modification, even if the alterations occur by operation of the terms of a debt instrument.

One example is a change in obligor or the addition or deletion of a co-obligor. Another example is a change in the nature of the debt instrument (i.e., an alteration that results in a change from recourse to nonrecourse or vice versa). 7 An alteration that results from the exercise of an option provided to an issuer or a holder to change a term of a debt instrument is a modification unless the option is unilateral and, in the case of an option exercisable by a holder, the exercise of the option does not result in a deferral of, or a reduction in, any scheduled payment of interest or principal. 8

Failure to perform: The failure of an issuer to perform its obligations under a debt instrument is not a modification. Although the issuer’s nonperformance is not a modification, the agreement of the holder not to exercise its remedies under the debt instrument may be a modification.

Absent a written or oral agreement to alter other terms of the debt instrument, an agreement by the holder to stay collection or temporarily waive an acceleration clause or similar default right (including such a waiver following the exercise of a right to demand payment in full) is not a modification unless and until the forbearance remains in effect for a period that exceeds two years following the issuer’s initial failure to perform and any additional period during which the parties conduct good-faith negotiations or during which the issuer is in bankruptcy. 9

Failure to exercise an option: If a party to a debt instrument has an option to change a term of the instrument, the failure of the party to exercise that option is not a modification. 10

Step Two: Was the Modification Significant?

Assuming a modification occurred, the next question is whether the modification is significant. The regulations provide six rules for addressing whether a modification is significant:

General test—facts and circumstances;
Change in yield;
Change in timing of payments;
Change in obligor or security;
Changes in the nature of a debt instrument; or
Changes to accounting or financial covenants.

Whether a modification of any term is a significant modification is determined under each applicable rule and, if not specifically addressed in those rules, under the general facts-and-circumstances test. 11 For instance, a deferral of payments that changes the yield of a fixed-rate debt instrument must be tested under both the change-in-yield test and the change-in-timing-of-payments test. 12

General test: Under the general test, a modification is a significant modification only if, based on all facts and circumstances, the legal rights or obligations are altered to a degree that is economically significant. In making a determination under the facts-and-circumstances test, all modifications to the debt instrument are considered collectively, so that a series of such modifications may be significant when considered together although each modification, if considered alone, would not be significant. 13 The general test does not apply if there is a specific rule that applies to the particular modification. 14

Change-in-yield test: This test applies to debt instruments that provide only for fixed payments, debt instruments with alternative payment schedules subject to Regs. Sec. 1.1272-1(c) (instruments subject to contingencies), debt instruments that provide for a fixed yield subject to Regs. Sec. 1.1272-1(d) (such as certain demand loans), and variable-rate debt instruments. If a debt instrument does not fall within one of these categories (e.g., a contingent payment debt instrument), then whether a change in the yield of the debt instrument is a significant modification is determined under the general facts-and-circumstances test. 15

In general, a change in the yield of a debt instrument is a significant modification if the yield varies from the annual yield on the unmodified instrument (determined as of the date of the modification) by more than the greater of: (1) one-quarter of 1% (25 basis points) or (2) 5% of the annual yield of the unmodified debt instrument (0.05 × annual yield). 16

A reduction in principal reduces the total payments on the modified instrument and would result in a reduced yield on the instrument, often resulting in a significant modification. As such, the regulations give the same effect to changes in principal amounts as to changes in interest rates.

Example 1: A debt instrument issued at par has an original term of 10 years and provides for the payment of $100,000 at maturity with annual interest payments at a rate of 10%. At the end of the fifth year, and after the annual payment of interest, the issuer and holder agree to reduce the amount payable at maturity to $80,000. The annual interest rate remains at 10% but is payable on the reduced principal.

In applying the change-in-yield rule, the yield of the instrument after the modification (measured from the date that the parties agree to the modification to its final maturity date) is computed using the adjusted issue price of $100,000. With four annual payments of $8,000, and a payment of $88,000 at maturity, the yield on the instrument after the modification for purposes of determining if there has been a significant modification is 4.332%. Thus, the reduction in principal is a significant modification. 17

Change in timing of payments: In general, a modification that changes the timing of payments (including any resulting change in the amount of payments) due under a debt instrument is a significant modification if it results in the material deferral of scheduled payments. Examples would include either an extension of the final maturity date or a deferral of payments due prior to maturity (such as a deferral of interest payments). There are many facts and circumstances to consider including the length of the deferral, the original term of the debt instrument, the amounts of the payments that are deferred, and the time period between the modification and the actual deferral of payments. 18

The regulations provide for a safe harbor where the modification will not be significant if the deferred payments are required to be paid within the lesser of five years or one-half the original term of the instrument. For purposes of the safe-harbor rule, the term of an instrument is determined without regard to any option to extend the original maturity, and deferrals of de minimis payments are ignored. Deferrals are tested on a cumulative basis so that, when payments are deferred for less than the full safe-harbor period, the unused portion of the period remains for any subsequent deferrals. 19

Example 2: A zero-coupon bond has an original maturity of 10 years. At the end of the fifth year, the parties agree to extend the maturity for a period of two years without increasing the amount payable at maturity.

The safe-harbor period starts with the date the payment that is being deferred is due (the original maturity date) and ends five years from this date. Thus, the deferral of the payment at maturity for a period of two years is not a material deferral under the safe-harbor rule and thus is not a significant modification. Although this extension of maturity is not a significant modification, the modification also decreases the yield of the bond and must also be tested under the change-of-yield rules. 20

Change in obligor or security: The substitution of a new obligor on a nonrecourse debt instrument is not a significant modification. 21 Conversely, a substitution of a new obligor on a recourse debt instrument is generally a significant modification. 22 There are a few possible exceptions for substitutions of obligors on a recourse debt instrument. These exceptions include the following:

The new obligor is an acquiring corporation to which Sec. 381(a) applies;
The new obligor acquires substantially all of the assets of the obligor; and
The change in obligor is a result of either a Sec. 338 election or the filing of a bankruptcy petition. 23

Moreover, for an exception to apply, the change in obligor must not result in a change in payment expectations or a significant alteration (an alteration that would be a significant modification but for the fact that the alteration occurs by operation of the terms of the instrument). 24 In general, a change in payment expectations occurs if, as a result of a transaction, there is a substantial enhancement or impairment of the obligor’s capacity to meet the payment obligations after the modification as compared to before the modification. In the case of an enhancement, the test is based on whether the obligor’s capacity to meet its obligations under the debt instrument was primarily speculative before the modification and adequate after the modification, and, in the case of an impairment, on whether the obligor’s capacity to meet its obligations under the debt instrument was adequate before the modification and is primarily speculative after the modification. 25

Example 3: A recourse debt instrument is secured by a building. In connection with the sale of the building, the purchaser of the building assumes the debt and is substituted as the new obligor on the debt instrument. The purchaser does not acquire substantially all of the assets of the original obligor.

The transaction does not satisfy exception (1) or (2) listed above. Thus, the substitution of the purchaser as the obligor is a significant modification. 26

The addition or deletion of a co-obligor on a debt instrument is a significant modification if the addition or deletion of the co-obligor results in a change in payment expectations. 27 For recourse debt instruments, a modification that releases, substitutes, adds, or otherwise alters the collateral for, a guarantee on, or other form of credit enhancement for a recourse debt instrument is a significant modification if the modification results in a change in payment expectations. 28

For nonrecourse debt instruments, a modification that releases, substitutes, adds, or otherwise alters a substantial amount of the collateral for, a guarantee on, or other form of credit enhancement for a nonrecourse debt instrument is a significant modification. A substitution of collateral on a nonrecourse debt instrument is not a significant modification, however, if the collateral is fungible or otherwise of a type where the particular units pledged are unimportant, such as government securities or financial instruments of a particular type and rating. In addition, the substitution of a similar commercially available credit enhancement contract is not a significant modification, and an improvement to the property securing a nonrecourse debt instrument does not result in a significant modification. 29

Example 4: A parcel of land and its improvements (a shopping center) secure a nonrecourse debt instrument. The obligor expands the shopping center with the construction of an additional building on the same parcel of land. After the construction, the improvements that secure the nonrecourse debt include the new building.

The building is an improvement to the property securing the nonrecourse debt instrument and its inclusion in the collateral securing the debt is not a significant modification. 30 If the priority of a debt instrument changes relative to other debt of the issuer and results in a change of payment expectations, the modification would be significant. 31

Change in the nature of a debt instrument: In general, a change in the nature of a debt instrument from recourse to nonrecourse, or vice versa, is a significant modification. There are two exceptions to this rule. First, a defeasance of tax-exempt bonds is not a significant modification if the defeasance occurs by operation of the terms of the original bond and the issuer places in trust government securities or tax-exempt government bonds that are reasonably expected to provide interest and principal payments sufficient to satisfy the payment obligations under the bond. 32

Second, a modification that changes a recourse debt instrument to a nonrecourse debt instrument is not a significant modification if the instrument continues to be secured only by the original collateral and the modification does not result in a change in payment expectations. For this purpose, if the original collateral is fungible or otherwise of a type where the particular units pledged are unimportant (for example, government securities or financial instruments of a particular type and rating), replacement of some or all units of the original collateral with other units of the same or similar type and aggregate value is not considered a change in the original collateral. 33

A modification of a debt instrument that results in an instrument that is not debt for federal income tax purposes is a significant modification. 34 For purposes of this rule, any deterioration in the financial condition of the obligor between the issue date of the unmodified instrument and the date of modification (as it relates to the obligor’s ability to repay the debt) is not taken into account unless, in connection with the modification, there is a substitution of a new obligor or the addition or deletion of a co-obligor. 35

Recently finalized regulations on issuer’s financial condition: Recently, the IRS issued regulations that address whether a deterioration in the issuer’s creditworthiness is taken into account in determining whether a modified debt instrument is still classified as debt for tax purposes. The IRS issued proposed regulations in June 2010 36 that were finalized on Jan. 7, 2011, 37 clarifying that, when determining whether a modified debt instrument is still classified as debt for tax purposes, the deterioration of the issuer’s creditworthiness is not taken into account. What precipitated the new regulations was the apparent limitation of the rule disregarding a deterioration in the issuer’s creditworthiness only for purposes of determining whether a debt instrument has been significantly modified and not for purposes of determining whether the modified debt instrument continued to be debt for all tax purposes.

Taxpayers requested clarification of when the credit quality of the issuer would be considered in determining the nature of the instrument resulting from an alteration or modification of a debt instrument. Absent the clarification, the concern was that the new instrument could be treated as equity due to the lack of certainty of repayment or a lack of sufficient collateral. The preamble to the proposed regulations clarifies that any decrease in the fair market value (FMV) of a debt instrument (regardless of whether it is publicly traded or not) between the issue date of the debt instrument and the date of the modification is not taken into account for purposes of determining whether the modified debt instrument continues to be debt for all tax purposes to the extent the decrease in FMV is attributable to the deterioration in the financial condition of the issuer and not to a modification of the terms of the debt instrument.

If the debt is modified and the resulting instrument is not characterized as debt for tax purposes (and is instead treated as equity for tax purposes), the transaction would be treated as an exchange of the old debt instrument for equity of the issuer. Whether this exchange results in COD income to the issuer is controlled by Sec. 108(e)(8). 38

The final regulations remove a potential concern in workouts of debt of financially troubled debtors since the modified debt would still be treated as debt for tax purposes, provided there is no change in obligor, and provided there is no change in the terms of the debt that would be inconsistent with debt treatment (such as eliminating a maturity date). If the debt is not publicly traded, the modification often would take place without the debtor having to recognize COD income, so long as the principal amount is not reduced and the debt has adequate stated interest. In contrast, if the debt is publicly traded, the debtor’s creditworthiness would affect the value of the debt, and the debtor would likely have COD income even if the debt was respected as debt for tax purposes. The tax consequences of modifying non–publicly traded debt and publicly traded debt are discussed in more detail later in this article.

Changes in financial and accounting covenants: A modification that adds, deletes, or alters customary accounting or financial covenants is not a significant modification. 39 Nonetheless, the issuer may make a payment to the lender in consideration for agreeing to the modification. The payment would be taken into account in applying the change-in-yield test. 40 Therefore, a modification to a debt instrument’s covenants can result in a significant modification if the lender receives a payment for agreeing to the modification.

Tax Consequences of the Deemed Exchange

Once the determination has been made that a modification of a debt instrument is significant, the tax adviser must analyze the tax consequences to the borrower and the holder. The borrower’s tax consequences are determined by comparing the issue price of the new debt to the adjusted issue price of the old debt. 41 Generally speaking, the adjusted issue price is the principal amount if the debt was not issued at a discount and provided for current payments of interest at a fixed or variable rate. Gain or loss to the holder/lender is measured by the difference between the issue price of the new debt and the tax basis of the old debt. The holder can have a different tax basis than the adjusted issue price. For instance, the holder could have bought the debt from the original lender at a discount.

To determine the issue price of the new debt, a determination must be made if the debt is publicly traded (discussed below) or not. For this purpose, either the old debt or the new debt (or both) can be publicly traded. If the debt is publicly traded, the issue price is equal to the FMV of the debt instrument. 42 The rules address publicly traded debt issued for property and non–publicly traded debt issued for publicly traded property. The property is the old debt instrument that is being exchanged for the new debt instrument. If the debt is not publicly traded, the issue price is equal to the principal amount of the debt instrument if the instrument has adequate stated interest. 43 An instrument has adequate stated interest if the stated principal amount is less than or equal to the imputed principal amount. 44 As a general rule, a debt instrument has adequate stated interest if it bears interest at least equal to the applicable federal rate (AFR) under Sec. 1274(d).

The following examples illustrate various scenarios and outcomes depending on whether the debt is publicly traded or not. 45

Example 5: Debt is not publicly traded: The original terms of the loan provide for a 10% interest rate. The $100 principal amount of the loan is equal to the amount of cash that was loaned. The lender is the original lender (and, consequently, has a $100 basis in the loan). The lender agrees to reduce the rate to 6%, which is above the current AFR. Assume that all accrued interest has been paid as of the date of the modification, and no accrued interest is being forgiven.

Impact to lender: Although the modification is significant, no loss is recognized since the issue price of the new debt is $100 (the principal amount) and the lender’s tax basis is $100.

Impact to borrower: No COD income is recognized because the issue price of $100 is the same as the adjusted issue price of $100.

Example 6: Debt is publicly traded: The original terms of the loan provide for a 10% interest rate. The $100 principal amount of the loan is equal to the amount of cash that was loaned. The lender agrees to reduce the rate to 6%. Assume that all accrued interest has been paid as of the date of the modification, and no accrued interest is being forgiven. The debt is publicly traded and has an FMV of $80.

Impact to borrower: $20 of COD income is recognized equal to the difference between the new issue price of $80 and the original amount borrowed of $100. The exchange also creates $20 of OID, resulting in interest deductions to the borrower over the remaining term of the new debt. 46 The modified loan has OID because it is treated as a new loan for tax purposes, with an issue price of $80 and a stated redemption price at maturity of $100. Consideration should be given to any interest limitation that would affect the deductibility of the OID, including Sec. 163(e)(5) (applying to corporate debt with a high yield that meets certain requirements provided in Sec. 163(i)).

Impact to lender: $20 of loss 47 is recognized in this deemed debt-for-debt exchange because the lender’s amount realized is the new issue price of $80 less the lender’s original tax basis of $100. The exchange also creates OID income of $20 to be taken into income as interest over the remaining term of the new debt.

Example 7: Debt is not publicly traded: The original lender sells the debt to a third party for $80, which is less than the principal amount of the debt. After the transfer, interest terms are renegotiated from 10% to 6%, which is above the current AFR.

Impact to borrower: None.

Impact to original lender: $20 loss is recognized from the sale of the loan for $80.

Impact to third-party buyer: $20 gain due to the receipt of the new debt instrument with an issue price of $100 in exchange for the old loan in which he had a tax basis of $80. 48

Example 8: Debt is publicly traded: The original lender sells the debt to a third party for $80, which is the current FMV of the debt. Immediately after the transfer, interest terms are renegotiated from 10% to 6%.

Impact to borrower: COD of $20 and OID deductions of $20 over the life of debt instrument.

Impact to original lender: Loss of $20 is recognized.

Impact to third-party buyer: OID income of $20 over the life of debt instrument. (If the terms of the debt had not been renegotiated, the $20 discount would not have been treated as OID. Instead, it would represent market discount to the third-party purchaser. Market discount is not required to be included in income as it accrues. Instead, accrued market discount is recognized when principal payments are made or when the debt is sold. 49 Because a significant modification occurred, the modified debt is treated as newly issued for tax purposes. Therefore, the modified debt is being issued at $80, resulting in $20 of OID, which must be included in income as it accrues.)

As evidenced by the examples above, depending on the facts and circumstances, there could be adverse tax consequences to the borrower, lender, or purchaser of debt if there is a significant modification of the debt instrument.

The ultimate effect of these trans-actions depends on the parties’ tax positions. For example, if a corporation has significant net operating losses that are expiring, it may be beneficial to trigger gain in the exchange (and generate future OID deductions). Moreover, a borrower with COD could use the various exclusions of such COD income under Sec. 108 for some or all of that COD. 50

When Is Debt Considered "Publicly Traded"?

In January 2011, the IRS issued proposed regulations (REG-131947-10) addressing when property is considered to be traded on an established market (publicly traded) for purposes of determining the issue price of a debt instrument. Under the current regulations, issue price is generally determined in the following order:

The amount of money paid for the debt instrument;
If the debt instrument is publicly traded and is not issued for money, the FMV of the debt instrument;
If the debt instrument is not publicly traded and not issued for money but is issued for property that is publicly traded (including a debt-for-debt exchange where the old debt is publicly traded), then the issue price of the debt instrument is the FMV of the publicly traded property; or
If none of the above, Sec. 1274 applies and the issue price will be the stated principal amount where there is adequate stated interest. 51

Under the current regulations, property (including a debt instrument) is considered traded on an established market if it is described in Regs. Sec. 1.1273-2(f) at any time during the 60-day period ending 30 days after the issue date of the debt instrument. Property described in Regs. Sec. 1.1273-2(f) is (1) exchange listed property, (2) market-traded property (i.e., property traded on a board of trade or in an interbank market), (3) property appearing on a quotation medium, and (4) readily quotable debt instruments. 52

Few debt instruments are listed on an exchange. For most debt instruments, the important questions are whether the instruments appear on a quotation medium or are readily quotable. A quotation medium is defined as a system of general circulation that provides a reasonable basis to determine FMV by disseminating either recent price quotations of one or more identified brokers, dealers, or traders, or actual prices of recent sales transactions. 53 For example, trade information appearing in the Trade Reporting and Compliance Engine (TRACE) database maintained by the Financial Industry Regulatory Authority would likely cause the instrument to be publicly traded.

A debt instrument is considered readily quotable if price quotations are readily available from dealers, brokers, or traders. 54 Determining whether a debt instrument is readily quotable requires fact gathering, and tax practitioners may differ on what types of facts would cause a debt instrument to be considered readily quotable.

In issuing the proposed regulations, the IRS explained that commentators had criticized the definition of “established market” as difficult to apply in practice and noted that the current regulations were outdated. Due to the increased amount of debt workouts in recent years, the issue has turned into a hot topic. Generally, not many debt instruments are listed on an exchange, as they are typically traded in privately negotiated transactions between a securities dealer or broker and a customer. A dealer or broker may quote a firm price that enables a customer to buy or sell at that firm price subject to volume limitations, which is referred to as a “firm quote.” A dealer, broker, or listing service may also quote a price that indicates a willingness to buy or sell a specific debt instrument but not necessarily at the specified price (referred to as an “indicative quote”).

The preamble explained that commentators struggled to apply the definition of an established securities market to the informal marketplace in which most debt instruments changed hands. The proposed regulations were intended to simplify, clarify, and generally expand the determination of when property is traded on an established market.

The proposed regulations identify four ways for property (including a debt instrument) to be traded on an established market. In each case, the time period for determining whether the property is publicly traded is the 31-day period ending 15 days after the issue date of the debt instrument.

The following are the four categories that the proposed regulations identify:

Property is listed on an exchange;
A sales price for the property is reasonably available;
A firm (or executable) price quote to buy or sell the property is available; or
One or more indicative quotes (i.e., price quotes other than firm quotes) are available from a dealer, broker, or pricing service (an indicative quote).

For the second category, a sales price is considered reasonably available if the sales price (or information sufficient to calculate the sales price) appears in a medium that is made available to persons that regularly purchase debt instruments (including a price provided only to certain customers or subscribers) or to persons that broker such transactions.

The proposed regulations provide that the FMV of property described in Regs. Sec. 1.1273-2(f) will be presumed to be equal to its trading price, sales price, or quoted price, whichever is applicable. If there is more than one price or quote, a taxpayer may use any reasonable method, consistently applied, to determine the price. When there is only an indicative quote, a taxpayer can use any method that provides a reasonable basis to determine the FMV if the taxpayer determines that the quote (or average quotes) materially misrepresents the FMV, provided the taxpayer can establish that the method chosen more accurately reflects the value of the property. The regulations, as proposed, would apply to debt instruments issued on or after the publication date of the Treasury decision adopting the rules as final regulations.

The proposed regulations would resolve a number of uncertainties regarding whether debt is publicly traded. Unfortunately, for some troubled debtors, these proposed regulations would be biased toward treating certain debt instruments as publicly traded. Given that the FMV of these troubled loans is significantly less than their principal amount, a significant amount of COD income may be realized if there is a significant modification to the debt instrument that results in a debt-for-debt exchange. Tax advisers should be aware of these potential consequences, assuming the rules in the proposed regulations are finalized, and try to mitigate any adverse tax effects through careful planning.

A tax adviser needs a working knowledge of the tax consequences of modifying debt. This knowledge is critical to avoiding unpleasant surprises when advising a client engaging in a debt workout. A tax adviser needs to know not only when a debt-for-debt exchange is deemed to take place, but also the resulting tax consequences. Additionally, a tax adviser should be aware of recent developments in the area, including regulations addressing whether a deterioration in the issuer’s creditworthiness should cause a debt instrument to be reclassified as equity. These developments also include proposed regulations that would expand the definition of “publicly traded” to cover a broader range of debt instruments.

Author’s note: The author would like to thank Richard Fox, a principal in the Real Estate Tax Group at Ernst & Young LLP, for his insightful comments and contributions to this article.

1 Congressional Oversight Panel, Commercial Real Estate Losses and the Risk to Financial Stability (Feb. 10, 2010).

2 COD income results from the cancellation or reduction of indebtedness (see Sec. 108).

3 OID means the excess of a debt instrument’s stated redemption price at maturity over its issue price (Sec. 1273(a)(1)).

4 Cottage Savings Ass’n , 499 U.S. 554 (1991).

5 Regs. Sec. 1.1001-3(c)(1)(i).

6 Regs. Sec. 1.1001-3(c)(1)(ii).

7 Regs. Sec. 1.1001-3(c)(2)(i).

8 Regs. Sec. 1.1001-3(c)(2)(iii). The regulations provide a definition of a “unilateral option” in Regs. Sec. 1.1001-3(c)(3).

9 Regs. Sec. 1.1001-3(c)(4)(ii).

10 Regs. Sec. 1.1001-3(c)(5).

11 Regs. Sec. 1.1001-3(e)(1).

12 Regs. Sec. 1.1001-3(f)(1).

13 Regs. Sec. 1.1001-3(e)(1).

14 Regs. Sec. 1.1001-3(f)(1).

15 Regs. Sec. 1.1001-3(e)(2)(i).

16 Regs. Sec. 1.1001-3(e)(2)(ii).

17 Regs. Sec. 1.1001-3(g), Example (3).

18 Regs. Sec. 1.1001-3(e)(3)(i).

19 Regs. Sec. 1.1001-3(e)(3)(ii).

20 Regs. Sec. 1.1001-3(g), Example (2).

21 Regs. Sec. 1.1001-3(e)(4)(ii).

22 Regs. Sec. 1.1001-3(e)(4)(i)(A).

23 Regs. Secs. 1.1001-3(e)(4)(i)(B), (C), (D), (F), and (G).

24 Regs. Sec. 1.1001-3(e)(4)(i)(E). The requirement that a significant alteration not occur does not apply if the transaction falls under Sec. 368(a)(1)(F) (a change in form or place of incorporation).

25 Regs. Sec. 1.1001-3(e)(4)(vi).

26 Regs. Sec. 1.1001-3(g), Example (6).

27 Regs. Sec. 1.1001-3(e)(4)(iii).

28 Regs. Sec. 1.1001-3(e)(4)(iv)(A).

29 Temp. Regs. Sec. 1.1001-3T(e)(4)(iv).

30 Regs. Sec. 1.1001-3(g), Example (9).

31 Regs. Sec. 1.1001-3(e)(4)(v).

32 Regs. Sec. 1.1001-3(e)(5)(ii)(B)(1).

33 Temp. Regs. Sec. 1.1001-3T(e)(5)(ii)(B)(2).

34 Regs. Sec. 1.1001-3(e)(5)(i).

35 Id.; Regs. Sec. 1.1001-3(f)(7)(ii).

36 REG-106750-10.

37 T.D. 9513 (Regs. Secs. 1.1001-3(c)(2)(ii), (e)(5), and (f)(7)).

38 Many other tax consequences can result from this exchange of debt for equity of the issuer including: (1) converting a single-member disregarded entity into a partnership for tax purposes, (2) a distribution under Sec. 752 due to a reduction of debt (and possible gain recognition to the partners), (3) a change in the treatment of the investment for the Secs. 856(c)(2)–(4) income and asset tests for REITs, (4) a change in the character and sourcing of income, (5) a change in the withholding tax treatment under Secs. 1441–1446, and (6) the cessation of interest accruals and the nonapplication of Sec. 166.

39 Regs. Sec. 1.1001-3(e)(6).

40 Regs. Sec. 1.1001-3(e)(2)(iii)(A).

41 Sec. 108(e)(10); Regs. Sec. 1.61-12(c).

42 Sec. 1273(b)(3); Regs. Secs. 1.1273-2(b) and (c).

43 Sec. 1273(b)(4); Sec. 1274(a); Regs. Sec. 1.1274-2(b).

44 Sec. 1274(c)(2). The imputed principal amount is generally the present value of all payments under the instrument.

45 These examples assume that the debt instruments in question are not “securities” for purposes of Sec. 368(a)(1)(E) and that the installment method will not be applied.

46 The various tax issues related to COD income along with COD exclusions or deferrals under Sec. 108 are beyond the scope of this article. The measurement and taxation of OID is also beyond the scope of this article.

47 The loss could be ordinary if the lender is in the trade or business of lending, or capital if the debt was a capital asset in the lender’s hands. If the exchange of the old loan for a new loan qualifies as a recapitalization under Sec. 368(a)(1)(E), the loss is not recognized.

48 A portion of the $20 gain may be treated as ordinary income under the market discount rules of Sec. 1276 depending on how long the buyer held the debt instrument before the modification.

49 Sec. 1276(b).

50 Sec. 108(a). Usually, the exclusion of COD from income results in a corresponding reduction of tax attributes under Sec. 1017.

51 Regs. Sec. 1.1273-2.

52 Regs. Secs. 1.1273-2(f)(2)–(5).

53 Regs. Sec. 1.1273-2(f)(4).

54 Regs. Sec. 1.1273-2(f)(5). Several safe harbors are provided to exclude debt instruments from being considered readily quotable, including issuances having an original principal amount of no more than $25 million and situations where the borrower does not have any other debt that would fall within the other categories of publicly traded under Regs. Secs. 1.1273-2(f)(2)–(4).

	Notes
	Howard Ro is a senior manager in the Real Estate Tax Group of Ernst & Young LLP in San Francisco. For more information about this article, please contact Mr. Ro at .

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tax consequences of assignment of contract

has anyone had any experience, from a tax standpoint, in assigning a contract for profit? in other words, what type of income does irs consider this transaction for person assigning?

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Are you the successor-in-interest? When a company inherits a government contract through a corporate transaction

Recent cases reinforce the long-established principle that companies inheriting government contracts through a corporate transaction can be considered a successor-in-interest, even without an approved novation agreement, despite anti-assignment laws applicable to government contracts.

The Anti-Assignment Acts: What are they?

The Assignment of Contracts Act, 41 U.S.C. § 6305, and the Assignment of Claims Act, 31 U.S.C. § 3727, together make up the “Anti-Assignment Acts.” These Acts generally prohibit the transfer of a US government contract from a contractor to a third party unless the government approves it expressly by novation or implicitly by ratification or waiver.

By preventing a contractor from unilaterally substituting another party as the prime contractor, the Acts seek to make clear the identity of the contracting parties and, as such, the entities to which the government may be liable. But courts consider exempt from the Acts any assignment that does not present the dangers that the Acts were designed to obviate. Generally, this includes transfers: by interstate succession or testamentary disposition; incident to proceedings in bankruptcy or receivership; by judicial sale; by subrogation to an insurer; or by statutory merger or corporate conversion. These types of assignments are considered to be “by operation of law.”

For government contractors, perhaps the most significant exception recognized “by operation of law” is when the transfer of a claim or contract is effectuated by statutory merger or corporate conversion. When an assignment is recognized as exempt, no government approval (explicit or otherwise) is required to recognize the assignee’s rights under the contract. We note that this exception is distinguished from “change of control” transactions and direct sales of equity securities by shareholders, which are not typically considered to be transactions that result in an assignment at all.

The exemption as applied to mergers and corporate conversions

The “by operation of law” exemption has been recognized since the Supreme Court’s 1878 decision in Erwin v. United States , 97 U.S. 392, 397 (1878), where the Court applied the exception to assignments when “there has been a transfer of a title .” In that case, the Court identified only two fundamental scenarios where this exemption should apply – intestacy and bankruptcy. However, the law has continued to develop. Indeed, more recent decisions have confirmed that government contracts that have been assigned through a corporate merger or conversion are, in fact, exempt from the Acts where – after the transaction – the government continues to deal with essentially the same entity with which it first contracted ( ie , the entity with the same management, personnel, processes, and financial capability). See L-3 Commc’ns Integrated Sys. v. United States , 84 Fed. Cl. 768, 776 (2008); see also Johnson Controls World Servs., Inc. v. United States , 44 Fed. Cl. 334 (1999).

Most recently, in Oxy USA, Inc. v. United States , 163 Fed. Cl. 75 (Feb. 8, 2023), the US Court of Federal Claims found that the “by operation of law” exception applied to a corporate reorganization resulting in the assignment of the “rights and benefits” of a government contract from an aviation-fuel refinery to a successor entity. In this case, the successor entity filed a claim for indemnification costs under the contract, but the government moved to dismiss the claim, alleging that the successor entity lacked jurisdiction because it was not a recognized contracting party under the Acts.

The court’s conclusion that the “by operation of law” exception applied was based, in large part, on the court finding that substantially all of the refining business had been transferred and the successor entity possessed the same assets and management team as the original contractor. In support of its analysis, the court explained that it is imperative to consider whether – for all intents and purposes – the subject government contract (and any obligations thereunder) continues with essentially the same entity.

In this regard, the court found that the nature of the corporate reorganization ensured that the successor entity had the same key management, assets, and financial resources to perform the government contract as the original contractor possessed. The court explained that these factors conform to the “Act’s policy goals” of ensuring the government would not be subject to multiple or duplicative obligations, and that it was always cognizant of the contracting party. Id . at *90-91.

Likewise, in another 2022 case, ATS Trans LLC DBA Around the Sound/Transpro, Appellant , 22-1 B.C.A. (CCH) ¶ 38151 (June 27, 2022) , the Civilian Board of Contract Appeals found that the surviving entity of a merger could submit a Contracts Disputes Act claim without a novation agreement formally recognizing the surviving entity as the successor-in-interest. In that case, the original contractor merged with and into a successor entity in 2016, and the successor entity survived the merger and assumed all of the original contractor’s assets and liabilities (often referred to as a forward merger – as opposed to a reverse triangular merger which structurally results in the original government contractor being the surviving entity). As a result of the merger, the original contractor ceased to exist as a separate legal entity, but the successor entity continued to perform the contractual obligations of the original contractor, including its government contracts. The successor entity informed the contracting agency of the merger, but no novation agreement was ever effectuated, and the agency continued paying the successor entity’s invoices.

All was well with this relationship until 2021, when the successor entity submitted a claim to the contracting officer, asserting that the procuring agency had constructively changed the contract’s requirements. The agency filed a motion to dismiss, arguing that the successor entity lacked privity of contract with the government necessary to bring its appeal. However, in ruling against the agency, the Board held that – notwithstanding the fact that there was no executed novation agreement or other ratification of the successor entity – there was a valid merger between the original contractor and the successor entity such that, by operation of law, the subject contract had been assigned to the successor entity.

These recent cases are consistent with the long-established principle that companies inheriting contracts through a corporate transaction can be considered a successor-in-interest, notwithstanding the anti-assignment laws applicable to government contracts. However, these holdings are not altogether consistent with Subpart 42.12 of the Federal Acquisition Regulation (FAR), which sets forth the requirements for effectuating a contract novation.

Specifically, FAR 42.1204(a) provides that a formal novation agreement is necessary when, following a transfer of assets to a third party, the third party in receipt of the assets desires to be recognized as the successor-in-interest to the original government contractor. As such, in accordance with these regulations, because a merger and/or a corporate conversion arguably results in the technical transfer of assets from one corporate entity to another, a formal novation typically is required by the government.

However, as confirmed by the cases referenced above, because a corporate conversion under state law and the merger of the original contractor into a successor entity with the successor entity surviving the merger does not involve the transfer of assets to a “third party,” the government’s express approval via an executed novation agreement is unnecessary, as a matter of law, for the successor entity to be recognized as the successor-in-interest.

From an operating and corporate perspective, at least with regard to corporate conversions, this makes sense. Indeed, it is consistent with how corporate conversions are typically treated under state law. For example, under California General Corporation Law, an entity that converts into another entity is for all purposes treated as the same entity that existed before the conversion and, importantly, the conversion is not considered to be a transfer of property. See CA Corp. Code Ch. 11.5.

The same is true in many other states. See, e.g., Va. Code § 13.1-944.6 (“When an entity conversion under this article becomes effective, with respect to that entity: The resulting entity is deemed to: Be the same entity without interruption as the converting entity that existed before the conversion; and Have been organized on the date that the converting entity was originally incorporated, organized, or formed”); 2 DE Code § 18-216 (stating that, when a corporate entity has been converted to a Delaware limited liability company, the conversion shall constitute a continuation of the existence of the converting other entity in the form of a domestic limited liability company.)

What does this mean for government contractors?

Although not new developments, the recent court and board rulings solidify the principle that contractors who are assigned contracts through a corporate merger or corporate conversion can be considered the successor-in-interest to a government contract under the Acts’ “by operation of law” exemption, without needing a novation agreement approved by the contracting officer in accordance with FAR 42.1204. This ostensibly provides more flexibility in structuring M&A transactions or internal reorganizations and expands the types of mergers that would be deemed to satisfy the exemption.

As discussed in the cases, however, it is important to be able to demonstrate that – for all intents and purposes – the government contract continues to be performed by essentially the same entity and, as such, there is no risk of the government incurring duplicative obligations.

In the merger context, evidence of this might reasonably include the fact that the original contractor is no longer an ongoing business concern. In the corporate conversion context, evidence might include the obligation to assume liabilities under state law and/or the fact that the converted entity has the same unique tax identification number as the original entity.

To the extent the “by operation of law” exception clearly applies, contractors should consider whether they can avoid the often burdensome, costly, and time-consuming process of obtaining a formal novation agreement approved by the responsible contracting officer. Alternatively, if a novation is deemed prudent for practical reasons, contractors should consider whether they can treat the assignment of contracts as legally effective – and thus avoid establishing interim, subcontracting agreements between the assignor and assignee – while a novation agreement with the government is pending.

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Understanding an assignment and assumption agreement

Need to assign your rights and duties under a contract? Learn more about the basics of an assignment and assumption agreement.

Get your assignment of agreement

by Belle Wong, J.D.

Belle Wong, is a freelance writer specializing in small business, personal finance, banking, and tech/SAAS. She ...

The assignment and assumption agreement

The basics of assignment and assumption, filling in the assignment and assumption agreement.

While every business should try its best to meet its contractual obligations, changes in circumstance can happen that could necessitate transferring your rights and duties under a contract to another party who would be better able to meet those obligations.

Person presenting documents to another person who is signing them

If you find yourself in such a situation, and your contract provides for the possibility of assignment, an assignment and assumption agreement can be a good option for preserving your relationship with the party you initially contracted with, while at the same time enabling you to pass on your contractual rights and duties to a third party.

An assignment and assumption agreement is used after a contract is signed, in order to transfer one of the contracting party's rights and obligations to a third party who was not originally a party to the contract. The party making the assignment is called the assignor, while the third party accepting the assignment is known as the assignee.

In order for an assignment and assumption agreement to be valid, the following criteria need to be met:

The initial contract must provide for the possibility of assignment by one of the initial contracting parties.
The assignor must agree to assign their rights and duties under the contract to the assignee.
The assignee must agree to accept, or "assume," those contractual rights and duties.
The other party to the initial contract must consent to the transfer of rights and obligations to the assignee.

A standard assignment and assumption contract is often a good starting point if you need to enter into an assignment and assumption agreement. However, for more complex situations, such as an assignment and amendment agreement in which several of the initial contract terms will be modified, or where only some, but not all, rights and duties will be assigned, it's a good idea to retain the services of an attorney who can help you draft an agreement that will meet all your needs.

When you're ready to enter into an assignment and assumption agreement, it's a good idea to have a firm grasp of the basics of assignment:

First, carefully read and understand the assignment and assumption provision in the initial contract. Contracts vary widely in their language on this topic, and each contract will have specific criteria that must be met in order for a valid assignment of rights to take place.
All parties to the agreement should carefully review the document to make sure they each know what they're agreeing to, and to help ensure that all important terms and conditions have been addressed in the agreement.
Until the agreement is signed by all the parties involved, the assignor will still be obligated for all responsibilities stated in the initial contract. If you are the assignor, you need to ensure that you continue with business as usual until the assignment and assumption agreement has been properly executed.

Unless you're dealing with a complex assignment situation, working with a template often is a good way to begin drafting an assignment and assumption agreement that will meet your needs. Generally speaking, your agreement should include the following information:

Identification of the existing agreement, including details such as the date it was signed and the parties involved, and the parties' rights to assign under this initial agreement
The effective date of the assignment and assumption agreement
Identification of the party making the assignment (the assignor), and a statement of their desire to assign their rights under the initial contract
Identification of the third party accepting the assignment (the assignee), and a statement of their acceptance of the assignment
Identification of the other initial party to the contract, and a statement of their consent to the assignment and assumption agreement
A section stating that the initial contract is continued; meaning, that, other than the change to the parties involved, all terms and conditions in the original contract stay the same

In addition to these sections that are specific to an assignment and assumption agreement, your contract should also include standard contract language, such as clauses about indemnification, future amendments, and governing law.

Sometimes circumstances change, and as a business owner you may find yourself needing to assign your rights and duties under a contract to another party. A properly drafted assignment and assumption agreement can help you make the transfer smoothly while, at the same time, preserving the cordiality of your initial business relationship under the original contract.

Real Estate Assignment Sales – New Tax Rules

The Federal Budget for 2022 has made amendments to Part IX of the Excise Tax Act (“ETA”). Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated single unit residential complexes or residential condominium units are taxable.

For clarity, with respect to residential housing transactions, the purchaser (assignor) enters into an agreement of Purchase and Sale with the builder and then sells (assigns) their “rights and obligations” in the agreement of Purchase and Sale to another person (assignee).

Typically, the closing date for a pre-constructions residential property can take several months or even years. During this time, purchasers may decide to assign their rights outlined in the Purchase and Sale agreement to an assignee. The Federal Budget for 2022 now imposes GST/HST tax obligations on assignors and assignees. Essentially, an individual assignor of residential real estate now must collect GST/HST remit it to the CRA. This rule is applicable even to those who do not have a GST/HST number and believe that they are not purchasing and assigning in the course of commercial activity. In cases where the assignor is a non-resident, the assignee is obligated to self-assess the GST/HST. Prior to this amendment, the GST/HST liability depended on whether an individual purchased and assigned their rights in the course of commercial activity and if the purchaser’s true intentions were to live in and use the property, then there would be no GST/HST liability.

Deposit Portion of Assignments

Where an assignment agreement is entered into on or after May 7, 2022, the Budget confirms that GST/HST would not be applicable to the deposit portion of the assignment price. However, it must be indicated in writing that a part of the consideration is attributable to the reimbursement of a deposit paid by the assignor to the builder under the Purchase and Sale agreement. This means that an assignor would only be liable for GST/HST on the amount above the deposit. This also eliminates double taxation and is consistent with the holding from current caselaw, Casa Blanca Homes Ltd. v. The Queen , 2013 TCC 338 .

Where an assignment agreement is entered into before May 7, 2022, and the assignment sale is taxable, the total amount payable for the sale is subject to the GST/HST, this includes any amount paid by the assignor as a deposit to the builder, whether or not this amount is separately identified.

“Anti-flipping” Rule

Budget 2022 further proposes that sales of residential properties owned for less than 12 months are deemed to generate business income under the Income Tax Act (“ITA”). These are subject to limited exceptions such as divorce, or relocation for employment purposes. In terms of assignment sales, it has not yet been determined whether the proposed “anti-flipping” rules would apply since taxpayers do not technically “own” the properties. Tax practitioners are carefully monitoring this. For more information see our previous blog discussing this .

If you have questions about the new rules contact us today !

**Disclaimer

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.

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Assignments of Agreement of Purchase and Sale – An Overview

What is an assignment.

The assignment of an agreement of purchase and sale is a legal transaction whereby a party to a contract transfers their rights and obligations in that agreement and associated property, to another party. It is commonly used in Ontario real estate transactions as a means of selling a property before the original purchase agreement is completed. Assignments are often pursued by buyers or investors who wish to purchase a property for a lower price than the original purchase price or who seek to benefit from a changing market or financial circumstances. In an assignment, the original purchaser (the assignor) sells their rights and benefits under the agreement to a third party (the assignee) for a negotiated price.

Benefits, Disadvantages, and Uses of an Assignment Transaction

There are several benefits to pursuing an assignment. For the assignor, it may provide an opportunity to sell the property at a profit without having to close on the purchase themselves. It may also allow them to avoid closing costs and other fees associated with the purchase. For the assignee, an assignment can offer an opportunity to purchase a property at a lower price than the original purchase price, particularly if the market has changed or the original purchaser is in financial distress. However, there are also potential drawbacks to assignments, such as uncertainty regarding the closing date, tax implications, higher than anticipated closing costs and the potential for disputes between parties.

Assignment Process

The assignment process typically involves several steps. First, the assignor must find a willing assignee who is willing to purchase their interest in the property. They may need to advertise the property and assignment (provided this is permitted by the original vendor in a pre-construction transaction) and negotiate a price with the assignee. Once an assignee is found, the parties must draft an assignment agreement that outlines the terms of the assignment, including the purchase price, closing date, obligations of each party and other relevant details. The assignment agreement must be signed by both the assignor and assignee and may need to be registered with the relevant authorities, such as the Land Registry Office. Finally, the assignee assumes the rights and benefits of the original agreement and is responsible for completing the purchase on the closing date. Throughout the assignment process, it’s important to seek legal advice and follow the requirements outlined in the original purchase agreement.

Fees and Default

Assignment agreements generally include an ‘Assignment Fee’ payable by the assignee to the assignor in exchange for the right to acquire the property. It is important to determine when this fee is payable. If any funds are to be released to the assignor prior to the completion of the original transaction, it must be specified. Otherwise, the default is that they are to be held in trust by the assignor’s solicitor, until the completion of the original agreement of purchase and sale.

If a seller defaults on the original agreement (i.e. fails to close the transactions), the assignment becomes null and void. The funds are returned to the assignee, and the assignor is not liable for any expenses or losses incurred therefrom by the assignee. The assignor can commence legal proceedings against the seller for failing to close the transaction, however, the assignee has little to no such legal remedy available, even in the face of changing market conditions.

Other Considerations

On a final note, the tax implications of assignments can be complex, and it’s important for buyers and sellers to seek legal advice before pursuing an assignment. Depending on the circumstances, both the assignor and assignee may be subject to various taxes, such as capital gains tax, HST, or land transfer tax. For example, while the resale of a residential property is naturally not subject to HST and, accordingly, there is no HST payable on the assignment fee, extra steps must be taken to ensure the same result for new-build properties; the assignment agreement must include a provision stating that part of the consideration is attributable to the reimbursement of a deposit paid by the assignee to the builder. As with the Land Transfer Tax, it is payable by the assignment after the completion date of the original transaction, on the aggregate purchase price (including the assignment fee).

Assignment of agreements of purchase and sale are a common tool used in Ontario real estate transactions to transfer property ownership rights and benefits. They can offer benefits such as flexibility and financial gain but also carry risks and challenges. Understanding the legal, financial, and practical implications of assignments is crucial for anyone considering pursuing this approach.

If you have any questions about assignments of agreement of purchase and sale or real estate law generally, please contact Jonathan at 289-220-3229 or [email protected]

Jonathan Dippolito
289-220-3229
(905) 668-9737
[email protected]

Main: (416) 863-0125

LegalShield: (416) 863-1029

Assignment Agreements of Purchase and Sale: What you need to know

Many would-be buyers of pre-construction properties are unable to get their hands on a new development due to factors such as financial constraints or missing the time period in which the sale of such a property comes available to public. More and more, purchasers are entering into an assignment of agreement of purchase and sale (“APS”) which allows you to purchase a pre-construction property prior to its final closing.

What is an Assignment?

An assignment APS is a contract that is drawn up which has two parties to it. The first party, known as the assignee, is the party which aims to purchase a pre-construction property from the assignor. The assignor is the seller who has already executed an APS with the builder of the pre-construction development but now wishes to sell their interest to the assignee prior to the final closing of the property.

Assignments can be highly lucrative. The sale price of an assignment will usually be above and beyond the price originally paid by the assignor to the builder. These type of assignments are usually undertaken by investors who seek to capitalize on the appreciation of the pre-construction property between the time they sign an APS with the builder to the time they sign an assignment APS with an assignee.

In rarer circumstances, some assignors may wish to assign their APS at the same price they originally paid the builder. This can happen for a multitude or reasons but one of the main reasons why this is done is because the assignor no longer finds the pre-construction property suitable to their needs (financially or otherwise).

The Importance of Sound Legal Advice

Receiving sound legal advice for an assignment APS is crucial. Not only do you want a lawyer to review the contract itself, but you may require tax advice . A prudent lawyer will be on alert for any potential HST issues on an assignment and advise their client to confer with their accountant or the Canada Revenue Agency, as necessary, to determine any tax implications for the assignor or assignee.

Further, a lawyer can assist in obtaining the consent of the builder to the assignment itself. The lawyers for the assignee, assignor and builder will work together to have all the parties execute what is commonly known as an assignment and consent agreement. In the same way a sensible buyer of a pre-construction property will seek to attain legal advice on their APS with the builder, an assignee should also request that their lawyer explain to them their responsibilities under the APS (such as agreeing to observe and perform all of the obligations that the assignor agreed to with the builder as per the original APS).

A lawyer can also explain the amounts that will need to be remitted by the assignee to the assignor. As a condition of the assignment, an assignor will want all of their deposits they have already paid to the builder from the assignee. In addition, the assignor will also want the difference between the original APS price the assignor agreed to with the builder and the assignment price with the assignee (for example, if the assignor purchased a pre-construction property for $100,000.00 and agrees to assign the APS for $150,000.00, the assignee will have to come up with $50,000.00, payable to the assignor, along with the deposits already paid by the assignor as previously mentioned).

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Assignment of a Purchase and Sale Agreement for a New House or Condominium Unit

From: Canada Revenue Agency

Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated residential housing are taxable for GST/HST purposes. This publication will be updated to reflect this legislative change. For more information about the legislative amendment, refer to GST/HST Notice 323, Proposed GST/HST Treatment of Assignment Sales .

GST/HST Info Sheet GI-120 July 2011

This info sheet explains how the GST/HST applies to the assignment of a purchase and sale agreement for the construction and sale of a new house.

The term "new house" used in this info sheet refers to a newly constructed or substantially renovated house or condominium unit. A house that has been substantially renovated is generally given the same treatment under the GST/HST as a newly constructed house. Extensive modifications must be made to a previously occupied house in order to meet the definition of a "substantial renovation" for GST/HST purposes. For a full explanation of the factors to consider in deciding if a substantial renovation has taken place, refer to GST/HST Technical Information Bulletin B-092, Substantial Renovations and the GST/HST New Housing Rebate .

In this publication, a house includes a single unit house, a semi detached house, a duplex, a rowhouse unit and a residential condominium unit (condo unit), but does not include a mobile home or floating home.

Where a person enters into a purchase and sale agreement with a builder for the construction and sale of a new house, the person may be entitled to assign their rights and obligations under the agreement to another person (an assignee). Generally, the result of the assignment is that the purchase and sale agreement is then between the builder and the assignee.

This publication addresses the situation where

a purchaser (referred to as the first purchaser) enters into a purchase and sale agreement with a builder (Builder A) for the construction and sale of a new house, and
the first purchaser subsequently assigns the agreement to an assignee (referred to as the assignee purchaser) before Builder A transfers possession or ownership of the house to the first purchaser and before any individual has occupied the house as a place of residence or lodging.

Generally, upon entering into an agreement for the construction and sale of a new house, the first purchaser is considered to have acquired an interest in the house. For GST/HST purposes, the assignment of the agreement to the assignee purchaser is normally considered to be a sale of the first purchaser's interest in the new house. The sale of an interest in a new house is generally taxable where the person selling the interest is a builder of the house.

For GST/HST purposes, the term "builder" is specifically defined and is not limited to a person who physically constructs a house. There are several instances in which an individual or other person is a builder for GST/HST purposes. For more information on persons who are included in the definition of "builder", refer to GST/HST Memorandum 19.2, Residential Real Property .

This info sheet addresses only whether a person is a builder as described in the following paragraph.

Primary purpose: selling the house or an interest in the house or leasing the house in certain circumstances

A builder includes a person who acquires an interest in a new house before it has been occupied by an individual as a place of residence or lodging for the primary purpose of selling the house or an interest in the house or leasing the house, other than to an individual who is acquiring the house otherwise than in the course of a business or adventure or concern in the nature of trade. When that person is an individual, the individual must acquire the interest in the course of a business or an adventure or concern in the nature of trade in order to be a builder described by this paragraph.

Even if a person is not a builder as described in the preceding paragraph, the person may be a builder based on one of the other definitions of the term as described in GST/HST Memorandum 19.2.

Assignment of a purchase and sale agreement by a person other than an individual

Where a person other than an individual (e.g., a corporation) is a builder as described in the section "Primary purpose: selling the house or an interest in the house or leasing the house in certain circumstances" and the person assigns a purchase and sale agreement for a new house, the person's sale of the interest in the house is subject to the GST/HST whether the sale takes place in the course of a business, an adventure or concern in the nature of trade, or otherwise.

Assignment of a purchase and sale agreement by an individual

If an individual enters into a purchase and sale agreement for one of the primary purposes described in the section "Primary purpose: selling the house or an interest in the house or leasing the house in certain circumstances", the sale of the interest in the house (or the house itself) is normally considered to be made in the course of an adventure or concern in the nature of trade or, depending on all of the surrounding circumstances, in the course of a business. If it is established that an individual is selling an interest in a new house in the course of a business or adventure or concern in the nature of trade, the individual is considered to have entered into the purchase and sale agreement for the primary purpose of selling the house or an interest in the house.

Whether the activity of acquiring an interest in a house, as a result of entering into a purchase and sale agreement, is done in the course of a business or an adventure or concern in the nature of trade is a question of fact. For more information on how to determine whether an activity is done in the course of a business or an adventure or concern in the nature of trade, refer to Appendix C of GST/HST Memorandum 19.5, Land and Associated Real Property .

Factors in determining the primary purpose

All of the relevant factors surrounding entering into a purchase and sale agreement should be considered in determining the primary purpose for a person's acquisition of an interest in a new house.

The following factors may indicate that, for GST/HST purposes, a person entered into a purchase and sale agreement for the primary purpose of selling an interest in the new house or the house itself. The factors are not listed in any particular order and there is no intent to weigh one more heavily than another.

The person offers to sell their interest in the house or takes other actions to attract buyers before, or while, the house is under construction.
The person finances the purchase of the house by a short-term mortgage, or an open mortgage that can be paid off without penalty, rather than by a long-term or closed mortgage.
Financing of the house is beyond the person's means and that person is relying on the increased value and saleability of the house, or an interest in the house, in a rising housing market.
The person is an individual and their stated intention to occupy the house as a place of residence is not supported by the circumstances of the case. For example, an individual has a family of four and enters into a purchase and sale agreement for a one-bedroom condo unit where they are not contemplating any changes in family circumstances.
The person's pattern of activity is such that their occupancy of the house does not have the qualities or characteristics of being permanent. For example, the person purchases more than one house at or around the same time. This factor may be given extra weight where the person has previously entered into a purchase and sale agreement for purposes of selling the house or an interest in the house. There are no outward indicators to support a contrary primary intention (i.e., an intention contrary to an intention of resale). For example, an individual is selling a condo unit, one or more of the above factors are present, there are no physical actions or evidence that the individual's primary intention was to live in the condo unit, use it as a vacation home, or rent it to another individual for use as their place of residence, and no evidence that the sale of the condo unit was triggered by some unforeseen event.

In order for the acquisition of an interest in a new house to be for one of the primary purposes described in the section "Primary purpose: selling the house or an interest in the house or leasing the house in certain circumstances", the intention to sell the house or an interest in it, or to lease the house in the manner described in that section, must have existed at the time of acquiring the interest. Nonetheless, the intention at the time of acquisition may be demonstrated over a period of time.

If an individual acquired an interest in the house for the primary purpose of using it as a place of residence, the person is not considered to be a builder of the type described in this info sheet even if, at a later point in time, the person sells the house or an interest in the house. However, the person may still be a builder if the person meets one of the other definitions of that term as described in GST/HST Memorandum 19.2.

The following examples illustrate when a person may or may not be a builder of a new house.

Sarah, Francine, and Angela are roommates renting a three-bedroom house. They entered into a purchase and sale agreement with a builder in January 2010 for a one-bedroom condo unit in a new condominium complex that was to be built. The purchase price under the agreement was $300,000 and the closing date was July 31, 2013.

In March 2011, the fair market value of the new condo unit had increased by 50%. They entertained several offers for the sale of their interest in the condo unit before assigning it to James. No individual had occupied the condo unit as a place of residence or lodging when they sold their interest in the unit. They split the proceeds, which they each used as a down payment to buy their own homes.

As it would not be practical for the three individuals to live in the condo unit together, they considered several offers for their interest in the unit, and there are no indicators to support a contrary intention, Sarah, Francine and Angela are considered to have acquired their interest in the condo unit for the primary purpose of selling the unit or an interest in it. The sale is considered to be made in the course of a business or adventure or concern in the nature of trade. Accordingly, Sarah, Francine, and Angela are all builders of the condo unit for GST/HST purposes. As they are builders of the unit and the sale of their interest in the unit is not exempt, GST/HST applies to the sale of each of their interests.

Pascal and Chantal own a four-bedroom house where they live with their three children. This is the only home they have ever owned and lived in. They have never purchased any other real property.

In June 2009, they entered into a purchase and sale agreement with a builder for a 1-bedroom condo unit in a new high-rise condominium complex that was to be built. The purchase price under the agreement was $275,000 and the closing date was June 30, 2010. In May 2010, they sold their interest in the new condo unit for $400,000 before it had been occupied by any individual as a place of residence or lodging. They used the sale proceeds to build an addition to their current home.

Although Pascal and Chantal have no history of buying and selling real property, it would not be practical for their family of five to occupy the condo unit as their place of residence. Lacking evidence to support a contrary intention, their primary purpose in acquiring the interest in the condo unit is considered to be for the purpose of selling the condo unit or an interest in it in the course of a business or an adventure or concern in the nature of trade. Accordingly, they are builders of the new condo unit for GST/HST purposes. As the sale of their interest in the unit is not exempt, GST/HST applies to the sale of their interest.

Eric and Gina owned a 3-bedroom house where they lived with their 3 children. They entered into a purchase and sale agreement with a builder in October 2010 to purchase a new 4-bedroom house that was to be built. They intended to use the new house as their primary place of residence as it was located much closer to the children's school and to Eric and Gina's workplaces and had more space. The closing date is July 31, 2011.

Eric and Gina sold their current home in January 2011 and moved into a rented home they planned to live in until their new house was ready. However, in June 2011, Gina's mother became ill and moved in with them as she was no longer able to live on her own.

Eric and Gina decided that the new house would no longer be large enough and that they would now need a house with a granny suite. They sold their interest in the new 4-bedroom house so that they could buy a bigger home that would suit their changed needs.

Eric and Gina's sale of their original home and temporary move to a rented house during the construction of the new home and their choice to purchase a home located closer to school and work support that their intention in acquiring the interest in the new house was to use the house as their primary place of residence. Given this, and the fact that their only reason for selling the interest was due to a change in personal circumstance (i.e., the new house would no longer accommodate their family's needs), they are not considered to have acquired the interest in the house for the primary purpose of selling it. Accordingly, they are not builders of the new house for GST/HST purposes and the sale of their interest in the house is exempt.

Cindy entered into a purchase and sale agreement with a builder in November 2010 for a new house that was to be built. She intended to use the house as her primary place of residence. Her new home would be located within walking distance from her workplace and would be closer to her family than the apartment she is currently renting. The closing date for the purchase is September 30, 2011.

In July 2011, Cindy's employer announced that it was relocating to another city located three hours away. To keep her current job, Cindy had to move to that city. She sold her interest in the house to John.

Since Cindy had intended to use the house as her primary place of residence and her only reason for selling her interest in the house was due to work relocation, she did not acquire the interest in the house for the primary purpose of selling it. Therefore she is not a builder of the house for GST/HST purposes and the sale of her interest in the house is exempt.

Assignment fees

The consideration charged for the sale of an interest in a house generally includes amounts that a person paid to a builder (e.g., a deposit) and that the person wants to recover when assigning their interest in the house. The sale price for the interest may also include a profit, i.e., an amount over and above amounts the person had paid to the builder. If a person's sale of their interest to an assignee purchaser is taxable, the total amount payable for the sale of the interest is subject to GST/HST, including any amount the person paid as a deposit to the builder, whether or not such an amount is separately identified.

A first purchaser enters into a purchase and sale agreement for a new house with a builder (Builder A) and pays a deposit of $10,000 at that time. The first purchaser does not make any further payments to Builder A. The first purchaser subsequently assigns the agreement to an assignee purchaser for $15,000. If the sale of the interest in the house from the first purchaser to the assignee purchaser is subject to GST/HST, tax applies to the full $15,000. This is the case even if the assignment agreement identifies that the $10,000 is a recovery of the deposit that the first purchaser paid to Builder A.

The assignment of a purchase and sale agreement for a new house may be subject to the approval of the builder with whom the first purchaser originally entered into the agreement to construct and sell the new house. The agreement may list conditions related to the first purchaser's right to assign the agreement to an assignee purchaser and, in many cases, the builder charges a fee to the first purchaser for the assignment of the agreement to another person.

The fee charged by the builder in such circumstances is generally subject to the GST/HST.

Eligibility for a GST/HST new housing rebate and provincial new housing rebate (where applicable) where a purchase and sale agreement is assigned

The GST/HST new housing rebate, and where applicable, a provincial new housing rebate, may be available for a new house purchased from a builder and for owner-built new housing. Guide RC4028, GST/HST New Housing Rebate , sets out the eligibility criteria for both types of GST/HST new housing rebates and provincial new housing rebates.

If the first purchaser (the assignor) makes a taxable sale of an interest in a house, i.e., the first purchaser is a builder and assigns the purchase and sale agreement to an assignee purchaser, the first purchaser would not be eligible for either a GST/HST new housing rebate or provincial new housing rebate as they did not acquire the house for use as their primary place of residence. Even if the sale of the interest in the house by the first purchaser is not subject to GST/HST (i.e., in situations where the first purchaser is not a builder of the house), the first purchaser would generally not be eligible for either a GST/HST new housing rebate or a provincial new housing rebate as the conditions for claiming the rebates are not met (e.g., ownership of the house would not transfer to the first purchaser, but to the assignee purchaser).

The assignee purchaser, if an individual, may be eligible for a GST/HST new housing rebate, and where applicable a provincial new housing rebate, where the assignee purchaser receives an assignment of a purchase and sale agreement for a new house. The assignee purchaser would have to meet the eligibility conditions for the rebates as set out in Guide RC4028.

Where a purchase and sale agreement for a new house is assigned, there may be two builders of the house – the original builder (Builder A) and the first purchaser (the assignor). If that is the case, an assignee purchaser would generally have to pay the GST/HST to Builder A for the purchase of the new house and to the first purchaser for the purchase of the interest in the new house.

Claiming a GST/HST new housing rebate when there is more than one builder

In some cases, the builder of a new house pays or credits the amount of the GST/HST new housing rebate, and where applicable, a provincial new housing rebate, to the purchaser of the house. In this case, the builder credits the amount of the new housing rebates to the purchaser by reducing the total amount payable for the purchase of the house by the amount of the expected rebates.

Where this happens, the purchaser and the builder have to sign Form GST190, GST/HST New Housing Rebate Application for Houses Purchased from a Builder , and the builder has to send the form to the Canada Revenue Agency (CRA). As the purchaser receives the amount of the rebate from the builder, the builder may claim the amount as a credit against its net tax when it files its GST/HST return.

Only one new housing rebate application can be made for each new house. Therefore, an assignee purchaser cannot submit a rebate application through a builder (Builder A) for the tax paid to Builder A on the purchase of the house and submit a second rebate application through the first purchaser (the assignor), or directly to the CRA, for the tax paid to the first purchaser on the purchase of the interest in the house.

In such cases, the assignee purchaser may want to file their new housing rebate application directly with the CRA rather than through Builder A. In this way, the assignee purchaser can include in the new housing rebate application the tax paid to Builder A and the tax paid to the assignor in determining the amount of their GST/HST new housing rebate and, where applicable, a provincial new housing rebate.

This info sheet does not replace the law found in the Excise Tax Act (the Act) and its regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate regulation, or contact any CRA GST/HST rulings office for additional information. A ruling should be requested for certainty in respect of any particular GST/HST matter. Pamphlet RC4405, GST/HST Rulings – Experts in GST/HST Legislation explains how to obtain a ruling and lists the GST/HST rulings offices. If you wish to make a technical enquiry on the GST/HST by telephone, please call 1-800-959-8287.

Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, you may refer to GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province .

If you are located in Quebec and wish to make a technical enquiry or request a ruling related to the GST/HST, please contact Revenu Québec at 1-800-567-4692. You may also visit the Revenu Québec Web site to obtain general information.

All technical publications related to GST/HST are available on the CRA Web site at www.cra.gc.ca/gsthsttech .

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ADVO TAX LAW

PROFESSIONAL CORPORATION

May 11, 2022

Tax Implications of a Real Estate Assignment: a Tax Exposure Calculator

This article provides an overview of GST/HST and Income Tax rules (current and proposed by the Federal Budget 2022) as they apply to real estate assignments sales.

In order to illustrate the points we discuss in the article, we have created a fun and interactive Assignment Tax Exposure Calculator for real estate assignments in Ontario (HST rate 13%) that result in business income for Income Tax purposes . If your assignment sale results in capital gain for Income Tax purposes, this calculator won't work for you (we might create one for our readers, if there is enough interest). Talk to your tax advisor to determine whether your assignment sale would result in business income or in capital gain.

We hope that our readers enjoy testing their business strategies with our Tax Exposure Calculator as they plan their assignment sales, but we caution them not to rely on the calculator in lieu of professional tax, legal or accounting advice.

Federal Budget 2022

A typical purchase agreement for a pre-construction residential property has a closing date scheduled months, often years in advance. As purchasers wait for the construction to complete/the transaction to close, some choose to assign their rights under the purchase agreement for the property for a fee. Federal Budget 2022 proposes new tax rules that will affect both such assignors and assignees.

Take, for example, Rebecca who purchased a pre-construction condominium in Downtown Toronto in 2017 for $300,000 (including HST) with a November 2022 tentative closing date. She provided a deposit of $60,000 to the builder. At the time of purchase, Rebecca’s intention was to live in the condo. As years went by, Rebecca changed her mind about living in Downtown; she decided to live in the suburbs instead. Lucky for Rebecca, the market value of her pre-construction condo surged to $500,000. In June 2022, Rebecca assigns her rights under the purchase agreement for the condo to a new purchaser who is willing to pay $260,000 ($60,000 to reimburse her for the deposit she made + $200,000 on account of the increase in price). Rebecca thinks she made an impressive profit of $200,000 but she did not consider taxes.

If you are like Rebecca, Federal Budget 2022 has some good news and some bad news for you (but mostly bad).

GST/HST to Apply on All Assignment Sales

The bad news is that effective May 7, 2022, under the Excise Tax Act (Canada) (“ETA”) every individual assignor of residential real estate would have to collect GST/HST on their assignment profit and remit it to the CRA. The rule will apply even to those who believe they are unrelated to the business of real estate and did not have a GST/HST number. Where an assignor is a non-resident, the assignee would be required to self-assess and pay the GST/HST to the CRA. In my example, Rebecca would have to remit 13% HST included in the $200,000 assignment profit ($23,008) directly to the CRA.

Before the Budget proposal, Rebecca’s HST liability depended on whether or not she purchased and assigned a condo in the course of a commercial activity. If Rebecca’s true intentions were to live in the condo, she would have been exempt from HST.

Income from Assignment: Business Income or Capital Gain?

Another element of bad news does not directly follow from the proposals, but raises concerns. Some commentators believe that, as an indirect effect of the Budget, we may see more assignment sales treated as business income (taxed at full rates) as opposed to capital gain (taxed at half rates) under the Income Tax Act (Canada) (“ITA”).

First, if all assignments are “taxable supplies” subject to GST/HST under the ETA, it generally implies the existence of a “commercial activity.” In its turn, a commercial activity generally implies business income treatment under the ITA. Granted, if an activity is deemed to be a “taxable supply” under the ETA, the deeming rule should not extend to a different Act, the ITA, but tax practitioners are watching carefully.

Second, Budget 2022 includes a new “anti-flipping” rule, which deems sales of residential properties owned for less than 12 months to generate business income under the ITA, subject to limited “life events” exceptions, such as a divorce or a job relocation. It is unclear whether the proposed “anti-flipping” rule would apply to assignments when taxpayers technically do not “own” the properties. Stay tuned.

In any event, the new “acceptable” list of life events replaces the current capital vs. income legal test entirely. Instead of determining whether the condo was Rebecca’s capital property or inventory, the focus shifts to merely checking whether her reason to sell/assign was on the list of the “acceptable” ones.

If Rebecca’s assignment profit is treated as business income for income tax purposes, her highest marginal tax rate would be 53.53% in Ontario. In very rough terms, Rebecca should budget well over 50% of her assignment profits for HST remittances and income tax. Depending on her marginal tax rate, she may be able to only keep about $88,000 of her original $200,000 assignment profit.

Before the Budget proposal, Rebecca’s intentions for the property (business or personal) would have been a question of fact. If she could prove that she intended to live in the condo, she would pay no HST and pay tax on capital gain. Her total tax liability would have been approximately $50,000 (25% of the $200,000 assignment profit).

No HST On Deposit Portion of Assignment Price

But there is also good news: the Budget proposes to exclude deposits from consideration for taxable supplies by assignment for GST/HST purposes. This means that GST/HST will only apply on the profit portion of the assignment price (in Rebecca’s case, $200,000), and not on the entire assignment price, which includes the deposit ($260,000). This is a welcome change that eliminates double taxation and is consistent with current caselaw ( Casa Blanca Homes Ltd. v. The Queen , 2013 TCC 338).

To generally estimate Income Tax and HST (Ontario) implications of an assignment that results in a business income, check out the Assignment Tax Exposure Calculator on our website .

IMPORTANT: Always speak to your tax professional to estimate or determine tax consequences applicable to your specific situation. DO NOT rely on our calculator for an accurate estimation of your tax liability. Nothing in this article constitutes legal advice and no solicitor-client relationship is created. If you require legal advice pertaining to your specific situation, please contact our tax lawyer .

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Assignment of Real Estate Contracts

This article continues the discussion of assignments of contracts from our last issue. Specifically, this article addresses assignment of real estate sales contracts, where the ability to assign and the effects of assigning are sometimes crucial. Following are some aspects of assignments of real property purchase and sale agreements.

Are real estate contracts freely assignable? Maybe. This depends on the agreement that the buyer and seller negotiated. Typically a seller reaches a level of comfort with regard to the trustworthiness and financial wherewithal of a particular buyer prior to signing an agreement. This expectation can be defeated if the buyer can simply assign its rights to buy the property to a third party who is a “stranger” to the seller. As a result, sellers attempt to restrict assignments of real estate agreements. For example, the agreement might say that it can be assigned only with the express written consent of seller, which cannot be unreasonably withheld. Whether a party acts “reasonably” is subjective, and thus, this approach can cause problems. A second approach might be to deny the buyer’s right to assign the property unless it is to an affiliate or subsidiary of the buyer. This approach allows a buyer to use a particular entity often times a so-called “single purpose entity” to buy the property. From the seller’s standpoint, this is often acceptable because the seller is generally still dealing with the same principals; the owners behind the assignee are generally the same owners behind the original buyer.

If the agreement is silent on matters of assignment it is freely assignable provided the transaction is an all cash deal to the seller. If the agreement calls for a mortgage from the buyer to the seller or if the property is to be bought by the buyer subject to a mortgage, then the seller is only obligated to make the deed out to that original buyer, effectively nullifying any assignment. This is an old rule but it remains sensible because when the seller signs the agreement he is relying on the credit-worthiness of a particular buyer to either make good on mortgage payments to the seller or to make payments on a mortgage loan upon which the seller is probably still a borrower.

Is the buyer liable on the agreement after he assigns it? Generally, yes. Unless the agreement of sale or an assignment document that is signed by all parties including the Seller expressly relieves the assignor of liability, the assignor remains bound and liable for financial obligations under the agreement. For this reason, it is a good idea for the assignor to get a written indemnity from its assignee as part of the assignment.

What about realty transfer taxes? It was once commonplace in commercial transactions in Pennsylvania for a buyer to sign an agreement to get a property “under contract”, and afterward set up an affiliate or a subsidiary which the buyer would assign the agreement to at closing. This is less common now as the Pennsylvania Department of Revenue now generally taxes assignments of agreements of sale. To avoid such taxes buyers now often avoid assignments by setting up and capitalizing the buyer (by contributing deposit money to the buyer) at the time the agreement is entered into rather than signing an agreement and then subsequently assigning it to a later formed entity. Other approaches are possible, including the use of so-called “novation agreements”, but in general buyers seem to be taking the simpler route of setting up the buying entity at the start of the transaction and skipping the assignment of the agreement altogether.

If you are a seller an assignment restriction should be included in your agreement of sale. If you are a buyer the substance of these restrictions should be reviewed and, if needed, negotiated. Realty transfer tax liability should also be considered.

— Rod Fluck

Tax Guidance for Assignors in Real Estate Assignment Transactions

Published: November 13, 2020

Last Updated: April 26, 2021

Tax Guidance for Assignors in a Real Estate Assignment Transaction – a Toronto Tax Lawyer Analysis

Introduction – what is real estate assignment.

Buying and Selling real estate assignments is a common form of transaction in the real estate market. An assignment is a transaction of the rights to a property before the legal ownership of the actual property is transferred. In the real estate context, the buyer of an assignment (the “assignee”) would purchase the rights to a real estate property, typically but not always a condo, that is being built under a Purchase and Sale Agreement, between the assignment seller and the builder, from the seller of the assignment (the “assignor”). This transaction would take place before the closing date of the property, and the ownership of the property legally remained with a third party, the builder, throughout the assignment transaction. Hence only contractual rights to a piece of property were assigned from one party to another in an assignment transaction and not the property itself.

Tax Guidance to Reporting Profits from an Assignment Sale – Capital Gains and GST/HST

The two main tax issues associated with the assignor in an assignment transaction are whether the profits from the sales are to be characterized as business income or taxable capital gain and whether the sales of assignments give rise to the obligation for the assignor to collect and remit GST/HST.

While many assignors would report their profits as taxable capital gains as well as taking the position that assignors are exempt from collecting and remitting GST/HST for sales of the assignments, over the past few years, the CRA has been aggressively going after assignment transactions, often auditing Canadian taxpayers for both unreported taxable business income and unremitted excise tax.

Whether a particular assignment sale will give rise to taxable business income will depend on the facts involved in the case. Similarly, whether the assignor has an obligation to collect and remit GST/HST will also depend on the facts. In short, there is no single answer and simple tax guidance as to how to report your taxes on every assignment transaction. We will breakdown the relevant tax factors below

Taxable Capital Gain vs. Taxable Income

The determination of income versus capital gain is a complex tax topic in which the Income Tax Act itself provides no tax guidance. This means the Tax Court will look to case law for a holistic set of relevant tax factors to determine taxable income vs. taxable capital gains. Please see our article on this general topic for a detailed breakdown (https://taxpage.com/articles-and-tips/a-canadian-tax-lawyers-introduction-to-business-income-vs-capital-gains/).

In the leading case on this issue, Happy Valley Farms Ltd v MNR, the Federal Court chose a set of holistic factors based on the principle of circumstantially determining the taxpayer’s intention at the time of the acquisition of the property. When a taxpayer acquired a property with the intention to resell at a higher value, such intention would strongly suggest the taxpayer has been carrying out business. Therefore, the taxpayer’s income should be characterized as taxable business income.

However, the mere fact an assignor ended up selling his or her legal interest in a piece of real estate property does not evidence that he or she had an intention to resell when he or she initially acquired the property. Usually, CRA has to prove an intention to resell through circumstantial evidence to make an inference that the taxpayer had an intention to resell upon acquisition. In the Happy Valley Farm case itself, the Federal Court determined the intention of the taxpayer by looking at his conduct while holding the property as well as his relevant past conducts.

Factors such as frequency or number of other similar transactions by the taxpayer and circumstances that were responsible for the sale of the property are ultimately tools to help the court to determine the taxpayer’s intention at the time of acquisition. No single Happy Valley Farms factor outside the motive factor is determinative, and the determination of taxable business income versus taxable capital gains in assignment transactions will depend on a holistic assessment of the facts.

GST/HST on Assignment Sales

Unlike the income tax implications of assignment sales, the GST/HST implication of assignment transactions is more clear. The seller in an assignment transaction can often be deemed as a “builder” under the Excise Tax Act, which gives rise to the obligation to collect and remit GST/HST upon the sales of the transaction.

However, even if the seller is not deemed to be a builder, an assignment sale is at the very least a transaction involving a “chose in action” which is considered an enforceable legal right in the property itself. A chose in action is specifically mentioned in the definition of “property” under section 123(1) of the Excise Tax Act

property means any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money; On the other hand, the seller of an assignment transaction can also claim Input Tax Credits for his or her initial purchase of the assignment rights from the builder. Since many buyers and sellers of real estate assignments are likely unaware of the GST/HST implications of assignment transactions, a crucial issue to keep in mind is the deadline and extension mechanism for claiming Input Tax Credit under subsection 225(5) of the Excise Tax Act.

Pro Tax Tips – Prepare for Different Tax Implication for Each Assignment Transaction

The tax implication of an assignment transaction for the assignor will depend on whether the assignor was legally engaging in business activities in the course of buying and selling his or her real estate property interest. Such determination will involve holistically looking at all the relevant facts surrounding the transaction. The nature of an assignment sale itself does not determine whether the profit from such sales should be reported as taxable income or taxable capital gains.

As CRA has been going after assignment transactions aggressively and will likely to continue doing so in the foreseeable future, it is important for Canadian taxpayers to be aware of his or her rights to objection under the Income Tax Act in order to make sure his or her right to file a notice of objection is preserved upon being audited by the CRA .

If you have been contacted by the CRA regarding your past assignment transactions or you have questions regarding a specific assignment transaction that you are contemplating and whether (or not) it constitutes a business transaction, please contact our office to speaking with one of our experienced Canadian tax lawyers.

Disclaimer:.

"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. 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 the articles. If you have specific legal questions you should consult a lawyer."

About the Author

David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

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Tax on Assignment Sales: What You Need to Know

Real estate assignment sales and flipping pre-construction condos have become popular strategies for investors looking to make a quick return. And CRA has noticed. In this blog, I will explain two ways CRA is cracking down on pre-construction investors and what you can do to minimize your tax paid on assignment sales.

#1 – CRA May Tax Assignment Sales as Business Income

Similar to selling a resale home, you are required to report an assignment sale on your tax return and pay the necessary tax. Many real estate investors are quick to assume that the profit from an assignment sale is a capital gain.

However, CRA may tax assignment sales in two ways:

Capital gain – where only 50% of the profit is taxable
Business income – where 100% of the profit is taxable

To make its determination, CRA will consider factors such as:

What was your motive or intention in buying the property?
How long did you hold the property before selling?
Do you have a history of similar transactions?
What is your reason for selling?

Based on past court cases, we know that CRA will generally consider the profit from assignment sales to be business income unless you have a compelling explanation.

With the potential to double its tax collection, you can bet that CRA is watching this closely!

#2 – CRA May Assess GST/HST on Assignment Sales

This is probably one of the most overlooked tax implications when it comes to assignment sales.

While resale homes are generally exempt from GST/HST, you may be surprised to learn that this may not be the case with assignments.

Similar to income tax, CRA will look at your intentions in buying the property to determine whether GST/HST applies to you.

For example, you are likely considered a “builder” and will have to charge GST/HST if you assign a pre-construction unit that you bought for the purpose of flipping to make a quick profit.

And it gets worse:

Not only do you have to charge GST/HST on your profit, you also have to charge GST/HST on the deposit you recoup from the buyer!

Since most real estate contracts embed GST/HST into the sales price, this cost will likely be borne by the assignor.

Let’s look at an example:

Scenario Luca purchased a pre-construction condo unit for $450,000 a couple of years ago. He paid a deposit of $90,000 to the builder. The unit is currently worth $575,000. Luca had always planned to buy this unit as an investment and assign it for a profit. He has a personal tax rate of 50%.

On the surface, it looks like Luca stands to make a great profit. But, let’s see how that holds up:

What Can You Do to Save Tax on Assignment Sales?

Firstly, if you are unsure whether you have a capital gain or business income, you should reach out to a tax professional for advice.

Secondly, if the profit on your assignment sale is in fact business income because of the factors discussed above, then you should consider incorporating.

The benefit here is that business income is usually taxed at low rates inside a corporation (about 12.2% in Ontario and 11% in British Columbia). This is much lower than the the top tax rate of 53% paid by individuals.

Now be warned:

Setting up a corporation for real estate investing is not for everyone. Be sure to consult with a tax professional before implementing this strategy.

Lastly, it is important to work with an experienced real estate lawyer to discuss your GST/HST options. In my experience, it may be possible to restructure an assignment sale to reduce the GST/HST you pay as an assignor.

In Luca’s case, with the right professionals on his team, he was able to restructure the deal to reduce his taxes by about 38% (50% less 12.2%), pay less GST/HST and put this money into his next real estate project.

Have qu estions about flipping pre-construction real estate? Contact us for a consultation.

The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.

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COMMENTS

Sale of a Contract: Ordinary v. Capital
The maximum rate was 39.6-percent prior to the Tax Cuts and Jobs Act ("TCJA"; P.L. 115-97). [xvi] IRC Sec. 1 (h). In contrast, a C corporation is taxed at a flat federal rate of 21-percent (a maximum of 35-percent prior to the TCJA) regardless of the ordinary or capital nature of the income or gain.
Sale of A Contract: Capital Gain or Ordinary Income?
The gain realized on the sale or exchange of property used in a taxpayer's trade or business is treated as capital gain. In general, the Code defines "property used in a trade or business" to include amortizable or depreciable property (subject to the so-called "recapture" rules), as well as real property, that has been used in a ...
Tax Implications on Assignment of a Purchase Contract
Called "assignment of purchase" agreements, such deals have tax implications for both the person who sells the contract and the person who buys it. Any profit realized from such assignment sales must be reported by the assignor and could have varying implications. These implications include the profit being treated as fully taxable business ...
Are Assignments of Contracts In PA Subject to Additional Transfer Tax
The simple answer is YES. The Pennsylvania Department of Revenue issued a Realty Transfer Tax Bulletin titled 2008-01 which was in accord with the Rule in BAEHR BROS, (61 PA.Code 91.170). The bulletin sets out several real estate transfer scenarios and describes the tax implications of each one. It can be found at www.revenue.pa.gov.The pertinent information for Wholesellers is Assignment of ...
Tax implications of Assignment Sales
Trusts with a tax year end of Dec 31, 2021. Filing Deadline: March 30, 2024. Payment Due Date: March 30, 2024. Corporations. Federal & Quebec with a filing due date after March 18 and before June 1. Filing Deadline: June 30, 2024. Payment Due Date: March 31, 2024. Alberta. 6 months after year-end.
Contract for deed income tax implications, reporting & capital gains on
Selling a home using a contract for deed does come with certain tax implications for sellers. For example, contract for deed sellers usually lose any property tax deductions to their buyers. 2. Property Tax Deductions. Also known as land contracts, contracts for deed are installment sales pertaining to homes.
Sorting the tax consequences of settlements and judgments
The receipt or payment of amounts as a result of a settlement or judgment has tax consequences. The taxability, deductibility, and character of the payments generally depend on the origin of the claim and the identity of the responsible or harmed party, as reflected in the litigation documents. Certain deduction disallowances may apply.
Real Estate & Construction
To bring some clarity to the tax implications on the assignment of a purchase contract, we will discuss the key income tax, GST/HST, and CRA audit considerations for both contracting parties. Before we get started, let's review the role of the three parties involved in this type of transaction: the assignor, the assignee, and the builder.
Tax Implications of Asset Purchase Agreements: What You Need to Know
Tax Implications for the Buyer. 1.1 Depreciation and Amortization. One of the primary tax benefits for buyers in an APA is the ability to depreciate and amortize the acquired assets over time. Depreciation allows the buyer to deduct the cost of tangible assets (e.g., machinery, equipment, buildings) over their respective useful lives, reducing ...
A Road Map of Tax Consequences of Modifying Debt
The borrower's tax consequences are determined by comparing the issue price of the new debt to the adjusted issue price of the old debt. 41 Generally speaking, the adjusted issue price is the principal amount if the debt was not issued at a discount and provided for current payments of interest at a fixed or variable rate. Gain or loss to the ...
tax consequences of assignment of contract
Capital gains works almost the same way. If the last dollar you earned was earned in the 15% bracket, then the first dollar of capital gains will be taxed at the capital gains rate in effect for the 15% bracket. If some portion of your capital gains pushes your total taxable income into a higher tax bracket, then that portion of your capital ...
A Guide to Assignment of Contract in Real Estate
Written by MasterClass. Last updated: Jul 12, 2021 • 4 min read. Assignment of contract involves one party transferring the rights of a real estate purchase agreement to another party. This real estate investing strategy can involve time and financial pressure, but the assignor can potentially make a quick buck.
Are you the successor-in-interest? When a company inherits ...
The Assignment of Contracts Act, 41 U.S.C. § 6305, and the Assignment of Claims Act, 31 U.S.C. § 3727, together make up the "Anti-Assignment Acts." These Acts generally prohibit the transfer of a US government contract from a contractor to a third party unless the government approves it expressly by novation or implicitly by ratification ...
Update: Realty Transfer Tax on Assignments of Agreements of Sale
The revised bulletin provides that the realty transfer tax will not apply to the assignment of an agreement of sale to a real estate company's SPE so long as the following requirements are met: the assignment of the agreement of sale must result in a "repudiation" of the buyer's duties to the seller, and a "novation" on the part of ...
Understanding an assignment and assumption agreement
The assignment and assumption agreement. An assignment and assumption agreement is used after a contract is signed, in order to transfer one of the contracting party's rights and obligations to a third party who was not originally a party to the contract. The party making the assignment is called the assignor, while the third party accepting ...
Real Estate Assignment Sales
The Federal Budget for 2022 has made amendments to Part IX of the Excise Tax Act ("ETA"). Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated single unit residential complexes or residential condominium units are taxable. For clarity, with respect to residential housing transactions, the purchaser (assignor) enters into an agreement of ...
Assignments of Agreement of Purchase and Sale
The assignment of an agreement of purchase and sale is a legal transaction whereby a party to a contract transfers their rights and obligations in that agreement and associated property, to another party. ... However, there are also potential drawbacks to assignments, such as uncertainty regarding the closing date, tax implications, higher than ...
Assignment Agreements of Purchase and Sale: What you need to know
What is an Assignment? An assignment APS is a contract that is drawn up which has two parties to it. The first party, known as the assignee, is the party which aims to purchase a pre-construction property from the assignor. ... as necessary, to determine any tax implications for the assignor or assignee. Further, a lawyer can assist in ...
Assignment of a Purchase and Sale Agreement for a New House or
A first purchaser enters into a purchase and sale agreement for a new house with a builder (Builder A) and pays a deposit of $10,000 at that time. The first purchaser does not make any further payments to Builder A. The first purchaser subsequently assigns the agreement to an assignee purchaser for $15,000.
Tax Implications of a Real Estate Assignment: a Tax Exposure Calculator
Tax Implications of a Real Estate Assignment: a Tax Exposure CalculatorThis article provides an overview of GST/HST and Income Tax rules (current and proposed by the Federal Budget 2022) as they apply to real estate assignments sales. In order to illustrate the points we discuss in the article, we have created a fun and interactive Assignment Tax Exposure Calculator for real estate assignments ...
Assignment of Real Estate Contracts
Assignment of Real Estate Contracts. This article continues the discussion of assignments of contracts from our last issue. Specifically, this article addresses assignment of real estate sales contracts, where the ability to assign and the effects of assigning are sometimes crucial. Following are some aspects of assignments of real property ...
Tax Guidance for Assignors in Real Estate Assignments.
GST/HST on Assignment Sales. Unlike the income tax implications of assignment sales, the GST/HST implication of assignment transactions is more clear. The seller in an assignment transaction can often be deemed as a "builder" under the Excise Tax Act, which gives rise to the obligation to collect and remit GST/HST upon the sales of the ...
Tax on Assignment Sales: What You Need to Know
Luca's Profit Without Tax Planning At Luca's tax rate of 50%, half of his $125,000 profit will go towards income tax. This leaves him with $62,500. Luca also owes GST/HST on his profit of $125,000 and on the $90,000 deposit. Assuming a 13% GST/HST rate, this leaves Luca with about $35,000 in net profits on the assignment sale.

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Tax on Assignment Sales: What You Need to Know

#1 – CRA May Tax Assignment Sales as Business Income

#2 – CRA May Assess GST/HST on Assignment Sales