You may have heard that speculative buying in the GTA is driving prices up, shutting out owner-occupiers and adding to an already frothy real estate market. It’s a culprit behind unsustainable price growth says Ontario Finance Minister Charles Sousa, promising a crackdown on those who jump in and out of the market in search of windfall gains.
Sousa says a major focus for the province will be addressing the practice of “paper flipping”, or selling condos on assignment – when a buyer enters a contractual agreement to buy a Toronto condo, and assigns it to someone else prior to closing, effectively driving up the price and avoiding tax at the same time.
Assignments are typically brand new condos or units still being built that buyers purchased much earlier in the preconstruction phase. By “assigning” — or flipping — them to new buyers before the project is fully occupied and registered, early buyers can turn a nice profit and pass on some or all of their closing costs to the subsequent buyer.
Government Targets Potential Tax Cheats
“These scalpers may be avoiding tax,” Sousa maintains. “We will require full disclosure if a property is transferred through an assignment clause.” In addition, he wants the province to work even more closely with the Canada Revenue Agency to ensure taxes are paid in full and that the capital-gains exemption for a principal residence is only allowed in appropriate cases.
He also wants the federal government to close a loophole that allows those flipping properties to treat their profits as capital gains – which means only 50 per cent is taxable – to limit the amount that the party selling the property can pocket.
But while such sweeping changes may or may not mean fewer assignments, Toronto real estate lawyer Kirsty Strong feels they could mean more bureaucracy and likely higher costs for owners.
“While the intention is well meaning, I think the implementation is going to be extremely difficult,” she says. “There are so many variables. What really needs to be done is more education for sellers and prospective owners about just what they’re getting themselves into.”
Not Every Seller Is a Scalper
Out of the thousands of new Toronto townhouses and condos currently under construction, most were bought by people intending to live in them. However, many were also purchased as investments – either to sell or rent, as a home for a child going to school, or as an itinerant pied-à-terre.
Buyers sometimes get transferred or simply change their minds though, looking to sell their condo either before the occupancy period or before the official close. Except, since they don’t yet own the condo, they can’t actually sell it. What they may be able to do, however, is assign their contract to someone else.
The assignment process can be tricky, Strong warns, with risks, legal requirements and paperwork that go beyond the usual agreement of purchase and sale for a condo: “As with any contract, it’s crucial for buyers and sellers to know what they’re signing,” she cautions.
Assignments More Complicated Than Resale Transactions
One thing that assignment sellers will find is that their assignment contracts heavily favour the developer in almost all situations. Some developers prohibit assignments altogether because they don’t want competition against their own project. Others charge a fee once the building has sold out, generally 1% of the original purchase price.
As well, legal fees to purchase an assignment condo are generally higher than typical resale condo purchases. Builders will typically ask assignors to pay their legal fees to have the request documents drawn up by their lawyers, adding as much as $500 in costs.
One advantage to assigning a contract is that sellers avoid the carrying costs (mortgage, maintenance fees, and taxes) for the period between listing and selling the property. As well, because no land ever changed hands, the original purchaser will get to avoid paying any land transfer tax.
More Cash Required Upon Closing
Once you purchase an assignment, you’re essentially stepping into the shoes of the original purchaser and taking over the contract as it already exists, along with the usual risks – time delays, changes to the unit or building, and extended interim occupancy periods – that often haunt preconstruction condos.
When the unit is officially registered and you close on the purchase, you’ll be responsible for several closing costs that don’t apply to resale units. These can easily amount to as much as 3 per cent of the original purchase price.
Make sure you have lots of cash on hand, Strong advises. Since the unit is still owned by the builder, not you or the assignor, it can’t be mortgaged. As a result, you’ll need to come up with funds to cover the above costs, as well the assignor’s profit.
You’ll also be responsible for land transfer tax on the new purchase price. For example, a $500,000 purchase would cost $12,200 in Toronto, although first-time buyers are entitled to rebates from the province and the city.
