Today, we will explain to you: HST involved in the transfer of pre-sale properties, whether HST needs to be paid for the transfer of pre-sale properties, and if so, how to calculate it?
1 What is “transfer of pre-sale property”?
Transfer of pre-sale properties It means that the buyer of the new house sells the house before the new house is completed and moved in. In other words, he/she actually transfers the purchase contract signed with the builder after signing the purchase contract for the new house with the builder and before the construction of the new house is completed. This transfer is not actually selling the property, because the transferor does not actually obtain the property rights of the house. From the perspective of the tax bureau, this transfer is actually the initial purchaser of the pre-sale property who purchases the pre-designed and built things together with the builder and signs the contract together. The purchaser only pays the deposit and then has to wait for a few years until the property is built before the ownership of the house can be truly transferred to the purchaser. During this period, if the initial purchaser sells the house before the house is completed and delivered, that is, before the ownership of the house is transferred, it is not a real estate resale transaction, but what we commonly call "pre-sale property transfer."
Do I need to pay HST when transferring a pre-sale property? The conditions for measurement depend on two aspects:
1) Is it profitable to transfer a pre-sale property?
2) What is the purchasing purpose of the initial purchaser of the pre-sale property?
Among the hundreds of property transfer cases handled by our firm in the past, 90% of the property transfer businesses were "simply and crudely" defined by the Canada Revenue Agency as "transactions for profit", and thus the property transferors were deemed to be builders. As a result, the property transfers would definitely involve the issue of paying HST.
So do all pre-sale property transfers have to pay HST? According to our experience, the answer is no.
Here are two common scenarios:
(1) The safest and most convenient transfer method that does not involve HST: the purchaser who initially signed the purchase contract and paid the deposit returns the contract to the house builder and gets the deposit back from the builder; the new buyer directly signs a new purchase contract with the builder. However, this method is not common in practice because the initial purchaser will lose the interest and opportunity cost of the deposit in vain, which is not reasonable in a market where house prices are rising.
(2) Even if the initial purchaser transfers the property and makes a profit from it, HST can be avoided if the purchaser can provide reasonable reasons for the initial purchase and the reason why the property cannot be sold due to changes in actual circumstances.
In the cases we have handled in the past, we found that not all transfers of pre-sale properties will necessarily be identified as "transactions for the purpose of profit." There are some explanations of the purpose of purchasing pre-sale properties that the tax bureau can accept and agree not to consider the impact of HST.
The following are some of the factors that can help you avoid HST when purchasing a pre-sale property:
(1) For a son or daughter to live in while attending college
(2) For parents who want or need to live
(3) A spouse who plans to live apart from his/her family purchases a house for his/her own use
(4) The actual area no longer meets the living needs at the time
(5) Buyers who plan to use the apartment when working in the city or visiting Toronto
(6) For an engaged son or daughter to live in
(7) The buyer wants to be closer to his or her workplace or move to the workplace
*Note: The above purchase intentions need to be supported by corresponding evidence.
If you have experience or plan to sell a property before, and can provide relevant evidence to support your initial purchase intention, you may want to try HST Ruling , maybe there will be unexpected gains! Our accountants are also very happy to help you.
If you do not qualify to avoid HST, the HST calculation formula for the transfer of a pre-sale property is as follows:
(Deposit recovered + Transfer Markup) * HST tax rate
Let's take an example
First, if A purchased a pre-sale apartment with a contract price of 300,000 Canadian dollars, and A paid a 20% deposit of 60,000 Canadian dollars according to the contract. After a while, A wants to transfer the property, so the first thing A wants to do is to get back the 60,000 Canadian dollars that A paid in advance. When A receives the returned $60,000, from the perspective of HST, it is not considered a return of the deposit, but will be considered a taxable sale. This means that when A receives the 60,000 Canadian dollar deposit, A already owes the tax bureau 13% HST, which is 7,800 Canadian dollars.
Secondly, since A has held the property for some time, if possible, A will transfer it at a price higher than the contract price. This behavior is of course subject to tax. Assuming that A transfers the property at a price of 340,000 Canadian dollars, the additional 40,000 Canadian dollars will also be subject to 13% HST, that is, $5,200 Canadian dollars.
Finally, the total HST that the transferor of the pre-sale property has to pay should be:
(Deposit recovered + Transfer price)* 13%
That is ($60,000+$40,000)*13% = $13,000 CAD
