For the last number of years, it was almost a given that if you bought a pre-construction condo, you would be able to sell it at a profit when the building was finished several years later. I am now seeing examples in my own law practice where there is no such guarantee.
In one example, the condo was purchased by Syrian immigrants 5 years ago, prior to the outset of hostilities in that country. When the building was finished in 2013, the buyers could not get access to their money in Syria. As such, they could not close their purchase and could not find anyone to purchase their contract. They forfeited all deposits paid, which were more than $30,000.
In another situation, the buyer was approved for financing 4 years ago when the condominium agreement was signed with the developer. However, when the building was finished, the same lender refused to give the financing, stating that the buyer’s financial status had changed and that they no longer qualified for the mortgage. In this case, the buyer was able to sell their contract before closing, but they had to take a loss of $20,000, and had to pay real estate commission on the sale as well, increasing their losses.
In another situation, the buyers were able to sell their contract before closing at a profit of $30,000. They later received a re-assessment notice from the Canada Revenue Agency on the basis that since this buyer never actually received title to their unit, they had to pay tax on the full $30,000 gain as though it were income, and not as a capital gain, where they would have been taxed on one half the gain, or $15,000.
Is there any way buyers can be protected from any of the above situations occurring?
In all cases, buyers should make sure when they sign a pre-construction contract, that they have the right to sell or assign it before closing without requiring the permission of the seller.
The situation with the Syrian buyers was very unfortunate, but it does not give them a legal right to cancel a contract. The same is true of the buyer whose financing gets pulled at the last minute. In order to have this right, it has to be negotiated at the time the contract is signed. Buyers should consider negotiating a clause with the builder that states that if there is a change of life circumstance before closing, such as death, serious injury or loss of employment, that they can cancel the contract upon the payment of a set amount or penalty.
For buyers who have no choice but to sell before closing, there may be a way to fight a re-assessment by the Canada Revenue Agency if you can demonstrate that at the time you bought, you clearly intended to close the sale, but that circumstances changed at closing, requiring you to sell. Since every individual situation will be different, it is best to always seek tax advice from a lawyer or accountant before making any decision to challenge a re-assessment. In addition, if you are ever called by someone from the Canada Revenue Agency inquiring about any prior transaction you may have made, my advice is to tell them you will call them back, and then get legal or accounting advice first. In my experience, it is very unsettling to get a call out of the blue from the Canada Revenue Agency and it is easy to say something wrong or get confused.
Click here to read the article: http://www.thestar.com/business/personal_finance/2014/01/10/beware_the_perils_of_buying_or_selling_a_preconstruction_condo.html
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About Mark Weisleder
Mark is a lawyer, author, instructor, Toronto Star columnist and keynote speaker for the real estate industry.