The Tax They Reported Right, and the One Nobody Mentioned

The situation

Sana had spent three decades as a software developer before retiring, and she and her spouse Miriam, a pharmacist, had put a portion of their savings into a pre-construction townhouse in a new development going up in Petawawa. The plan was simple: put down a deposit, hold the agreement of purchase and sale while the building went up, and either move in or sell once it was complete. Interest rates climbed sharply while they waited, and their own financial picture changed enough that closing on the unit no longer made sense.

Instead of closing, they did what many pre-construction buyers in their position do: they assigned their agreement of purchase and sale to another buyer before the building was finished. An assignment sale transfers the buyer's contractual right to purchase the unit from the builder to a new buyer, called the assignee, in exchange for a payment that covers the deposits already paid plus a profit if the property has gone up in value since the original agreement was signed. Sana and Miriam found a buyer, Rivka, who was willing to step into their place, and the assignment closed a few months later.

Their accountant flagged, correctly, that the profit on the assignment would not qualify as a capital gain. A federal rule treats profit from selling a housing unit — including an assignment of a pre-construction contract — as fully taxable business income rather than a capital gain when the underlying property was held for under a year, with no access to the principal residence exemption that might otherwise have sheltered part of the gain. Sana and Miriam reported the profit that way on their return and paid tax on the full amount at their marginal rate. They believed, reasonably, that they had closed the file.

What the review found

Two years later, a CRA audit letter arrived addressed to both of them. It was not about the income tax return. It was about GST/HST — the goods and services tax and harmonized sales tax that applies to new housing sold in Ontario. Since 2022, federal rules have made every assignment sale of a newly constructed or substantially renovated home taxable for GST/HST purposes, regardless of why the assignor is selling or how the profit is characterized for income tax. Nobody had told Sana and Miriam that the assignment itself carried a separate HST obligation, distinct from the income tax already paid on the profit.

That much was a genuine gap, and a real one. When an assignor sells their contractual position to an assignee, the amount the assignee pays — the deposit reimbursement plus whatever profit is built in — is treated as consideration for a taxable supply. The assignor is expected to charge, collect, and remit HST on that amount, the same as any other seller of a taxable supply, unless the assignment documents specifically shift that obligation to the assignee. Sana and Miriam's assignment agreement was silent on the point, and no HST had been charged, collected, or remitted by anyone.

What made the CRA letter alarming rather than merely disappointing was the number attached to it. Instead of applying HST to the roughly $250,000 in deposit reimbursement and profit that had actually changed hands between Sana, Miriam, and Rivka, the assessment calculated HST on the full contract price of the unit itself — the entire amount the ultimate buyer would eventually pay the builder to close, well over $700,000. On top of that inflated base, CRA had applied a penalty for gross negligence, which is reserved for cases involving a high degree of carelessness or an intentional understatement, plus several years of accumulated arrears interest. The total demand came to roughly $175,000.

What we did

1. Separated the two tax questions cleanly. The income tax treatment of the assignment profit as business income had been done correctly and was never in dispute. We made that clear at the outset so the file would not get tangled with the actual issue, which was strictly a GST/HST question about an unrelated statute.
2. Challenged the assessment base. The taxable supply in an assignment sale is the assignor's contractual interest, not the underlying home. HST is properly calculated on what the assignee actually pays the assignor — here, the deposit reimbursement and profit totalling roughly $250,000 — not on the full price the assignee will later pay the builder for the completed unit. We set out this distinction in writing with the assignment agreement and the deposit records as supporting evidence.
3. Pushed back on the gross negligence penalty. That penalty requires a high threshold of carelessness or intent. Sana and Miriam had engaged an accountant, reported the income tax portion correctly, and had no reason to know that a separate consumption tax obligation attached to the same transaction — the HST treatment of assignment sales was itself a relatively recent change. We argued the facts supported an honest oversight, not negligence, and asked CRA to apply the ordinary late-remittance penalty instead.
4. Filed a notice of objection. Once the reassessment was formally issued, we filed a notice of objection within the required period, preserving Sana and Miriam's right to have the file reviewed by CRA's appeals division rather than letting the original number stand by default.
5. Negotiated the arrears interest. With the assessment base corrected, we worked to align the interest calculation with the smaller, accurate amount owing rather than interest that had compounded on the inflated figure for over two years.

The outcome

CRA's appeals division accepted the corrected calculation basis: HST applied to the roughly $250,000 in consideration actually paid on the assignment, not the full underlying contract price. That single correction took the HST portion of the bill down from over $100,000 to roughly $32,500. The gross negligence penalty was withdrawn and replaced with the standard late-remittance penalty, and the interest recalculated on the smaller principal. The final amount owing came to roughly $39,000 — deliberately, HST plus a modest penalty and interest, all real and all payable, but a fraction of the roughly $175,000 CRA had originally demanded.

This was not a case where the firm made a genuine tax debt disappear, and Sana and Miriam were told that plainly from the first call. They had, in fact, missed a real obligation. Assignment sales of new construction homes have carried an HST obligation for the assignor since 2022, and that obligation exists independently of how the profit is taxed for income tax purposes. No one along the way — not the real estate lawyer who handled the assignment closing, not their accountant — had flagged it, and by the time CRA's letter arrived, interest had been accumulating for two years. The firm's role was to make sure the bill that resulted matched the transaction that actually happened, rather than a miscalculated version of it, and to make sure a good-faith mistake was not treated as deliberate evasion.

Sana and Miriam paid the reassessed amount over several months on a payment arrangement with CRA. Their existing income tax filing was not reopened or touched.

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