A man in British Columbia lost his $81,990 deposit on a townhouse despite having a contract option to transfer the deal to another buyer. Sudip Sehgall put down the deposit on the yet-to-be-built property in 2021 but was unable to sell his home in New Delhi to finance the deal due to new regulations and floods. When he tried to find a buyer to take over the Canadian deal, the developers opted to keep his deposit and sell the unit themselves. Sehgall is part of a growing number of Canadians defaulting on deals to buy presale or preconstruction condos or homes due to financial pressures, according to realtors.

A first-time homebuyer in Surrey, British Columbia, is facing the loss of an $81,990 deposit after the developer refused to allow him to assign the contract to another buyer. The Real Estate Development Marketing Act of B.C. allows developers to refuse assignment options and does not require them to deliver exactly what was seen in a showroom. The contracts are one-sided and weighted in favour of developers, according to real estate lawyer Richard Pazder. The average home price in the area is predicted to drop by up to 10% in early 2024, leaving presale buyers vulnerable as their investment depreciates. The buyer has reached out to politicians and business leaders for help but has been advised that the contracts are ironclad.

The Details of Real Estate Lawyers Are Urging Presale Buyers To Exercise Caution Amidst A Wave Of Defaults

One B.C. male lost his $82K deposit, despite an agreement option to transfer to another purchaser.

In 2021, Sudip Sehgall paid $81,990 upfront for a townhouse that hasn’t been built yet in Surrey, B.C. While it was under construction, he sometimes checked out the site to see it grow.

The 52-year-old visualized the offer taking him steps closer to owning his first Canadian home, however, he only had enough for a deposit after a loan from his retired dad.

Sehgall was depending on offering his home in New Delhi to get funding to close the deal. He began to worry when new regulations in India made his home less desirable. After the floods happened, he wasn’t able to sell it anymore.

Making matters worse, when he searched for a purchaser to take over the Canadian deal so he might get a refund, the designers decided to keep his deposit and offer the brand-new unit themselves.

Sehgall, who came to Canada in 2016 as a skilled worker, says he is now broke and back to leasing, this time a cramped $1,700-a-month basement suite with his belongings lined up in suitcases against the walls. He lost his less expensive leasing, thinking he was about to move into his new home.

“I might have to go back to India, and my dreams of living in Canada have been totally ruined,” he told CBC News.

Sehgall belongs to a growing contingent of Canadians who are defaulting on deals to purchase presale or preconstruction apartments or homes due to monetary pressures.

Real estate agents suggest that the boost in defaults can be attributed to the mix of elevated rates of interest and decreasing condominium worths. Nationwide, realtors and real estate legal representatives observe that various purchasers are surrendering their deposits. Although Sehgall’s situation is exceptional, specialists claim that other Canadians are also encountering difficulties and discovering the prospective dangers connected with such deals. This issue is ending up being more prevalent.

In the past 30 years, Barry Lebow, a real estate broker in Toronto, has actually not experienced such a high variety of purchasers defaulting on their purchases.

Lebow specified that a considerable variety of individuals are experiencing this phenomenon, with various accounts emerging of people choosing to leave.

Buying presale or preconstructed homes indicates putting down a deposit and signing a contract that you will pay the balance after the residential or commercial property is built to agreed-upon specifications on a particular date, called the closing date.

Lebow states the decreasing apartment worths and high interest rates are making it difficult for individuals to fund and close deals. Sometimes the system has actually lost so much value they now can’t afford a home loan.

Financial institutions figure out loan quantities based on the existing market value of the residential or commercial property, so if the agreed-upon purchase cost is higher than the home’s present worth, the bank will just provide financing for the lower quantity. The purchaser needs to then create the staying funds separately.

According to Lebow, there was a similar wave like this in the ’90s.

Lebow helps designers in showing to their lending institutions that they have offered units at the greatest possible price, therefore reducing losses and optimizing profits. This is particularly essential when purchasers default and developers are accountable for reselling the systems. The process includes providing proof that the systems were noted at the highest cost and consequently resold at that rate. This helps designers to secure the required financing to total construction and cover closing costs.

Toronto condo legal expert Gerry Miller has observed that people tend to prefer purchasing concrete possessions. He has actually seen customers experience substantial monetary losses, approximately $300,000 in deposits, due to legal commitments that greatly favor the opposite celebration, describing them as elaborately constructed and weighted against the buyer to an extent he thinks about unreasonable.

Sehgall’s effort to offer his home on the borders of New Delhi was not successful due to an unforeseen event – the area got more rain in a single day than it had in the past four years, leading to prevalent flooding.

“It became very difficult,” he said. He says he called the designer and spoke repeatedly to Jennifer Wilson, vice president of sales for StreetSide Developments, requesting a refund of his deposit and looking for consent to have the deal assigned to purchasers he had actually found who were eager to take over the townhouse contract.

Sehgall said that the contract allows for an “assignment,” which means transferring the deal to a different buyer. The agreement specifically states that the builder cannot unreasonably refuse this transfer. Sehgall mentioned that there may be a fee for transferring the deal to another party, but he wouldn’t lose his entire deposit.

The developer was not willing to permit it, according to him.

Sehgall said, “They said no.” They have another presale going on near the area.

Vancouver realty lawyer Kenneth Pazder discusses that re-assignments may be seen as competition that might divert potential purchasers far from other homes the designer is selling.

According to Sehgall, he was allowed to extend his time and search for a co-owner, but despite his efforts, he was unable to discover a suitable solution.

“I pleaded with her, I sent desperate emails, I really didn’t want to stop paying,” said Sehgall. He explained that he begged and requested desperately, trying his best to avoid defaulting on his payments.

Agreements are ‘extremely one-sided’: legal representative

According to Pazder, it is occasionally feasible to get a refund on a deposit, generally including a charge ranging from one to 3 percent; however, the market is slow.

He said that presales are not selling as quickly as they usually do.

He said while the presale market is managed by the provincial federal government, contracts for presales or preconstructed units are not. He also said they can be sticky to work out, and the wording is weighted in favour of developers. Not only can the designer refuse to think about an “assignment” alternative, but it’s also not required to deliver exactly what the buyer saw in a display room.

According to Pazder, all these offers are very biased. Sometimes, you might be able to talk about the price and maybe they will give you an extra parking space or a storage room.

According to TD Bank’s projection in November, there may be a decrease of approximately 10% in typical home costs by early 2024 due to a boost in housing supply. This could leave presale buyers in a susceptible position as the worth of their financial investment possibly reduces.

Pazder stated he believes Sehgall has premises for a legal difficulty, arguing that the designer was “being unreasonable” offered Sehgall’s claim that he had actually found another purchaser for the residential or commercial property.

Business decreases interview

CCBC News contacted the person selling the property in Sehgall’s case, but they declined to be interviewed. A representative from the company stated that their actions adhere to the guidelines stated in the Realty Development Marketing Act of B.C., as mentioned in an email.

Jonathan Meads, the vice-president of StreetSide Developments, which is a division of Qualico—an established company building projects in Western Canada—said, “This is a legal matter, and we have advised Mr. Sehgall to seek appropriate guidance from a lawyer.” He expressed that they would not provide any other comment.

Sehgall has actually contacted political leaders and leaders in the Surrey company community for help.

Sehgall has no experience in buying a house. Ha said, “I’m not someone who invests in properties. I didn’t have any idea, and my real estate agent didn’t advise me either. We just went ahead and signed the papers.”
“The agreements we signed are very strong. It’s extremely difficult if the home builder rejects you. Someone like me, who is buying a house, doesn’t have the legal or financial ability to fight against a big construction company.”
‘We have been messed up’

B.C. Real Estate Minister Ravi Kahlon told CBC News that Sehgall’s scenario was discouraging.

In a statement, Kahlon highlighted the significance of offering homebuyers the essential info to make well-thought-out decisions, as buying a home is often a major monetary choice for people.

“That’s why the Property Advancement Marketing Act makes it mandatory for developers to provide a document called a disclosure statement to buyers. It also gives buyers the right to cancel their purchase agreement within the first seven days. This helps customers get enough time to carefully think about their decision before moving forward with the purchase.”

Consumers can acquire information from the B.C. Financial Provider Authority to much better comprehend the procedure of presale purchases and their associated rights according to the act.

According to him, a waiting period of three days was executed in January 2015 to assist buyers in obtaining funding or arranging home examinations.

Sehgall is sorry for not getting better assistance. The $81,990 that was deposited was money that his family assisted in saving, and its loss had a profound impact, particularly on his elderly moms and dads.

“We have been destroyed,” said Sehgall.

He stated that my parents were really shocked and they still had hope that they would get their money back, even though it was a very slim chance.

Wrapping Up

A man from British Columbia, Canada, lost his $81,990 deposit on a yet-to-be-built townhouse, despite having a contract option to transfer the deal to another buyer. Sudip Sehgall, who had put down the deposit in 2021, was relying on selling his property in New Delhi to finance the purchase. However, new regulations in India and subsequent floods made selling the property impossible. When Sehgall tried to find a buyer to take over the Canadian deal so he could get a refund, the developers opted to keep his deposit and sell the unit themselves. Sehgall’s case is part of a growing trend of Canadians defaulting on presale or preconstruction condo and home purchases due to financial pressures.

Experts attribute this trend to high-interest rates and declining condo values, which make it difficult for buyers to finance and close deals. Many buyers end up losing their deposits. Toronto real estate broker Barry Lebow notes that he hasn’t seen this many buyers defaulting in 30 years. The declining condo values and high-interest rates have made it challenging for buyers to obtain mortgages, as banks only loan money based on the current value of the property.

Sehgall claims that despite finding another buyer for the property, the developer refused to consider the assignment and refused to refund his deposit. The presale market is currently slow, making it difficult for buyers to sell their units. Real estate lawyer Tony Pazder explains that presale contracts heavily favor developers and are often one-sided. While deposits can sometimes be recovered with a penalty, the slow market and the surge in housing stock put presale buyers at risk of losing their investment.

Sehgall has sought help from politicians and business leaders but feels powerless against the developer. B.C. Housing Minister Ravi Kahlon expresses sympathy for Sehgall’s situation and emphasizes the importance of providing homebuyers with the information they need to make informed decisions. He highlights the government regulations in place to protect consumers in presale transactions and suggests seeking advice from the B.C. Financial Services Authority. Sehgall regrets not receiving better advice and describes the loss of his deposit as devastating, particularly for his elderly parents who had contributed to the savings.

There are typically three methods for transferring property among family members:

1. gifting,
2. selling at a reduced price, and
3. holding property jointly (Joint Names)

These asset transfers are commonly carried out for various reasons, such as avoiding estate certification fees (probate fees) and protecting assets from potential future creditors, particularly in the case of small businesses. Gifting is also utilized to transfer high income to low-income family members for income splitting purposes.

1. Gifting

Firstly, it is important to note that Canada does not impose a gift tax. However, it is still possible for the Canada Revenue Agency (CRA) to levy significant taxes under the Income Attribution Rules if one is unaware of them. Let’s now discuss three scenarios where the Income Attribution Rules are applicable.

Transfer of assets to a trust (trust)

When assets or property are transferred to a trust, the person who established the trust will generally be responsible for any capital gains resulting from the sale of those assets. Additionally, any gains from those assets will be subject to retroactive taxation on the original donor. These circumstances are governed by the Income Attribution Rules.

Transfer of Assets to Minor Children

The transfer of assets to minor children is subject to the Income Attribution Rule, which means that any income generated after the gift, such as rental income, is retroactively taxed to the original donor. However, there is an exception for capital gains earned by a minor. If a child sells a house, for example, the capital gain is taxed under the child’s own name. Therefore, from a tax-saving perspective, it may be advantageous to gift assets with significant appreciation, such as houses, stocks, jewelry, paintings, and calligraphy, to a minor family member. However, this action carries substantial risks, particularly considering that minors are maturing mentally at earlier ages. It is important to carefully consider the potential consequences under family law before proceeding.

Subsequent Appreciation/Loss Of Assets Transferred To A Spouse Or Adult Child

Loss of subsequent appreciation on assets transferred to a spouse or adult child occurs when a property, such as a home, is gifted to a family member. According to the tax code, this gift is treated as if it were sold at its market value. If the market value at the time of the gift is higher than the current year’s purchase price, indicating an increase in value, added value tax will be calculated based on the standard capital gain.

In the event of gifting a primary residence, the donor is exempt from paying taxes, and the recipient purchases the property at its fair market value. If the recipient already owns the property and decides to sell it in the future, any difference between the sale price and the market value at the time of the gift will be considered as capital gain for the recipient. For instance, if a father acquires his own home for $300,000 and gifts it to his adult son at the market value of $800,000, the appreciation of $500,000 will not be subject to taxation. Subsequently, if the adult son accepts the gift and sells the house after 5 years with a market value of $1,000,000, any capital gain would be calculated as $1,000,000 – $300,000 = $700,000. However, if the adult son continues to utilize the property as an investment asset, he will be liable for taxes on the capital gain of $700,000. If the adult son has been utilizing this home for personal purposes, it will remain exempt from taxation. The capital gain on the owner-occupied home does not incur any tax obligations.

In the case of a rental home, assuming it was acquired for $300,000 in the current year and is now listed for sale at $800,000, if the father gifts the property to his adult son, tax laws treat it as if it had been sold at its market value. This gift results in a capital gain of $500,000 for the father, with 50%, or $250,000, being subject to income tax in that year.

However, there is one exception – if the transfer occurs between spouses, it is deemed to have taken place at the initial cost of the home and does not generate any capital gain. Using this same house as an example as well:

This gift involves the transfer of a rental house from a husband to his wife, which is considered a transfer at cost according to tax law. Unlike a gift from a father to an adult son, there is no requirement for a “deemed sale” between spouses. The tax law treats the husband’s gift as having a cost of $300,000. As the donor, the husband does not incur any capital gain, while the wife, as the recipient, establishes a cost base of $300,000. If the wife sells the house for $800,000 in a future year, she will generate a capital gain of $500,000, which will be taxed on the husband’s income. It is important to note that any income derived from assets gifted between spouses will be subject to retroactive taxation back to the original donor (attribute to the transferor).

Is there a way to avoid retroactive tax in this situation? The answer is yes, but the process is more complex. If you wish to avoid being subject to the Income Attribution Rules or if you are divorced and your spouse does not want to pay a significant capital gain upon selling your house, what steps should you take? You will need both spouses’ signatures and must write a letter to the CRA indicating that you do not want Section 74.2 of the Income Tax Act to apply. In other words, you are electing that the spousal rollover rules do not apply. This will allow the house to be sold at its market value, and later the wife can sell the house and be solely responsible for the resulting capital gain tax.

2. Selling At A Reduced Price

We have observed instances where families sell property to their relatives at significantly reduced prices. However, it is unwise to sell the property to a family member for less than its market value, rather than gifting it. This is because it results in double taxation.

To illustrate this, let’s consider a simplified example: Suppose an investment property was originally purchased for $100,000 and now has a market value of $500,000. If the father sells the house to his adult son for $1, it is essentially equivalent to selling it at market value. The capital gain would be $400,000 ($500,000 – $100,000), and at a tax rate of 50%, $200,000 would be included in the father’s taxable income for that year.

For the adult son, Cost = $1, which means that once the house is sold in the future (for example, the house is sold when it rises to $1 million), since costbase is only $1, capitalgain = $1 million – $1 = or 999,999, half of which is incorporated into the adult son’s income for the year to pay taxes.

3. Holding Property Jointly

A common practice among families is to establish joint accounts and acquire property through joint ownership. In this arrangement, each spouse possesses an equal share of the property. If one spouse passes away, the surviving spouse becomes the sole owner of the entire property, eliminating the need for estate distribution procedures and associated fees. Additionally, any capital gains generated are transferred without taxation under spousal transfer rules. Nevertheless, it is important to note that when the surviving spouse also passes away, tax obligations will arise in due course.

In the event that Mr. Li passes away, the joint investment property owned by him and Mrs. Li will automatically be transferred to Mrs. Li without any tax implications, given its current market value of $500,000. However, if Mrs. Li were to pass away and the property’s fair market value at that time is $600,000, her post-death account, even if inherited by her children and not sold, will still be subject to capital gains tax. Specifically, $500,000 of the appreciation will be subject to this tax. It is important to note that the tax deduction must be completed before any distribution can be made as per the will.

Due to the fact that the utilization of a joint account eliminates the need for the probate process and associated fees for property transfer, the advantages of employing a joint account are evident. Consequently, could Mrs. Li contemplate the option of establishing a joint account with her adult children to collectively possess the property and thereby evade both the added value tax and probate fees? The response is that opting for a joint account with her children might still incur capital gains tax. As per Canadian tax legislation, when assets are transferred into a joint account and the joint owners do not share a spousal relationship, the assets are treated as if they were sold, potentially resulting in tax implications.

For instance, in the case of Mr. and Mrs. Li jointly owning an investment property and desiring to transfer it to their children through a joint account, with the children possessing a 50% ownership stake, it should be noted that when the parents establish a joint account, the property itself remains unchanged. However, there is a shift in ownership, with both parents and children sharing ownership rights. Consequently, 50% of the assets are treated as a sale at this point, resulting in the parents being liable to pay capital gains tax. To illustrate further, if Mrs. Li opens a joint account with her son for her investment property, it implies that half of her property has effectively been sold. This means that half of the appreciation value of her assets is realized during the transfer of ownership. Assuming the property cost $100,000 initially and its market value at the time of opening the joint account is $500,000, half of this appreciation value ($200k) would be subject to taxation.

It is generally advised against jointly titling a self-owned property with the children if Mr. and Mrs. Li are the owners. This is due to the fact that if the property is transferred to the children as a joint account with 50% ownership, they will not qualify for the capital gains tax exemption on their own self-owned home.

In the event of Mrs. Li’s unfortunate demise after the establishment of the joint account, her son will automatically inherit the property she possesses within the account, thereby bypassing the probate process and associated fees. However, during the year of Mrs. Li’s passing, half of her property will be considered as sold, resulting in her being liable to pay tax on the capital gain. Assuming a constant cost of $100,000 and a market value of $700,000 in the year of her death, the capital gain on Mrs. Li’s half of the property has risen from $50,000 to $350,000. Consequently, $150,000 of this appreciation is subject to capital gains tax.

The article above is originally posted on bcbay.com and it’s slightly modified and posted in this blog blog.bchomeworld.com. To search for property, go to BCHomeWorld. To qualify for a mortgage, read this article How To Qualify For A Mortgage In BC.

As a trusted real estate professional, I want to emphasize the importance of seeking professional advice when it comes to any legal matters concerning your property. Real estate transactions can be complex, and legal implications may arise that require expert guidance. Therefore, I strongly recommend consulting a qualified lawyer who specializes in real estate law. Their expertise can provide you with the necessary insights and ensure that you make informed decisions that protect your interests. Please remember that this is merely a friendly suggestion to ensure your peace of mind and safeguard your investments. If you require any assistance in finding a reputable real estate attorney, I would be happy to provide recommendations.

Summary

• Chinese families tend to maintain stronger bonds between parents and children, with a greater emphasis on financial interdependence.
• Property assets are frequently exchanged among family members through gifting, selling at a reduced price, or holding property jointly (Joint Names).
• These asset transfers are commonly carried out to avoid estate certification fees (probate fees) and protect assets from potential future creditors.
• Gifting is also utilized to transfer high income to low-income family members for income splitting purposes.
• Canada does not impose a gift tax, but the Income Attribution Rules may apply in certain scenarios.
• Transferring assets to a trust or minor children is subject to the Income Attribution Rule.
• Subsequent appreciation/loss of assets transferred to a spouse or adult child is also subject to the Income Attribution Rule.
• If gifting a primary residence, the donor is exempt from paying taxes, and the recipient purchases the property at its fair market value.
• If transferring assets between spouses, it is deemed to have taken place at the initial cost of the home and does not generate any capital gain.
• Holding property jointly eliminates the need for estate distribution procedures and associated fees.
• Capital gains generated are transferred without taxation under spousal transfer rules.
• If one spouse passes away, the surviving spouse becomes the sole owner of the entire property.
• Establishing a joint account with adult children to collectively possess property may still incur capital gains tax.
• Seeking professional advice from a qualified lawyer is recommended to ensure informed decisions that protect interests.