Doug Carroll – Page 27 – Tax, Estate & Financial Planning Advocate

Homebuyer tax breaks

Marshaling finances for residential ownership

For many of us, the largest financial transaction we will ever undertake is the purchase of a home. Fortunately, there are several public support programs and tax provisions available to provide financial relief for homeowners—and particularly first-time homebuyers. The most recent addition is the First Home Savings Account (FHSA), which became available for contributions by first-home buyers in 2023.

This article provides a summary of the main provisions aimed at assisting the initial purchase of a home, as well as measures that reduce the cost of renovations designed to make a property safer for the elderly and for those with disabilities.

A brief explanation is provided for each item, with hyperlinks to official government sources in an appendix on the last page, for readers who wish to look deeper into relevant topics.

Resources from Canada Mortgage and Housing Corporation ¹

The Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency. Its central purpose is to make housing affordable for everyone in Canada. It has a wealth of resources available to help consumers and their professional advisors, including “Homebuying Step by Step: Your guide to buying a home in Canada” and a companion workbook “Homebuying Step by Step: Workbook and Checklists.”

Mortgage borrowing

A mortgage is a loan to help someone purchase a residence or home. The size of a mortgage is often significantly larger than the amount that new homeowners contribute toward the purchase price. Mortgage repayments are usually made at weekly or monthly intervals, with each payment being a combination of principal reduction and interest charge. Being so large, a mortgage will commonly up to two decades or longer to pay off.

Mortgage loan insurance ²

If the amount advanced on a mortgage is more than 80% of the property value, the lender must obtain loan insurance from the CMHC. The CMHC insurance premium ranges from 2.8% to 4% of the loan, which in turn depends on the size of the buyer/borrower’s down payment toward the purchase price. Though paid by the lender, typically the premium cost is passed through to the borrower.

30-year mortgages for qualified buyers ³

Commonly, mortgages are amortized for up to 25 years. As of August 2024, first-time buyers of newly constructed homes may be elgible for mortgages up to 30 years amortization. To be a first-time buyer, a borrower cannot have purchased a home before, or have occupied a home as a principal place of residence that either they themselves or their current spouse or common-law partner owned. Qualification may be extended to those who have recently experienced the breakdown of a marriage or common-law partnership. This measure will only apply to high-ratio mortgages where the loan amount exceeds 80% of the property value.

Mortgage stress test ⁴

Banks are regulated by the federal Office of the Superintendent of Financial Institutions (OSFI). As a margin of safety against negative financial shocks, OSFI requires federally regulated financial institutions to test whether borrowers will be able to handle higher interest rates if personal or economic conditions change. As last confirmed by OSFI in December 2022, a borrower must be able to service a mortgage interest rate at the greater of the mortgage contract rate plus 2%, or 5.25%. Note that the OSFI stress test does not apply to credit unions that are provincially regulated.

Assembling the down payment

As compared to mortgage money that is borrowed from a lender, a down payment is the amount of the purchase price that comes from the buyers’ own resources. Buyers may accumulate savings in many ways, with three main programs currently available to provide tax-assisted support in building their down payment. All these programs may be used on the same property purchase.

HBP – Home Buyers’ Plan ⁵

A person with working income is entitled to make tax-deductible contributions into a Registered Retirement Savings Plan (RRSP). Though primarily intended for retirement, RRSP money may be accessible earlier for the purchase of a home. Since 1992, the HBP rules have allowed first-time home buyers to make non-taxable RRSP withdrawals. The current maximum withdrawal is $35,000 per person. That amount must be returned to RRSPs in annual, non-deductible repayments over the 15 years following the purchase, and otherwise will be taxable if not repaid.

TFSA – Tax-Free Savings Account ⁶

Introduced in 2009, the TFSA is a flexible plan that can be used for any savings purpose over a person’s lifetime. Every Canadian over age 18 gets an allotment of annual room—currently $7,000 in 2024—with unused room carried forward to be used in future years. Contributions are not deductible, but then there is no tax on income and growth within the plan, and withdrawals are tax-free. The total of all withdrawals in a year is credited toward more room for re-contribution from the next January 1.

FHSA – First Home Savings Account ⁷

Like a RRSP, FHSA contributions are tax-deductible, and income and growth within an FHSA are not taxable. Then, similar to a TFSA, withdrawals are non-taxable, though only if applied to the purchase of a first home. The maximum annual contribution amount is $8,000, with a lifetime maximum of $40,000. If not used to purchase a home within 15 years, or if the individual reaches age 70 years, all FHSAs must be closed. Tax will apply on withdrawals for any purpose other than a home purchase, but this can be deferred by transferring into a RRSP or Registered Retirement Income Fund (RRIF), without requiring or affecting the individual’s RRSP contribution room.

FTHBI – First-Time Home Buyer Incentive ⁸ closed to new applications

The FTHBI was launched in 2019, accepting applications up to March, 2024. The CMHC will continue to oversee all approved mortgages for their duration in accordance with the terms of the program.

Under the program, the CMHC provided 5% or 10% of a home purchase price through a shared equity mortgage. Buyers were required to qualify for mortgage insurance, with total income and borrowing within certain thresholds. Generally, the full amount must be repaid no later than 25 years or on sale but may be repaid at any time without penalty. The CMHC share of appreciation is capped at 8% per year.

Home buyers’ amount/credit ⁹

Also known as the first-time home buyers’ tax credit (HBTC), this is available as a one-time tax reduction for first-time homebuyers. It is calculated based on a $10,000 amount, making it worth $1,500 in reduced tax that can be claimed by one person or split with a spouse/common law partner. If the homebuyer claims the Disability Tax Credit (DTC) and the new home provides greater accessibility or accommodation for the disability, the claimants do not have to be first-time buyers.

GST/HST new housing rebate ¹⁰

The new housing rebate may reduce the GST/HST when purchasing from a GST/HST registrant builder, on an owner-built new home, or on a substantial renovation of at least 90% of a property. For owner-built and renovations, the rebate does not apply to the owner’s personal labour. The value of the rebate is up to $6,300 of the federal portion of GST/HST, and may apply to some of the provincial portion, depending on province.

Moving and renovation breaks

Moving expenses ¹¹

Moving expenses may be deductible if a person must move 40km or more to be closer to work, to run a business, or to pursue full-time post-secondary education. Eligible expenses include vehicle and meal expenses during travel, property transportation, temporary lodging until new accommodation is available, costs of selling an old home (including real estate commission), and costs of acquiring a new home.

HATC – Home Accessibility Tax Credit ¹²

This can be claimed for someone age 65 years or over, or over 18 and eligible for the DTC. It is worth as much as $3,000 based on spending up to $20,000 to make a dwelling more accessible for that person or to reduce risk of harm for that person living there. The amount is available annually and may be applied to a project extending over multiple years, or to different projects each year. It may be claimed by that person or by an eligible caregiver.

MGHRTC – Multigenerational home renovation tax credit ¹³

Like the HATC, this credit can be claimed for someone age 65 years or over, or over 18 and eligible for the DTC. It is worth as much as $7,500 based on spending up to $50,000 to create a self-contained secondary unit attached to another residence. Whereas the HATC is a non-refundable credit that can reduce tax payable, this is a refundable tax credit that can be claimed and paid even if the person doesn’t owe tax. It may be claimed by the person being accommodated, or by the family relation who owns the property.

Canada Greener Homes Initiative ¹⁴

This program provides incentives to homeowners to make their homes more energy efficient. There are grants from $125 to $5,000 on retrofits, with up to $600 reimbursed for the cost of pre- and post-retrofit evaluations. For major projects, interest-free loans up to $40,000 may be obtained, with repayment terms of 10 years.

PRE – Principal residence exemption ¹⁵

Generally, tax applies to the increase in the value of property, levied on half of the capital gain in the year there is a disposition. The PRE exempts the capital gain on a principal residence from being taxed. The gain must still be reported on the income tax return for the year of sale/disposition, but then the PRE protects against it being taxed. The PRE is shared between spouse/Common law partners.

Links to official government sources

US and other foreign recreational properties

Estate planning informing vacation planning

For decades, Canadian parents have piled their kids and pets into the car for the weekend trek to the nearby cottage, cabin or chalet.

These days, it is not uncommon to have a vacation property in another province or outside the country altogether. That’s an extra layer of complexity to contend with when thinking about selling or transferring the family getaway, including preparing for estate and capacity planning.

Wills and estate transfers

Generally, a Canadian Will is effective to deal with a person’s real property (real estate) in the home province, and personal property wherever it may be. In order to deal with real estate elsewhere, the Will has to be proven to the satisfaction of the courts/law in that other jurisdiction. While this is not an impossible task, it carries with it additional cost, time and potential uncertainty.

A second Will where the property is located?

With that in mind, it may be desirable to plan ahead by executing a second Will in that other jurisdiction. In so doing, it is crucial that the second Will doesn’t inadvertently revoke the person’s main Will, or otherwise alter distribution. An open dialogue between the lawyers in the two jurisdictions should keep plans aligned.

Discussions with the foreign lawyer should include gaining an understanding of tax obligations (currently and for the estate), and legal responsibilities of the executor. This may necessitate adjustments in the home Will, or at least some informal guidance.

Alternatively, it could lead to naming a distinct second executor, with appropriate allocation of powers and constraints between the two. This knowledge may even affect the owner’s longer term intentions for the property.

Incapacity while owning or being abroad

Arguably, the estate transfer is the easy situation as compared to responding to a crisis while an owner is living. For one thing, death is obvious, but incapacity not so much so. And while an estate transfer is a property matter, there are both property and personal issues to address while a person is living, with attendant greater urgency.

The act of naming substitute decision-makers has been a recommended part of estate planning for decades. The traditional term “power of attorney” (POA) is still used in many jurisdictions, and is otherwise understood as a generic reference even if other formal phrasing applies. And while it is usually intended that the power be exercised wherever the grantor or property may be, challenges can arise when foreign elements are involved.

Each jurisdiction has its rules on the execution process, witnessing, allowable language and format – sometimes requiring official forms – any part of which may be at odds with the home jurisdiction’s rules. Even if there are no such formal impediments, there can be delays (and associated costs) as individuals, health care workers and businesses assure themselves of their obligations, perhaps even requiring them to seek their own legal advice before being able to take instructions.

One may ask why there isn’t a common form and rules to get around these complications? Indeed, efforts have been made to do just that over the last decade through recommendations from the Uniform Law Conference of Canada and the Uniform Law Commission in the United States. However, it’s up to each province and state to decide whether to adopt these recommendations, and to date only a handful have gone that far.

Parallel POA planning

As with Wills, it may be desirable to have POA documents drawn up in the foreign jurisdiction in order to expedite action at critical times. In addition to the provisos about guarding against revocation and having open communications, some further questions should be canvassed:

- Can the same person be named in both jurisdictions? Are there practical/logistical/linguistic concerns that may lean toward naming a different person in the foreign jurisdiction?
- What events may cause an appointment to be revoked (eg., marriage, separation, bankruptcy)? If such rules differ between the jurisdictions, how will that be reconciled?
- What is the scope of the attorney’s activity for each jurisdiction? Are there gaps, how will they be handled?
- If it is intended that the home jurisdiction attorney has ‘final say’, is this possible under the foreign jurisdiction’s rules? How can an attorney be removed?
- Is compensation allowed/required/prohibited, and do the planning documents together guard against double-compensation?
- What checks are there to assure appropriate accounting and accountability for each attorney’s actions?

Tax points to ponder – Property in the United States

Given our geographic proximity, most of this cross-border planning will be with our neighbour to the south – or to the north if you’re crossing to Alaska. In fact, it is critical to appreciate that just like our provinces, each American state has its own rules. Accordingly, each individual/couple/family will need to cater their planning to their home province and the state that welcomes them.

And despite that we are near neighbours, we also can’t forget that the United States is a foreign country with its own tax rules. Like Canada, there are income tax powers at both the sub-national (state) and federal levels. Here are some important tax matters affecting Canadian owners and sellers of US recreational property.

Tax reporting on sale, including principal residence

Sale of a US property must be reported on a seller’s Canadian tax return, on a US federal return, and on a US state’s return if there is a state income tax. Capital gains are taxable in both countries, with the US gain based on the change in property value, and the additional factor of the exchange rate affecting the Canadian calculation. In theory, there could be a capital gain on one side of the border and a capital loss on the other. Ordinarily though there will be a gain for both, and Canada generally allows a foreign tax credit for US tax on a sale.

The Canadian principal residence exemption (PRE) can apply to property outside of Canada. The property may still be exposed to capital gains tax on the US side, as a foreign tax credit could not be claimed in Canada, since the PRE claim would result in no associated Canadian tax against which to use that credit.

Withholding tax on sale

When a foreign owner sells US real estate, the purchaser is required to withhold up to 15% of the selling price and remit that to the US Internal Revenue Service (IRS). The percentage can be reduced depending on the selling price and whether the purchaser intends to occupy the property. The withholding rate may be further reduced or eliminated if the seller obtains a certificate confirming that the ultimate US tax liability will be lower than the withholding rate. Otherwise, the seller can recover the tax by filing a US tax return following the sale.

US estate return and US estate tax

At a Canadian owner’s death, the executor for that non-resident must file a US estate tax return if the fair market value at death of the decedent’s US situated assets exceeds $60,000, regardless whether any tax is due.

As to that tax liability, real estate owned by a Canadian is US-situs property for the purposes of the US estate tax, but only if their worldwide assets exceed the exemption threshold, which is US$15,000,000 in 2026 (indexed).

Hidden costs of cottage ownership

All decked-out at your cottage, cabin or chalet

You look out across the rippling water admiring the rise of evergreens painted against an indigo sunset. A warm breeze on your face, a deep relaxing breath, a cold beverage at hand … priceless, right? Wrong.

Whether you’re reminiscing from younger days, recalling a recent visit with a friend or just holding an image in your mind, cottage life can be very appealing. Savour these memories fondly, and dream what feelings the future holds.

At the same time, you need to be thinking both conceptually and practically about the cost of that life of leisure. Without puncturing those visions entirely, let’s look at some of the costs and trade-offs of owning vacation property.

There and back again: The cottage commute

Be sure you are up to the travel back and forth. Weekend cottage migration can be time-consuming and costly, as gas is obviously not free.

If you are able to work remotely, maybe you can ease your woes by heading up a weekday earlier or staying on while others join the Sunday stream of headlights. That can be a sanity-saver but can also impose its own costs, especially if you need rural high speed internet access.

And if you’re breaking the family into two vehicles to coordinate commuting, that convenience will cost you.

Year-round or seasonal? Measuring your maintenance

Is this your getaway or a duplicate home? Either way, you need furniture (rustic though you could choose it to be), appliances and the periodic roof, fence or deck mending.

For bills and utilities, some will vary by usage or may be available seasonally, while others like property tax will apply annually. For year-round access, you may need a local snowplow contractor, or at least own a dependable snow blower.

Careful not to be trapped by the trappings

Just being at a cottage is good for some, but ‘doing’ is what many people look forward to.

Often that means being out on the water, or at least at its edge. That can range from a foam floaty, to a canoe or kayak, all the way up to a powerboat with water-ski line.

Again, there’s the cost of gas? Though smaller items can easily be packed away, motor craft will have to be winterized and may require offsite storage.

Keeping it clean and tidy, and sharing your good fortune

Do you like housework?

Hopefully so, because you now have two houses to take care of. Don’t mean to rain on the parade, but we all had chores at our family cottage, and they doubled-up when we had guests coming.

Of course, welcoming visitors is a large part of the charm (and it’s a good antidote to cabin fever with one’s family), but guard yourself against going from gracious host to inundated innkeeper.

Renting to ease the finances

If you’re stretched to carry the place, whether from the outset or once you’re established, you could consider renting it out to defray some cost.

This is a lifestyle concession as much as a financial boost, as you may have to concede prime times when you would like to be there yourself. But with prices being at historic highs, this may be the route for you if you are intent on making cottage realty your reality