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

FHSA – First home savings account

The newest way to build a down payment for a new home

Housing cost is one of the largest budgeting outlays for the average family. For those looking to make the move from being renters to owners, it can be challenging to both cover current shelter needs and save toward a down payment on a first home.

First proposed in the 2022 Federal Budget and brought into effect in 2023, the First Home Savings Account (FHSA) entitles eligible taxpayers to:

- Tax-deductible contributions,
- Tax-free investment growth, and
- Tax-free withdrawals for a first home purchase.

Eligibility

The FHSA is open to Canadian residents age 18 to 71. To open an account, an individual cannot be living in a home owned by that person (solely or jointly) in the year the account is opened, or in any of the four preceding calendar years. This includes a home owned by a spouse or common law partner (CLP).

No tax will apply on FHSA withdrawals used for the purchase of a new home, but only one property will qualify for this special treatment over an individual’s lifetime.

Contribution treatment and dollar limits

Tax treatment

Like a registered retirement savings plan (RRSP), FHSA contributions are tax-deductible. Alternatively, an individual may choose to transfer existing RRSP funds to a FHSA on a tax-free rollover basis, though such a transfer will not restore RRSP contribution room.

Dollar limits

The lifetime contribution limit is $40,000, subject to a base annual FHSA participation room of $8,000. Both new contributions and existing RRSP transfers count toward both the annual limit and lifetime limit.

A limited carryforward rule allows unused room to be added to a later year’s FHSA participation room. In the year that a person opens their first FHSA, their FHSA participation room that year is $8,000. In following years, the FHSA carryforward is $8,000 less all contributions and transfers made to all FHSAs in the prior year. That means that up to $16,000 could be contributed in a given year (other than the year the first FHSA is opened), though that would be the result of having made no contributions in the immediately preceding year.

An individual is allowed to open as many FHSAs as desired, but the annual and lifetime limits apply to transfers and contributions across all accounts. For someone who begins contributing the maximum $8,000 annual amount as soon as their first FHSA is opened, the lifetime $40,000 limit could be reached in five years.

Timing of deductions

Despite the similarities to RRSPs, there are important distinctions as to when deductions may be claimed:

- Whereas RRSP contributions in the first 60 days of a year may be deducted against the previous year’s income, FHSA contributions are deductible in the calendar year when made.
- Still, like RRSP contributions, if the person does not wish to take the deduction presently, it may be carried forward to use in any future year.
- Once there has been a qualifying withdrawal for a new home purchase, no further FHSA contributions may be made (and accordingly no new deductions allowed), but past deductions may still be used or carried forward.

Tax-sheltering investment income

Like many other registered accounts, including RRSPs and tax-free saving accounts (TFSAs), investment income and growth while within a FHSA are not taxable.

Withdrawals

Withdrawals to assist in the purchase of a first home are non-taxable, as long as you are not living in a home as your principal residence that year or in the preceding four years. Note that, unlike the criteria for opening a FHSA, you may be living in a home owned by a spouse or common law partner and still qualify for the tax-free withdrawal – understanding that the withdrawn amount must then be applied to a new home purchase. As well, both spouse/CLPs may use their FHSAs on the same purchase, if both meet the withdrawal criteria.

Tax will apply on FHSA withdrawals taken for any purpose other than a home purchase. However, this can be deferred by transferring into a RRSP, or to a registered retirement income fund (RRIF). Such transfers will not replenish FHSA room, but also will not require or reduce an individual’s RRSP room. Eventual withdrawals from the RRSP or RRIF will be taxable in the normal course.

Coordination with the RRSP home buyers’ plan

The RRSP home buyers’ plan (HBP) allows individuals to take up to $35,000 from a RRSP without tax applying in the year of withdrawal. Beginning in the second year following the first HBP withdrawal, withdrawn amounts must be returned to a RRSP over the course of up to 15 years. Repayments are not deductible, while any unrepaid amount is taxable in the year it is due.

As originally proposed in 2022, an individual was not permitted to use both the HBP and FHSA for the purchase of the same qualifying home. This restriction was removed by the time the rules came into force in 2023.

Plan closure

All FHSAs must be closed by December 31 of the earliest of:

- the year following the first qualifying withdrawal for a first home purchase,
- the 15^th anniversary of the first FHSA opening, and
- the year the individual turns age 71.

Amounts remaining in any FHSAs at the end of the defined period will be treated as income for that year.

Treatment at death

A detailed discussion of FHSAs at death is beyond the scope of this summary article, as there are many variables that can come into play. In general, any remaining account value will be treated as income of the estate, unless directed otherwise in the FHSA contract or in the deceased’s Will:

- If a spouse or common law partner is named as either successor holder or beneficiary, options may include receiving the amount as a taxable distribution, or transferring tax-deferred to the survivor’s own FHSA (if the survivor meets the qualifying criteria at that time), RRSP or RRIF.
- For any other named beneficiary, any amount received will be taxable income to the beneficiary in the year received. Not that this distinguishes FHSAs from RRSP/RRIF where the named beneficiary is entitled to the gross proceeds, but the amount is treated as taxable income in the deceased’s final year.

Home … free? The principal residence exemption

Tax truth about the PRE

The family home is a place of comfort and stability, and a significant store of wealth. And while there are upkeep costs involved, owners generally expect that they will benefit from rising real estate values.

But could that real estate growth be eroded by tax?

Fortunately, the principal residence exemption (PRE) is one of the most generous tax benefits we have, enhancing the appeal of home ownership by eliminating the tax on capital gains.

Qualification criteria

Type of housing

For the PRE, the property (including land up to one-half hectare) may be a detached or semi-detached house, townhouse, apartment, or part of a duplex or multi-plex; a condominium or share of a strata corporation; a share in a co-operative housing corporation; a vacation property like a cottage, cabin or chalet; a trailer, mobile home, or houseboat; and even a life lease arrangement or similar disposable leasehold interest.

It surprises many people to learn that the PRE applies not only to property in Canada, but also to foreign property that otherwise meets the criteria. Still, one must typically be a Canadian resident to make use of the PRE.

Ordinarily inhabited

To qualify as a principal residence, a property must be “ordinarily inhabited” in the year by the taxpayer, a current or former spouse or common-law partner (CLP), or a minor child. Note that in 1993 the term spouse was extended from married persons to include a common-law spouse of the opposite sex, and the latter term was further broadened in 2001 to include a person of the same sex under the new term common-law partner.

There is no minimum number of days that the property must be occupied in a year to qualify. Further, if more than one property is owned, the claim does not have to be made on the property that is more frequently inhabited.

If the main reason for owning the property is for income and/or capital appreciation, it will not be considered to be ordinarily inhabited. However, incidental rental income is acceptable, again as long as that is not the main purpose of owning. Even if the main reason is nonetheless to earn income, if it is rented to the owner’s child who lives there, then it may still qualify for the PRE. It is a question of fact whether a property is ordinarily inhabited, so legal advice should be obtained to clarify expectations if any of these factors are present.

Who may be the owner?

Whatever type of property it may be, the central condition is that it must be owned (that is, not rented) in order to claim the PRE. Usually the taxpayer must be the owner, though it may also be available in other ways:

Trust

If a person is a beneficiary of a personal trust, the trust may claim the PRE. The ordinarily inhabited requirement applies to that trust beneficiary, his/her current or former spouse/CLP or minor child.

Partnership

A partnership cannot claim the PRE, but a partner may use the PRE to offset a capital gain on qualifying property that is allocated from the partnership. Again, the ordinarily inhabited requirement must be met.

Corporation

While a corporation could own a property in which a shareholder resides, corporations cannot claim the PRE. Also be aware that if a shareholder makes personal use of corporate assets in this way, it will likely be treated as a taxable benefit based on how much it could have been rented to someone at arm’s length.

Calculating, reporting and claiming the exemption

From per-person to family unit

From 1971 when Canada began taxing capital gains, each person could claim the PRE, though it could only apply to one property for any taxation year. This allowed couples to multiply the PRE, for example by having one of them on title to the house and the other on a vacation property. In 1981, the rules changed to limit it to one property per family unit, generally meaning the individual, a spouse/CLP and their minor children.

When to make the PRE designation

A homeowner does not normally make the PRE designation from year to year. Rather, it is generally only reported in a year when there is a disposition. Dispositions include both actual transfers and deemed dispositions, with the latter including adding an owner to title, death of an owner, and a change in use such as converting a property to or from rental or business purpose.

Prior to 2016, a selling homeowner did not have to report anything if the entire gain could be claimed under the PRE. Now, it must be disclosed on the person’s income tax return for the year of disposition, specifically on Schedule 3 Capital Gains (or Losses). In addition, a Form T2091 must be filed, providing information including the address, acquisition date and cost, and the amount of the proceeds of disposition. Failure to file on-time could result in late penalties up to $8,000, or in the extreme a denial of the PRE.

How does the designation work

A taxpayer does not select specific calendar years for the PRE, but instead elects what proportion of years to apply it, using this formula:

The purpose of the “1 +” in the numerator is to accommodate for the common situation when there is a sale and purchase of property in the same year. This assures continuity such that the second property does not lose a year of claim, but does not confer any extra benefit as the PRE can only reduce the tax on a calculated gain to zero.

Provisos and pitfalls

Here are some more issues to discuss with a lawyer when buying, selling or considering a change in property use:

Legal and beneficial ownership

The PRE is based on beneficial ownership, which may not be the same as who is on title. It is the taxpayer’s onus to prove the nature of ownership if it is questioned. This is relevant in common law provinces, but under Quebec civil law, legal and beneficial ownership can’t be broken apart.

Renting a property

Despite the ordinarily inhabited rule, a property can be rented up to four years and still have those years qualify under the PRE, as long as a required tax election is filed. This may extend beyond four years if the reason for the property being rented is employment relocation of the taxpayer or spouse/CLP.

Former spouses

If the PRE is claimed by one party on a post-relationship disposition, the other party’s PRE entitlement will be limited or eliminated on his/her property if the two properties had been concurrently owned during the relationship. For certainty, a written separation agreement should address ongoing property dealings.

Elections for a deceased person

An executor may use Form T1255 to make the designation for a deceased person. If the deceased owned multiple properties, that designation could affect estate distribution if properties devolve to different beneficiaries. The testator’s Will could provide direction if there are any issues of this sort.