This year’s Federal Budget expands your options
Heading into the spring house-hunting season, first-time buyers have some additional financial options in their planning toolkit.
Since it’s likely the largest financial transaction you’ll ever undertake, we’ll show you the tools available to help you – and as importantly, know how each works to make sure they don’t hurt you.
First-Time Home Buyers’ (FTHB) tax credit
Let’s start with what has not changed. Technically the “home buyers’ amount”, the FTHB helps first-time home buyers cushion some of the costs of purchasing a home. To qualify as ‘first-time’, you can’t have occupied a home that you or your spouse owned in the four years prior to the purchase.
It works indirectly in the form of a non-refundable credit against your income tax due in the year of purchase. While it’s often expressed as being $5,000, you have to multiply that amount by the 15% credit rate to arrive at the actual tax reduction of $750.
For more, see the Government of Canada website: Line 369 – Home buyers' amount
First-Time Home Buyers Incentive (FTHBI) – *NEW*
Proposed in the 2019 Federal Budget, the FTHBI is a shared equity mortgage program through Canada Mortgage and Housing Corporation (CMHC) expected to be operational by September 2019.
A first-time home buyer must first meet the minimum down payment for a CMHC insured mortgage. The buyer would then apply to have CMHC finance a further portion of the home purchase cost: 10% for a new home build, or 5% for an existing home transfer.
With CMHC holding a shared equity interest, the required mortgage would be smaller, meaning lower mortgage payments for the buyer. No monthly payments would be required on the FTHBI, which would instead be repaid on sale of the property. The trade-off is that the CMHC would be entitled to a proportionate share of the growth in value.
The incentive is for buyers with an annual household income of under $150,000 in Toronto, Vancouver, and Victoria, and under $120,000 in other parts of Canada. The combined mortgage and incentive can’t exceed 4.5 times the qualifying income in Toronto, Vancouver, and Victoria, and 4 times in other parts of Canada.
For more, see the CMHC website: First-Time Home Buyer Initiative
RRSP Home Buyers’ Plan (HBP)
The HBP allows first-time home buyers to make non-taxable RRSP withdrawals for the purpose of purchasing a home.
The 2019 Federal Budget increased the HBP withdrawal maximum from $25,000 to $35,000 per person. For a purchasing couple, that’s as much as $70,000 combined.
If you have separated, divorced, or ended a common-law partnership, you can still take advantage of the Home Buyers' Plan, even if you have purchased a home before. You just need to meet these conditions:
- The separation had to take place within the previous four years, and you must be living apart for a minimum of 90 days.
- You cannot be living with a new spouse or common-law partner when you withdraw under the Home Buyers’ Plan.
- If you own a primary home at time of withdrawal, you must sell this principal residence no later than two years after the end of the year in which you make the withdrawal.
- If you own a home jointly with your ex-spouse, you can use the HBP to buy out your spouse (in this case you don’t need to sell the principal residence, and the existing rule that individuals may not acquire the home more than 30 days before making the withdrawal will also be waived).
- HBP balance must be $0 at time of withdrawal.
Normally, an RRSP withdrawal is taxable income, but not under the HBP. You must generally purchase by October 1st of the year following withdrawal. You then have up to 15 years to return the money to your RRSP beginning the 2nd year after withdrawal.
It is critical that you understand that the repayments are not deductible in those future years. If you don’t make them on schedule, you will still have to find the cash to pay the tax on the unrepaid amount, and you don’t get back that RRSP room. Your decision to use the HBP should be made with a clear picture of the future cash flow you will need to carry the property, including these repayment obligations.
For more, see the Government of Canada website: What is the Home Buyers' Plan?
Tax-free savings account (TFSA)
Our discussion would be incomplete without balancing the RRSP-HBP with the TFSA.
This year’s allotment of TFSA room moved up to $6,000, which cumulatively makes it $63,500 if you were 18 when it began in 2009. That’s before any investment growth.
Bear in mind that compared to the pre-tax nature of an RRSP, the TFSA is after-tax money. To illustrate, someone at a 30% marginal tax rate could put a full dollar in an RRSP, but only 70 cents in a TFSA. In turn, the RRSP will eventually be taxed, but that could still be favourable if the person is under a 30% tax rate (in this example) at withdrawal.
On the other hand, what makes the TFSA appealing is that the full account value is available for your down payment, without any required repayment or additional tax cost.
This is not to suggest that it is an ‘either-or’ proposition between RRSP-HBP and TFSA. Many people make use of both – and now may also consider working the FTHBI into their planning. Once more, the key is to map out your future cash flow so that you can choose a home that meets both your desired lifestyle and your financial capacity.
For more, see the Government of Canada website: The Tax-Free Savings Account
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