Martin K. I. Rumack outlines the RRSP funding and tax benefits available to newbie buyers.
First-time homebuyers – Tax Benefits and RRSP funds
If you have a client who is a first-time homebuyer, he or she may be entitled to certain benefits under the RRSP Home Buyers’ Plan and the First-time Homebuyers’ Tax Credit Program.
These benefits are also available if your client has previously owned a home but has sold it, and has not owned a home for the previous four years and does not own a home at the present time.
1. First-time Home Buyers’ Tax Credit
If your client is a qualifying first-time home buyer, there is a federal credit of $750.00 that they can claim against their personal income tax in the year they acquire a home. In order to qualify, no one involved in the sale, neither a spouse nor a common-law partner (who is defined as an individual cohabiting in a conjugal relationship for a continuous period of at least one year, or if they are the parent of a child born as a result of the relationship), must not have owned a home in the year of purchase or in the immediate prior four years prior to the year of purchase. Your client must be purchasing the home for his or her own personal occupancy, with that occupancy taking place within one year from the closing date.
The tax credit can be claimed by one party, or else be shared between parties to a total maximum of $750.
2. RRSP Home Buyers’ Plan
Under this plan, buyers can withdraw a maximum of $25,000 from their RRSP in order to buy a qualifying home in which he or she will live. Additionally a spouse or common-law partner can also withdraw a maximum of $25,000 from his or her RRSP to apply towards the purchase of the same property.
A withdrawal for this purpose does not result in tax being withheld from the monies withdrawn from an RRSP. To be entitled to exercise this option, your client and his or her spouse or partner cannot have owned a home in the four years prior to the year that the home is purchased. Your client must occupy the home within one year of withdrawing the monies from their RRSP.
These RRSP monies must be repaid over a maximum period of fifteen years from the date of withdrawal, commencing in the second year following that withdrawal date. The prepayment amount must be a minimum of 1/15th of the amount withdrawn; however, no interest is payable on the RRSP funds withdrawn. The amount repaid can be made in each calendar year or within 60 days after the end of the year; i.e., February 28, which is the same timeframe as that for making an RRSP contribution. Of course, the amount you are liable to repay is not deductible from your income for that year. However, if you do not make the minimum required repayment in any year, that amount will be included in your income for that year.
As an alternative strategy to the RRSP/Home Buyer’s Plan option, a tax-free savings account (TFSA) can be used. The TFSA program allows a maximum $5,000 yearly contribution to be made into a tax-free account; although the money contributed is not tax-deductible, it can be used to earn tax-free investment income and the funds can be withdrawn from the account without tax liability. Since the program’s inception, if your client has maximized his or her contribution each year, he or she would now have $20,000 in the TFSA which could be used towards a down payment.
There are various stipulations in connection with the use of a TFSA (such as a minimum age of 18), but there is a broad array of investment options such as mutual funds, individual stocks, Guaranteed Investment Certificates and bonds.
A third alternative is to combine the funds from RRSP and TFSA accounts; this is yet another very favourable option if your client wants to have a larger down payment when purchasing a home and wishes to minimize both the tax consequences and the amount that he or she will have to borrow in the form of a mortgage.
Veteran real estate expert, Toronto lawyer and author