First-time homebuyers – Tax Benefits and RRSP funds
If you are a first-time homebuyer, you 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 you have previously owned a home but have sold it, and have not owned a home for the previous four (4) years and do not own a home at the present time.
a. First-time Home Buyers’ Tax Credit
If you are a qualifying first-time home buyer, there is a federal credit of $750.00 you can claim against your personal income tax in the year you acquire a home.In order to qualify, neither you nor your spouse or common-law partner (who is defined as an individual cohabiting with you 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 with you) must not have owned a home in the year of purchase or in the immediate prior four (4) years prior to the year of purchase. You must be purchasing the home for your own and your spouse/common-law partner’s personal occupancy, with that occupancy taking place within one (1) 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.
b. RRSP Home Buyers’ Plan
As a buyer, under this plan you can withdraw a maximum of $25,000 from your RRSP in order to buy a qualifying home in which you will live. Additionally your spouse or 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A withdrawal for this purpose does not result in tax being withheld from the monies withdrawn from an RRSP.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 you and/or your spouse/common-law partner cannot have owned a home in the four (4) years prior to the year that you purchase the home. You must occupy the home within one (1) year of withdrawing the monies from your RRSP.
These RRSP monies must be repaid over a maximum period of fifteen (15) years from the date you withdraw them, commencing in the second year following that withdrawal date. The prepayment amount must be a minimum of 1/15th of the amount you withdraw; however, no interest is payable on the RRSP funds withdrawn..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, you can instead use a tax-free savings account (TFSA). 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 you have maximized your contribution each year, you 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 your RRSP and your TFSA; this is yet another very favourable option if you want to have a larger down payment when purchasing a home and you wish to minimize both the tax consequences and the amount you will have to borrow in the form of a mortgage.
MARTIN K.I. RUMACK
Barrister and Solicitor
202 - 2 St. Clair Avenue East
Toronto, ON M4T 2T5
Tel: (416) 961-3441 (ext. 26)
Fax: (416) 961-1045
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