The purchase of your first home is arguably the most important financial decision in your life. What are some of the tax considerations and consequences concerning this purchase? Let’s have a look!
Purchasing your home
There is no tax implication when purchasing a property. In fact, if it happens to be your principal place of residence, you could even be eligible for some programs setup by the Canada Revenue Agency (CRA) to help with this purchase:
Home Buyers’ Plan
The Home Buyers’ Plan (HBP) is a program setup by the Federal government to help with the down payment of the purchase of your first home. The plan allows you to “borrow” from your RRSP in order to get funds for a down payment of your home purchase, which is your principal residence. Since it is “borrowed”, the amount withdrawn under the HBP is not included in your taxable income, unlike normal RRSP withdrawals. Of course, this program is available only to RRSP holders and like any program offered by the government, there are lots of conditions!
First, you have to determine whether your purchase is considered “first time” according to the CRA. Who knew that there are conditions to considering something as a “first time” purchase, but we are talking about taxes! In essence, the CRA considers you a first-time purchaser if in the last four years before the withdrawal, you did not occupy a home that you or your current spouse or common-law partner owned.
To start the process of withdrawal, you must fill out the T1036 form, and then submit to your financial institution. You can withdraw up to $25,000 from your RRSP under this plan. For couples, each one of the spouses can withdraw up to $25,000, for a total of $50,000.
You start paying back the “loan” the second year after the year you withdrew funds from your RRSP(s) for the HBP. You do this by contributing back into your RRSP through 15 yearly instalments. The instalment amount per year is the amount of your withdrawal divided by 15. Do not forget to designate your RRSP contributions as a repayment under the HBP when filing your tax return. If you do not contribute to your RRSP or do not designate them as a repayment, the instalment amount gets added back to your taxable income.
Home Buyers’ Amount
The Home Buyers’ amount is a non-refundable tax credit on your tax return that you can claim if you meet the criteria mentioned above about the Home Buyers’ Plan. The credit amounts to $5,000 non-refundable for the purchase of your “first home” (see definition above). The actual tax savings to you translates to $750 once you factor the non-refundable tax credit rate, which is set at 15%. You don’t need to have a withdrawal under the Home Buyers’ Plan in order to claim the credit; if you meet the eligibility criteria to the HBP, you are entitled to the Home Buyers’ amount.
Selling your home
When you decide to sell your home, there are normally no tax consequences as long as your former home is considered a principal residence as per the CRA definition. Remember though that your home has to be your principal residence for all the years that you owned it. If you rented your home for a portion of that time period, you will have a taxable capital gain to declare for those years.
If you sell your home for the purpose of moving closer to your new workplace (employed or self-employed) or post-secondary educational institution, you can, under certain conditions, deduct your moving expenses. In order to qualify, your new home must be at least 40 kilometres (by the shortest usual public route) closer to the new place of work or school.
Expenses you can deduct include transportation and storage costs, travel expenses (meals, and accommodation), costs of selling your old residence, temporary living expenses etc… For certain expenses, you can choose what the CRA calls the “simplified method” of calculating them, which means you are not required to have receipts for these expenses; the flip side is you can only claim the flat rate that is set by the CRA.
The tax deduction for moving expenses is limited to the income you gained at the new work location (employed or self-employed). For students, the tax deduction is limited to scholarships, fellowships, bursaries, certain prizes, and research grants that are required to be included in income. Any excess amount of expenses you cannot deduct can be carried forward and claimed in future years.