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Saving Up and Moving Out? Tax-Savvy Strategies for Your First Home Purchase

by UFile Team Équipe ImpôtExpert | Feb 20, 2018   Comments:

UFile blog Real EstateWhether you’re moving out of your parents’ basement for the first time, or just upgrading from a rental to a place of your very own, it can be hard to know where to start.

To get you moving, our tax experts share some wisdom on saving for your down payment, navigating recent real estate tax regulations, and more.

Saving up for a down payment? Choose a tax-friendly option

If this is your first time buying a home, you might be wondering – what’s the tax-smart way to stash your savings?

First, find out if you qualify under the Home Buyer’s Plan. If you do, a Registered Retirement Savings Plan (RRSP) is your best bet. Not only do your savings accumulate tax-free with a RRSP, but you’ll also receive a tax deduction. That means the money you put in equals money back, which you can then use to maximize your down payment.

When it comes time to make the payment, the Home Buyer’s Plan enables you to borrow from your RRSP. You are only required to start repaying the “loan” in the second year after the withdrawal, with 15 years to repay after that. You can read more about RRSPs in our Primer here.

Another option is a Tax-Free Savings Account (TFSA). Just like the RRSP, your savings will accumulate tax-free with a TFSA. While these accounts won’t qualify for a tax deduction when you file with your CRA approved software, you’ll be able to pull out your money tax-free at any time, and make your down payment. This is a good option if you’re buying in the short term – say, 2 years or less.

One thing to keep in mind is your yearly limit for both:

  • RRSP: 18% of earned income from the previous year
  • TFSA: $5,500 per year

Reinvest what you receive in deductions

If you’re trying to grow your down payment quickly, a smart strategy might be to contribute to your RRSP, and receive your deduction on your tax return. You’ll see your total amount in deductions when you report your contributions in your CRA certified software. Then, take whatever you receive as a deduction, deposit it into a TFSA, and watch your down payment grow.

Getting your parents help? Here’s what you need to know

Many first-time home buyers receive financial help from parents or family members. If you receive a cash gift to help purchase a home, you won’t be required to pay tax on that amount –as long as the home is your principal residence. Be careful though! If you use the cash to earn income, attribution rules may apply and your parents might have to declare that income on their own tax return! 

If you receive property as a gift, you will have to declare what the government calls a “deemed disposition” at the fair market value of the property – even if no money has been exchanged. You will then have to declare a capital gain on your tax return, which is additional taxable income.

Understand whether recent regulatory changes apply to you

Recent regulatory changes haven’t directly impacted the way you report your taxes when it comes time to load up your CRA tax return software. However, they’re important to note if you’re considering an investment property. B.C. and Ontario have both implemented non-resident speculation taxes to cool an overheated market. If you’re a non-resident who is considering making an investment in either province, keep in mind you’ll face an additional 15% speculation tax.

Have more questions on tax-smart strategies for saving up and moving out? Connect with us on Facebook and Twitter for news and updates on the 2017 tax return and UFile 2017 tax software. Visit Tax & U to get accurate answers to all your questions about your 2017 tax return.

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