Beginner’s Luck: An Overview of Canada’s First Time Home Buyer’s Plan

In 1992 the federal government introduced a plan to allow more Canadians to become homeowners. Since then over 2.6 million people have taken advantage of the tax breaks and incentives that the government offers to those purchasing a qualifying home. In order to benefit from this initiative, it is critical to understand what benefits are available and how you can qualify for them.

There are three government programs that benefit first time home buyers (FTHBs) and they have different criteria and nominal values.

The three programs are:

  1. Land transfer tax rebate – a pro-rated rebate of up to $2000 ($4,000 in Toronto) based on home price)
  2. FTHB RRSP plan – allows up to $25K withdrawal from each person’s RRSP for down payment
  3. FTHB tax credit – a credit of $750 (all parties combined) from income taxes

These three benefits are a great way to let the government reward you for helping drive Canada’s housing market and the overall economy. The land transfer rebate and tax credit are obvious opt-ins for most folks but the RRSP Plan benefit really depends on your tax bracket at contribution time versus your bracket at withdrawal time. Taking advantage of the RRSP withdrawal will allow you to reduce your (current) tax liability by a larger amount as your annual income increases. Actually I used to believe this benefit was greater than it actually is. The real benefit of the RRSP FTHB benefit is the tax not paid on the withdrawal for the term of the loan and the resulting savings on money that does not have to be borrowed under the mortgage. For example, a $25,000 withdrawal with a 30% tax rate yields a benefit of $7,500 of tax that is not required to be paid and can therefore reduce the mortgage amount. If the mortgage rate is 4%, then the actual benefit of the withdrawal is $400 for the first year. This benefit reduces over time as the loan must be repaid over 15 years.

Who is a first time homebuyer?

The CRA does not use identical criteria to determine eligibility for each benefit listed above. The criteria which are common however, are quite simple. Below is a short list of the basic criteria, with links to the CRA website for more comprehensive definitions befitting more complex situations.

FTHB Eligibility:

  1. You must purchase a qualifying home (most homes qualify, more on this here) and intend to occupy it as your principal residence within 1 year of your purchase date. You may also buy the home for a relative with a disability and not occupy it yourself.
  2. For Land transfer rebate – You may not have owned an interest in a home anywhere in the world previously
  3. For Tax credit and RRSP – You may not have lived in a home owned by you or your spouse in the previous 4 year period as defined here

Other useful rules criteria:

  1. RRSPs must be in your account for 91 days before you withdraw them for your deposit. The funds must also be paid back to your RRSP over the next 15 years.
  2. You must build or buy a qualifying home before October 1st of the year after you withdraw the RRSP funds
  3. The government wants you to claim these benefits all in the same tax year.
  4. You can own a rental property and still be considered a FTHB for the Tax credit and RRSP

This is all well and dandy but…

How does one actually receive these benefits?

All of these benefits can be claimed at the time you would have incurred the tax liability.

  1. Land transfer tax rebate – Apply either electronically or by paper form to the Land Registry Office. The lawyer who closes your purchase and/or mortgage will usually do this for you.
  2. FTHB RRSP plan – Fill out and submit a T1036 to the institution where you withdraw your RRSPs
  3. FTHB tax credit – Claim this credit on line 369 of your yearly income tax return

Some interesting facts that might surprise you:

  • One could qualify as a FTHB under the RRSP Plan more than 3 times with enough persistence.
  • Your spouse could have owned a home that they are selling this month, and as long as you have not lived in it, you are entitled to receive some FTHB benefits.
  • You don’t have to spend the RRSP funds on your down payment if you’ve got $25,000 cash already going into the home. You could spend it on closing costs, renovations, furniture, or whatever you like because your cash is replaced by the withdrawn funds.

I am always available to discuss the contents of this article by phone or email at 416-371-2077 or david@mortgageoutlet.ca. I also maintain a blog at www.weteachfinance.com for all your financial and borrowing needs.

Edit: After posting this article I was asked to weigh in on Four essential questions for the FTHB by the editors at Typical Geek, an honour I gladly accepted.

Useful Resources:

Income Tax Calculator:

http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2015-Personal-Tax

CRA – Home Buyer’s (RRSP) Plan:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

CRA – Home Buyer’s Tax Credit:

http://www.cra-arc.gc.ca/hbtc/

Ministry of Finance – Land Transfer Tax Credit:

http://www.fin.gov.on.ca/en/refund/newhome/

 

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