Real estate prices in Canada have escalated significantly over the past two years, but even before that, Canadian housing prices had been steadily rising at a rate that was higher than wage increases.
While affordable housing is a complex matter with no easy solution, new tax initiatives the federal government proposed in the 2022 budget could offer some relief—and have many Canadians curious about the impact.
In this article we discuss the five income tax proposals related to housing and what they mean to taxpayers.
New Tax-Free First Home Savings Account
The boldest of these initiatives is the introduction of a new registered account, the Tax-Free First Home Savings Account (FHSA). First-time homeowners would be able to contribute a maximum of $40,000 over their lifetime to this account, at a maximum of $8,000 per year. This means that the maximum could be contributed over as little as five years, starting in 2023.
Similar to a tax-free savings account (TFSA), the funds contributed into an FHSA will be able to earn investment returns tax-free. Unlike the TFSA, the contributions into an FHSA would be tax-deductible.
Unlike a TFSA, any unused annual contribution room cannot be carried forward. For example, if an individual contributed $5,000 in 2023 but had the funds to contribute $15,000 in 2024, they would be restricted to contributing $8,000 in 2024—they could not add on the $3,000 not contributed in 2023 to their 2024 contribution. This means that any year where the full $8,000 is not contributed will not represent a forfeited contribution amount over the life of the plan but it will lengthen the time to reach the maximum lifetime contribution limit of $40,000.
Eligible individuals must meet all four of the following conditions:
- Be at least 18 years of age.
- Be a resident in Canada.
- Not have owned a home at any time in the year the FHSA is opened.
- Not have owned a home at any time during the preceding four calendar years.
When a withdrawal is made from the FHSA to purchase a qualifying home, the withdrawal will be tax-free. However, if a withdrawal (rather than a transfer) is made for any other purpose, it will be taxable.
According to the proposal, an FHSA would have a maximum life of 15 years. At that time, if a home has not been purchased, the plan will be collapsed and the funds would either be subject to tax, or eligible to be transferred without taxes to a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF). Such a transfer would not affect otherwise available RRSP contribution room, which could reduce the risk for anyone who wants to participate in an FHSA but is concerned about whether they should make an RRSP contribution or an FHSA contribution.
In other words, a taxpayer could first contribute to a FHSA, and if a home is not purchased with the funds, could transfer the money to an RRSP without any tax consequences. Any subsequent withdrawal from the RRSP or RRIF will be taxable in the same manner as other RRSP or RRIF withdrawals.
The proposals also provide for flexibility for moving funds between an RRSP and an FHSA. For example, if there are funds in an RRSP, they could be transferred to an FHSA over five years to provide $40,000 tax-free to purchase a home.
However, funds in an RRSP could also be used to buy a first home under the Home Buyers’ Plan (HBP). The HBP has been in existence for many years and allows a homebuyer to take a loan of up to $35,000 from their RRSP to use for purchasing a home. This loan must be repaid to the RRSP over 15 years or be taxed as a withdrawal over 15 years.
There may be situations where a transfer from an RRSP to an FHSA to buy a home makes sense because the FHSA funds can be withdrawn tax-free with no need to repay the funds. However, while funds from an RRSP to create a Home Buyers’ Plan can be withdrawn all at once, funds can only be transferred from an RRSP to a FHSA at a rate of $8,000 per year. An individual will only be able to use funds from an FHSA or funds from an RRSP (under the Home Buyers’ Plan) to buy a house, not both. If funds are transferred from an RRSP to a FHSA, the contribution room to the RRSP will not be restored.
Each individual will need to assess how an FHSA could benefit them. This plan also represents an opportunity for a parent to help their adult child save for a first home. The parent would not be able to contribute funds directly to an FHSA set up by their child and achieve a tax deduction, but they could gift the funds to their child, who could then use it to contribute to an FHSA. The child would then get the tax deduction.
Multigenerational Home Renovation Tax Credit
Many older adults would like to stay in their own home and live as independently as possible. For some families, a home may be renovated to create a “granny suite,” or an area within the home of adult children where an elderly parent can live. This is one type of situation where the proposed Multigenerational Home Renovation Tax Credit (MHRTC) could help.
The proposed MHRTC will be a refundable credit calculated as 15% of eligible expenses to an upper limit of $50,000. Although the final details are not yet available in legislation, eligible expenses would be defined as those used to create a secondary unit within the main unit. The secondary unit would need to be a self-contained unit with a private entrance, kitchen, bathroom facilities, and sleeping area. The secondary unit could be newly constructed or created from an existing living space that did not already meet the requirements to be a secondary unit.
The following rules and definitions would also apply:
- An individual age 65 or older or a younger adult who qualifies for the disability tax credit are considered eligible persons.
- Eligible expenses are those that will enable an eligible person to reside in the dwelling with a qualifying relation.
- A qualifying relative could be an adult who is a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece, or nephew of the eligible person, as well as the spouse or common-law partner of a qualifying relative.
- The relative, the eligible person, or the spouse or common-law partner of the eligible person could claim the expenses. Where one or more eligible claimants make a claim, the total amount claimed cannot exceed $50,000.
- Only one qualifying renovation would be allowed to be claimed in respect of an eligible person over their lifetime.
It is proposed that this credit would apply for the 2023 and subsequent taxation years, for work performed and paid for and/or goods acquired on or after January 1, 2023. If your family is thinking about creating a secondary unit for an eligible person, it might make sense to wait until 2023 as this new credit could provide up to $7,500 in tax relief.
Home Buyers’ Tax Credit
There is currently a non-refundable tax credit available to first-time home buyers of $5,000, which provides tax relief at 15% or $750. The budget proposes to double this credit to $10,000, which would provide up to $1,500 in tax relief. This proposal will apply on the purchase of a qualifying home made on or after January 1, 2022.
Home Accessibility Tax Credit
The budget also proposes that another of the current housing tax credits be doubled. The Home Accessibility Tax Credit (HATC) provides a 15% non-refundable tax credit on eligible home renovation expenses up to $10,000.
Eligible expenses for this credit are incurred when the expenses are for the renovation or alteration of a home to allow an adult age 65 and over to have greater accessibility in the home or to have a reduced risk of harm within the home. An adult individual who is eligible to claim the disability tax credit or a supporting person of such an individual can also claim the credit for these types of renovations.
The budget proposes to double the annual expense limit to $20,000, which would then provide up to $3,000 in tax relief. This enhanced measure would apply when the expenses are incurred in the 2022 or subsequent taxation years.
Residential property flipping rule
The Canadian tax rules distinguish between a capital gain, which is currently only 50% taxable, and income gains, which are fully taxable. The principal residence exemption is a provision in the Canadian tax legislation that provides a tax-free gain on the sale of a residence that meets the definition of a principal residence.
The government is concerned that individuals who purchase real property, including rental property, with the intention of reselling within a short period of time (property flippers) are incorrectly reporting their gain on resale as a capital gain, or in some cases as a tax-free gain from the disposition of a principal residence, rather than as fully taxable business income.
To address this, the federal budget proposes to treat the disposition of real property held for less than 12 months as business income, except in limited circumstances that would be beyond a taxpayer’s control (such as death, marital breakdown, addition of family members, disability, change of place of work, and insolvency).
It is proposed that this measure would take effect in respect of residential properties sold on or after January 1, 2023. The government has yet to issue draft legislation with respect to this measure.
How BDO can help
Our BDO tax professionals can help you assess how these potential changes can benefit you or your family members.
For assistance, please contact:
Rachel Gervais, Tax Service Line Leader, GTA and Private Wealth Leader
Bruce Sprague, Tax Service Line Leader, Western Canada
Greg London, Tax Service Line Leader, Eastern Canada
The information in this publication is current as of May 6, 2022
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.