Rounding it up
There are a number of tax credits available to both new and existing homebuyers.
First-time homebuyers have a leg up with tax credits and the Home Buyers Plan — both of which make the purchase of a new home easier.
There are plenty of tax credits available to those buying second and third homes too, especially if you work from home or make green improvements.
Perhaps more than ever before, buying and owning your own home is a dream to which many Canadians aspire. Especially during a global pandemic, when having your own space and property can make a world of a difference. Need a little fresh air? Pop out to your backyard! Need to get the dog walked? No worries, just head out your front door!
Because of the desire to own homes, and the relatively low supply, prices have been sky high in the last six to eight months. However, we have seen some signs of prices slowing down as countries begin to get the pandemic under control and economies progressively become closer to normal. This makes it, in many ways, a perfect time to purchase a new home.
There are lots of things to think about when you’re planning on purchasing a home. One of those things has to be the tax benefits that may be available to you during the purchase process and as you begin to furnish your household. Let’s take a look at a few of the tax credits you might be able to take advantage of when you purchase a house.
Tax credits for one and for all, right?
Yes and no. If you’re a first-time home buyer in Canada, you will be able to access more tax credits and benefits than if you were buying a second home. Through these benefits, the government wants to make the idea of buying a new home as enticing as possible, as new home building and purchases are great indicators of the economy’s strength. Don’t be too upset though, second-time homebuyers. There are still plenty of tax benefits for you too; we’ll get into them later.
The First Time Homebuyer Incentive
When we talk about tax credits for home purchases in Canada, this is really the one that gets tossed around quite a bit. If you qualify for this tax credit, you can enter into a shared equity mortgage contract with the Government of Canada. This contract helps you defray some of the costs of purchasing your home. If you qualify, the Canadian government will allow you to borrow between 5 and 10% of the purchase price of your home to put toward the down payment. When you sell the home, you’ll repay 5% or 10% of the current value of the home.
For example, if you purchase a home for $100,000 and the government loans you 10%, you’ll receive $10,000 toward your down payment. Let’s say you decide to sell your home in a few years, and it increases in value to $200,000. When you receive the proceeds of your home’s sale, you’ll give a check to the Canadian government for $20,000, which is 10% of the current value. The additional money in your down payment will lower the amount of interest you have to pay over the long term, which makes your home more affordable to get in the first place. Nice!
Before you get too excited, however, you need to ensure that you will qualify for the credit. First, this needs to be the first home you’re purchasing. You also must not have lived with your current spouse or partner who owned a home in the past four years. If you’ve recently experienced a divorce or separation, however, you can become eligible again.
Some other requirements include:
Your total annual qualifying income doesn’t exceed $120,000 ($150,000 if the home you are purchasing is in Toronto, Vancouver, or Victoria)
Your total borrowing is no more than 4 times your qualifying income (4.5 times if the home you are purchasing is in Toronto, Vancouver or Victoria )
You are a Canadian citizen, permanent resident, or non-permanent resident authorized to work in Canada
You meet the minimum down payment requirements with traditional funds (savings, withdrawal/collapse of a Registered Retirement Savings Plan (RRSP), or a non-repayable financial gift from a relative/immediate family member)
For more information or to apply, visit the Place To Call Home website operated by the Canadian government. You’ll fill out two forms after you’ve been pre-approved for a mortgage and the lender will submit the application on your behalf.
The Home Buyers Plan
The Home Buyers Plan (HBP) is another tax scheme operated by the government. It provides qualified buyers with up to $35,000 from a Registered Retirement Savings Plan (RRSP) for the purchase or building of a new home. Also only open to first-time homebuyers, with some exceptions, the HBP is designed to defray some of the cost of purchasing a home. You’ll simply withdraw funds, tax-free, from your RRSP. You’ll then have 15 years to repay the funds, so you can think of it as a loan from yourself.
It’s important to read the fine print on the HBP and understand the repayment requirements. Additionally, take into consideration the growth you may not realize by withdrawing the money from your RRSP. Still, if you’re a first-time homebuyer who is a Canadian citizen and has a written agreement to purchase or build a home, you can take advantage of the HBP.
Other deductions and credits
There are a few other credits you can realize as a home buyer and it doesn’t have to be your first rodeo to do so. The Home Buyers’ Amount is a straight $5,000 tax credit offered on your end of the year return if you purchased a home in the preceding year. Canada estimates that most individuals who apply for the credit can realize a $750 federal tax savings.
Tax relief is also available for GST/HST taxes on the purchase price or renovation price of homes if you qualify. The amounts vary here, but if you’ve purchased a home or substantially renovated it, you can realize both federal and provincial GST and HST savings. This credit applies to a number of different types of dwellings as well, including single-family homes, modular homes, and even co-ops.
Anything for a current homeowner?
There sure is! The Canada Greener Homes initiative allows you to receive grants of up to $5,000 for the purchase and installation of energy-efficient appliances. The program also provides up to $600 for a professional energy efficiency consultation.
The pandemic has also moved much of our business to our homes. The Canadian government understands this and has promoted a tax credit that has been in place for some time, allowing citizens to write off home office expenses. This credit also changes drastically based upon your work, how much space you use in your home, and more. At the end of the day, you could write off a substantial portion of your expenses or take a straight $2 per day deduction.
There is no shortage of tax credits for those who want to purchase a house. Whether you’re a first-time homebuyer or buying your third house, the Canadian government wants to make it a bit easier to find the best pad for you and your family. It’s important to do your own research about the credits available and determine if they’re right for your specific financial situation. Plus, it never hurts to apply!
Dan is a runner and writer living in the Washington, D.C. area, where he currently works for a financial services trade association as the Communications Director.