• Life Events
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Tax Issues

As with many major life changes, there are always tax aspects to be considered. Here are some tax issues around home ownership:

The Home Buyers' Plan (HBP)

This program can be very beneficial for the right home buyer and it is used frequently. Essentially, the HBP allows you to borrow from yourself'to finance your first home. Many Canadians have been saving through Registered Retirement Savings Plans (RRSPs) and under the HBP you can use the money in your RRSP(s) to make the down payment on a home without immediate tax consequences. This will allow you to reduce the amount to be borrowed from financial institutions at commercial rates. The downside is that while you are using the funds for your home purchase they are not growing tax free inside your RRSP. There are many specific rules relating to the use of the HBP. Here are some of the rules:

• Each person who qualifies can withdraw up to $25,000 from an RRSP or RRSPs. Therefore a couple can withdraw up to $50,000
• The home purchased must be a 'first home' which generally means you have not owned a home in the last five years
• To avoid taking this withdrawal into income for tax purposes, you are expected to repay the money to an RRSP over a maximum of 15 years at one-fifteenth of the amount per year. The payments are required to begin in the second tax year after the withdrawal. For example, if you withdraw $15,000 from your RRSP in 2009 you have to start paying $1,000 per year back starting in 2011.
• Any money not repaid according to the schedule is regarded as taxable income

The Home Buyers' Tax Credit (HBTC)

For those who purchase a home after January 27, 2009 there will be a non-refundable tax credit of $750 based on $5,000 times 15%. Eligibility for the credit is essentially the same as for those who qualify for the Home Buyers' Plan and typically means those persons (or their spouse) who have not owned a home in the last five years. The rules are more liberal where the homeowner is defined as disabled pursuant to the CRA definition.

The Principal Residence Exemption

Although you are considering buying, you should be aware of the Principal Residence Exemption which will probably come into play at some time in the future. This exemption is often the most beneficial tax strategy for Canadians. Basically, you don’t have to pay tax on any appreciation of the value of your home when you sell it. For example, if you bought your home for $200,000 and sold it for $500,000, there is a $300,000 capital gain. However, capital gains from qualifying principle residences are exempt from this tax. If it wasn’t exempt you would have to include 50% of the gain or $150,000 in to income and pay resulting taxes. Discuss the benefits of the Principle Residence Exemption with your advisor.