Making Housing More Affordable
In its April 7, 2022 Budget, the Government of Canada announced a number of measures intended to make housing more affordable for Canadians. These measures include personal income tax changes, and funding for a variety of housing programs. For many Canadians, the creation of the new Tax-Free First Home Savings Account is the highlight of the personal tax changes. Other personal income tax measures include the introduction of the Multigenerational Home Renovation Tax Credit, an increase to the Home Accessibility Tax Credit, and an increase to the First-Time Home Buyers’ Tax Credit.
Tax-Free First Home Savings Account
The Budget proposes to create a new Tax-Free First Home Savings Account (FHSA) starting sometime in 2023. Timing of when an FHSA can be opened will depend on co-ordination between the government and financial institutions. The key features of the new account are that contributions will be tax deductible, income and growth within the account will not be taxed as they are earned, and withdrawals to purchase a qualifying home will not be taxed.
The government currently proposes the following rules for an FHSA
You must be at least 18 years old to open an FHSA.
You must be a resident of Canada to open an FHSA.
You must not have lived in a home that you owned at any time in the year that you open an FHSA or the four preceding calendar years.
The maximum annual contribution is $8,000.
The maximum lifetime contribution limit is $40,000.
You cannot carry forward unused annual contribution room.
You may have more than one FHSA at the same time, but total annual and lifetime contributions to all of your FHSAs cannot exceed the limits above.
You can make a transfer from your RRSP to your FHSA. These transfers are restricted by the FHSA annual and lifetime contribution limits.
Withdrawals and transfers from your FHSA do not replenish your annual or lifetime contribution limits.
Tax-free withdrawals may only be made in respect of one home.
You must close your FHSA within one year of making your first tax-free withdrawal.
After you make a tax-free withdrawal from an FHSA, you will not be eligible to open another FHSA.
Amounts that you withdraw for purposes other than a qualifying first home purchase are taxable.
You may make tax-free transfers from your FHSA to your RRSP or RRIF. These transfers are not limited by your available RRSP contribution room.
Amounts that you transfer from your FHSA to your RRSP or RRIF will be taxed when you withdraw them from your RRSP or RRIF.
If you have not purchased a qualifying home within 15 years of opening your FHSA, then you must close it. Money in your FHSA at that time could be transferred to your RRSP or RRIF, or taken out as a taxable withdrawal.
Withdrawals from your RRSP under the RRSP Home Buyers’ Plan will continue to be available. However, you cannot make a tax-free FHSA withdrawal and an RRSP Home Buyers’ Plan withdrawal for the purchase of the same home.
Expect additional rules to be included when the legislation is released. For example, the government’s announcement does not mention living in a home owned by your spouse or common-law partner as a factor that would prevent you from opening an FHSA. That may be in the rules when the details are released.
Multigenerational Home Renovation Tax Credit
The Budget proposes a new refundable Multigenerational Home Renovation Tax Credit for 2023 and future years. The Credit will assist with the renovation of an existing residence to create a secondary housing unit that would allow an eligible person to live in an eligible dwelling with a qualifying relative. The Credit will be 15% of up to $50,000 of qualifying expenses for the renovation of or an addition to an eligible dwelling. The maximum tax credit is $7,500.
An eligible person is someone who is at least 65 years old by the end of the year that the renovation is completed, or someone who is at least 18 years old by the end of the year that the renovation is completed and qualifies for the Disability Tax Credit. The Credit can only be claimed once in respect of an eligible person.
A qualifying relative is a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the eligible person (or the spouse or common-law partner of one of those individuals).
The Credit can be claimed for the year that the renovation is completed. The Credit can be claimed by the eligible person who lives in the eligible dwelling, their spouse or common-law partner who lives with them in the eligible dwelling, or their qualifying relative who lives with them in the eligible dwelling. It can also be claimed by a qualifying relative who owns the eligible dwelling. The Credit can be split among taxpayers who are eligible to claim it as long as the total expenses claimed do not exceed $50,000.
An eligible dwelling is a housing unit that is owned by the eligible person, their spouse or common-law partner, or a qualifying relative, and that is lived in by the eligible person and a qualifying relative within twelve months of the completion of the renovation.
The renovation or addition must be done to enable the eligible person to live in the eligible dwelling with a qualifying relative in order to be a qualifying renovation. A qualifying renovation must be an enduring renovation of or addition to an eligible dwelling that creates a self-contained living space. The self-contained living space must include a private entrance, kitchen, bathroom facilities and sleeping area. All required permits for the qualifying renovation must be obtained. A qualifying renovation is not complete until it passes the final inspection, or other proof of completion, that is legally required for the jurisdiction where the dwelling is located.
Qualifying expenses must be reduced by the amount of any other reimbursement, rebate or financial assistance that may be claimed with respect to the renovation. Expenses claimed for the Credit cannot also be claimed for the Medical Expense Tax Credit or the Home Accessibility Tax Credit.
Based on Canada Revenue Agency’s current interpretation of the Principal Residence Deduction, one of the two housing units that exist after the qualifying renovation will not qualify for the Principal Residence Deduction.
Home Accessibility Tax Credit
The Home Accessibility Tax Credit gives individuals who are 65 or older, or who qualify for the Disability Tax Credit a 15% non-refundable tax credit on up to $10,000 of expenses for eligible renovations to their home. Eligible renovations are renovations that allow the individual to gain access to, or to be more mobile or functional within their home. Eligible renovations also include renovations that reduce the risk of harm to the individual within their home or in gaining access to it. In some cases, the credit can be claimed by the individual’s spouse or common law partner. Effective for 2022 and future years, the Budget proposes to increase the limit on eligible expenses from $10,000 to $20,000. This will double the maximum tax savings from $1,500 to $3,000.
First-Time Home Buyers’ Tax Credit
The First-Time Home Buyers’ Tax Credit provides a $750 non-refundable tax credit (15% x $5,000) to an individual who purchases a home to use as their principal place of residence within one year of acquiring it. To be eligible for the credit, the individual (and their spouse or common-law partner if they have one) must not have owned and occupied another home during the year or during the four preceding years. The credit can also be claimed by an individual who purchases a home to be lived in by a close relative who qualifies for the Disability Tax Credit. In this case the home must be more accessible for that relative, must allow that relative to be more mobile or functional, or must be better suited to that relative's personal needs and care. Effective for 2022 and future years, the Budget proposes to increase the base amount for the tax credit to $10,000, doubling the tax savings to $1,500.
John Connolly, CPA, CMA Senior Tax manager, MRSB Chartered Professional Accountants Inc.