New homebuyers have a lot to think about. Often, a new homebuyer gets confusing advice about what the terms “first time home buyer” and a “new home buyer” mean and how such status, if you have it is properly used to minimize their costs or maximize their deductions when they first enter into home ownership.
The idea is further complicated because there once was an Ontario program available only to “first time home buyer of a new home.” Now that program has been modified to include potentially all first home purchases, but there are still three different programs for first time homebuyers.
Sometimes, even real estate industry insiders seem to be uncertain as to the status of what constitutes a new homebuyer. Some of that confusion comes from the fact that the Ontario (provincial) Government and the (federal) Government of Canada have different definitions of first time home buyer, and different programs.
Saving Provincial and Municipal Land Transfer Tax (LTT & MLTT)
The provincial government is presently operating a plan where new home buyers have the right to buy their first home with a chance to do so Land Transfer Tax free. In this situation, it is absolutely necessary that the buyers or at least one of them, has never owned a house, anywhere in the world, before. Some people may advise you that your new homebuyer status would resurface if you have been bankrupt or have not owned a home for five years. For Ontario’s land transfer tax break, this is not the case. It is also important to note that not every house ends up to be entirely land transfer tax-free. If the price of the house exceeds $368,000.00, some portion of the land transfer tax reasserts itself and is collected on closing. If two people buy a house together, and one of them is a first time home buyer/owner under the Ontario plan, then if they are joint and equal owners, one-half of the purchase price can be excluded from land transfer tax, still up to and including the $368,000.00 limit. This limit is new as of 2017. Previously the highest priced LTT tax free home was $200,000.00. The old limit saved $2,000 in Land transfer Tax, the new limit saves $4000.00, as the rate steps up. There is also a new higher rate (2.5%) on the price of homes over 2 million. Please also note that the right does not duplicate if, in fact, the buyers are married couples. Any individual, including an individual living in a common law relationship can claim a first time homebuyer exemption. A married individual can claim a first time home buyer exemption if they have never owned a home before and they have never lived in a married relationship with their spouse at a time when the married spouse owned a home. If a person was to marry and move into their married spouse’s home, having never been a home buyer, it would make no difference whether the new spouse’s name was ever on the deed, the new spouse, under the present plan would have lost, forever, the right to claim a first time home buyer’s Land Transfer Tax exemption under the Ontario plan.
It is also important to note that the City of Toronto charges an additional land transfer tax and the similar same rules apply to the Toronto or “municipal” land transfer tax. Because the rates are different that the Ontario Tax, this could save the buyer up to $4475.00. (After March 1, 2017). Immigration status was also introduced as a factor, which can be grandfathered in regard to the Municipal Tax.
The Federal Home Buyers Plan (HBP)
Some of the confusion in the industry arises from the fact that the federal government runs two programs to benefit first time homebuyers. The first plan creates a right a first time home buyer to access up to $25,000.00 from their RRSP without triggering the tax that is normally charged when money is taken out of an RRSP, as long as they use the withdrawn funds towards the purchase of a personal use home. Under this legislation, a five-year gap in homeownership will re-qualify a person as a first time homebuyer, even if they have owned a home previously.
Utilizing this HBP option has potentially costly side effects. The person taking the money from their RRSP agrees in writing to restore the money to the RRSP by a certain date. If they fail to do so, the RRSP money will be taken into income and taxed, as is the norm when any money is withdrawn from an RRSP. Re-contributing the money to the RRSP may impact negatively on your ability to otherwise build up your RRSP. Taking the money out of the RRSP also impacts negatively on the growth of your RRSP as whatever sum you take will not be earning tax-free interest, dividends or capital gains and will not be compounding. A Canada Revenue Agency Form T1036, which is available on the Internet should be completed and filed with your financial institution as much as six weeks before closing to make sure the money will be available and the withdrawal properly approved by the closing date. This form and more information about this plan is available on the Canada Revenue Agency website.
The government calls this the Home Buyer’s Plan (HBP). It does require that you move into the house within a year and make it your principal residence. There is also a possibility of using the HBP if you are acquiring the home for use by a disabled person, that is, a related person with a disability. To qualify you must intend that related person with the disability occupy the home as his or her principal place of residence. If the qualifying home is purchased with another person, each person can withdraw up to $25,000.00. The repayment period is no more than 15 years. Payments should be divided equally between the 15 years to meet the minimum repayment requirement. The precise definition of a first time home buyer under the HBP plan is:
The home buyer is not considered a first time home buyer if, at any time during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal, the home buyer or their spouse owned a home that they occupied as a principal place of resident.
This definition of first time homebuyer is differs from the definition of a first time homebuyer for the purposes of Ontario’s land transfer tax exemption. As mentioned above, to be eligible for the land transfer tax exemption, you must have never owned a home at any time, not just in the last five years. Further, if you have an HBP plan previously, but are now re-qualified as a first time home buyer, please note your whole HBP plan balance must have been paid off before you can make another exempt withdrawal. Locked in RRSP’s will not be suitable or available under the HBP. You must have a signed contract to buy a house before you can apply for the HBP.
Remember the whole point of the HBP program is to save the tax that would be charged if you withdraw the money from your RRSP for the house purchase. The only savings is the tax, which can be quite significant if a large lump sum was being withdrawn from your RRSP. The costs are not just the 15-year repayment schedule but also the reduction in growth on the money that would have accumulated tax free if you had left the money in your RRSP, and your reduced ability to sock away RRSP money while you are catching up.
Federal First Time Home Buyers Tax Credit (FTHBC)
The federal government also has a first time homebuyer’s tax credit, where it provides that first time homebuyers may be eligible for a 15 per cent income tax credit for closing costs. The intent of the plan is to assist first time homebuyers with the costs related to the purchase of a home. The first time homebuyer’s credit (FTHBC) provides a maximum of 15 per cent credit on a maximum $5,000.00 of home purchase costs that might include legal fees and land transfer tax. The maximum tax relief is $750.00. This program only came into effect on January 27, 2009 and must be claimed in the taxation year in which the home is acquired. Again, under this program, an individual will be considered a first time home buyer if neither the individual nor the individual’s spouse or common law partner owned or lived in another home in the calendar year of the home purchase or in any of the preceding four calendar years. More information about this is available on www.fin.gc.ca, or from Service Canada at 1-800-662-6232. If the claimant has also completely eliminated their land transfer tax by using the Ontario program, this tax credit might be as little as $150.00. Be sure to tell your tax preparer that you bought a house in the year and that you are a first time homebuyer. They will need the information in the report and legal bill from your lawyer to establish what your total closing costs were. The appropriate place to claim this number is on Line 369 of your T1 return. Should you wish to claim the homebuyer’s amount, it is also claimable when your first time qualifying home is a mobile home, a condominium unit or a duplex or triplex, etc.