Programs and incentives to help first-time homebuyers

As real estate prices soar in Canada, the government is looking at ways to cool the market while helping new buyers purchase their first home. Ontario is expanding its foreign buyers’ tax and many are watching the April 7 federal budget for additional measures to address affordability.

As spring approaches and clients look to purchase a new home, now is a great time to mention some of the programs available (or in the works).

First Home Savings Account

The Liberals proposed the First Home Savings Account (FHSA) as part of their 2021 election platform to help Canadians under the age of 40 save for a down payment on their first home.

The account will be a combination of an RRSP and a TFSA. Contributions to the FHSA will provide the taxpayer with a deduction that can be used to reduce their income for the year. The maximum contribution is $40,000, and account funds will grow tax-free. When the funds are withdrawn, the growth won’t be taxable if the funds are used to purchase the taxpayer’s first home.

If the home purchase isn’t complete by the year the taxpayer turns 40, the funds in the FHSA can be transferred to an RRSP.

This account is still in the proposal stage, and there are lots of unknowns as to how it will actually work. For instance, it’s not clear if all eligible Canadians will have the same $40,000 contribution limit or if contributions will be based on earned income, similar to the RRSP. If the taxpayer doesn’t purchase a home, will they need RRSP contribution room to be able to transfer the balance of the FHSA to an RRSP?

This account could be extremely helpful to young Canadians looking to save for a home. It will be interesting to see the details if this proposal proceeds.

First-time Home Buyers Incentive

This isn’t new but is worth mentioning because it can help make home ownership for first-time buyers more affordable. This program essentially lends the homebuyer a portion of their down payment, with the amount depending on property type.

It’s important to note that this is a share equity mortgage, which means the taxpayer will pay back the amount borrowed based on the fair market value of the property at the time they sell it. If the property goes up in value, the government benefits. The repayment must be paid in full after 25 years or when the property is sold, whichever comes first. The homebuyer may repay the amount before the 25-year period ends, and no pre-payment penalty applies.

Below are the property types and the applicable incentive:

New build — incentive of 5% or 10%
Existing home — incentive of 5%
New or existing prefabricated home or mobile home — incentive of 5%

This program allows first-time homeowners to have a larger down payment, which results in smaller and hopefully more manageable mortgage payments.

Home Buyers’ Plan

This program allows first-time buyers to withdraw up to $35,000 from their RRSPs without withholding tax, and the taxpayer can repay the funds within a 15-year period. To qualify, a participant must:

be a Canadian resident when the funds are withdrawn;
have an agreement to buy or build a qualifying home;
be a first-time homebuyer, which means they didn’t own and occupy a home in the four years prior to purchasing a home; and
intend to occupy the home as their principal residence within one year of buying or building it.

There’s also a provision that allows taxpayers to use the plan to help a related person with a disability purchase a home.

As of Budget 2019, the government allows a first-time homebuyers’ withdrawal in the event of a marriage or common-law relationship breakdown. To qualify, the taxpayer must have lived separate and apart from their former spouse or common-law partner for at least 90 days due to relationship breakdown. They must have disposed of their previous principal residence within two years from the end of the year that the homebuyers’ withdrawal was made. If the client is using the withdrawal to buy the other spouse’s share, this requirement is waived.

In addition, with a marriage breakdown the taxpayer can acquire the home more than 30 days before making the homebuyers’ withdrawal. This isn’t permitted for any other Home Buyers’ Plan withdrawals.

Home Buyers’ amount

If your client is considered a first-time homebuyer, they may be eligible for a $5,000 non-refundable tax credit when they purchase a qualifying home. The Liberals pledged in last fall’s election to double the amount to $10,000, but no change has been enacted.

GST/HST New Housing Rebate

This rebate is designed to help eligible taxpayers recover some of the GST/HST paid when they purchased a new home, did substantial renovations to an existing home, converted a property from non-residential into a house or built a major addition to an existing home. To qualify, the purchase price or cost of the renovation must be less than $450,000, and the maximum rebate is 36% of GST paid.

Underused Housing Tax Act

Further to a consultation period from August to September 2021, the government drafted legislation for the Underused Housing Tax Act to address speculative transactions and reduce vacancies in Canada.

The Underused Housing Tax (UHT) is a tax of 1% based on the value of residential property owned by a non-Canadian non-resident and that’s considered underused or vacant. Exceptions include vacation or recreational properties and properties where the owner, their children or spouse or common-law partner reside. This measure is effective as of Jan. 1, 2022.