Tax-related housing proposals from the 2022 federal budget
Real estate prices in Canada have escalated significantly over the past two years, but even before that, Canadian housing prices had been steadily rising at a rate higher than wage increases. While affordable housing is a complex matter with no easy solution, new tax initiatives the federal government proposed in the 2022 budget could offer some relief.
In this article we discuss the five income tax proposals related to housing and what they mean for taxpayers.
New tax-free first home savings account
The boldest of these initiatives is the introduction of a new registered account, the Tax-Free First Home Savings Account (FHSA). First-time homeowners would be able to contribute a maximum of $40,000 over their lifetime to this account, at a maximum of $8,000 per year, starting in 2023.
Similar to a tax-free savings account (TFSA), the funds contributed into an FHSA will be able to earn investment returns tax-free. Unlike the TFSA, the contributions into an FHSA would be tax-deductible. Further unlike a TFSA, any unused annual contribution room cannot be carried forward.
When a withdrawal is made from the FHSA to purchase a qualifying home, the withdrawal will be tax-free. However, if a withdrawal (rather than a transfer) is made for any other purpose, it will be taxable.
The proposals also provide for flexibility for moving funds between an RRSP and an FHSA. For example, if there are funds in an RRSP, they could be transferred to an FHSA over five years to provide $40,000 tax-free to purchase a home.
However, funds in an RRSP could also be used to buy a first home under the Home Buyers’ Plan (HBP). The HBP has been in existence for many years and allows a homebuyer to take a loan of up to $35,000 from their RRSP to use for purchasing a home. This loan must be repaid to the RRSP over 15 years or be taxed as a withdrawal over 15 years.
There may be situations where a transfer from an RRSP to an FHSA to buy a home makes sense because the FHSA funds can be withdrawn tax-free with no need to repay the funds. However, while funds from an RRSP to create a Home Buyers’ Plan can be withdrawn all at once, funds can only be transferred from an RRSP to a FHSA at a rate of $8,000 per year.
Each individual will need to assess how the FHSA could benefit them. This new plan also represents an opportunity for a parent to help their adult child save for a first home.
Multigenerational home renovation tax credit
Many older adults would like to stay in their own home and live as independently as possible. For some families, a home may be renovated to create an area within the home of adult children where an elderly parent can live. This is one type of situation where the proposed Multigenerational Home Renovation Tax Credit (MHRTC) could help.
The proposed MHRTC will be a refundable credit calculated as 15% of eligible expenses to an upper limit of $50,000. Although the final details are not yet available in legislation, eligible expenses would be defined as those used to create a secondary unit within the main unit. The secondary unit would need to be a self-contained unit with a private entrance, kitchen, bathroom facilities, and sleeping area. The secondary unit could be newly constructed or created from an existing living space that did not already meet the requirements to be a secondary unit.
It is proposed that this credit would apply for the 2023 and subsequent taxation years, for work performed and paid for and/or goods acquired on or after January 1, 2023. If your family is thinking about creating a secondary unit for an eligible person, it might make sense to wait until 2023 as this new credit could provide up to $7,500 in tax relief.
Home Buyers’ Tax Credit
There is currently a non-refundable tax credit available to first-time home buyers of $5,000, which provides tax relief at 15% or $750. The budget proposed to double this credit to $10,000, which would provide up to $1,500 in tax relief. This proposal will apply on the purchase of a qualifying home made on or after January 1, 2022.
Home accessibility tax credit
The budget also proposed that another of the current housing tax credits be doubled. The Home Accessibility Tax Credit (HATC) provides a 15% non-refundable tax credit on eligible home renovation expenses up to $10,000.
Eligible expenses for this credit are incurred when the expenses are for the renovation or alteration of a home to allow an adult age 65 and over to have greater accessibility in the home or to have a reduced risk of harm within the home. An adult individual who is eligible to claim the disability tax credit or a supporting person of such an individual can also claim the credit for these types of renovations.
The budget proposed to double the annual expense limit to $20,000, which would then provide up to $3,000 in tax relief. This enhanced measure would apply when the expenses are incurred in the 2022 or subsequent taxation years.
Residential property flipping rule
The Canadian tax rules distinguish between a capital gain, which is currently only 50% taxable, and income gains, which are fully taxable. The principal residence exemption is a provision in the Canadian tax legislation that provides a tax-free gain on the sale of a residence that meets the definition of a principal residence.
The government is concerned that individuals who purchase real property, including rental property, with the intention of reselling within a short period of time (“property flippers”) are incorrectly reporting their gain on resale as a capital gain, or in some cases as a tax-free gain from the disposition of a principal residence, rather than as fully taxable business income.
To address this, the federal budget proposed to treat the disposition of any real property held for less than 12 months as business income, except in limited circumstances that would be beyond a taxpayer’s control (such as death, marital breakdown, addition of family members, disability, change of place of work, and insolvency).
It is proposed that this measure would take effect in respect of residential properties sold on or after January 1, 2023. The government has yet to issue draft legislation with respect to this measure.
How BDO can help
Contact us for more information on how these new housing-related tax initiatives proposed by the federal government could benefit you or your family members.