Buying your first home is a big step in your personal and financial life. As a first-time homebuyer, you likely have many questions regarding all aspects of the process. This four-part article explores some of the basics regarding the first-time homebuying experience so that you can have a good understanding of what to expect and how best to approach this important step both legally and financially.
1. Homebuyers’ Tax Credit
The Homebuyers’ Tax Credit (HBTC) is a federal, non-refundable credit that allows first-time purchasers of homes to claim a tax refund of up to $750 in the year when they purchase a home.
How do you qualify?
To be eligible for this rebate, the purchaser must meet the following 3 conditions:
- You or your spouse/common-law partner must be buying a qualifying home within Canada
- Must intend to occupy the home within one year of purchase
- Cannot have lived in a home owned by you or your spouse within the previous 4 years
What kinds of homes are covered?
Most types of homes qualify for the HBTC, including:
- single-family houses
- semi-detached houses
- mobile homes
- condominium units
- apartments in duplexes, triplexes, fourplexes, or apartment buildings
How do you claim the credit?
To take advantage of this rebate, it must be claimed on your personal tax return for the year affiliated with your home purchase. On line 369 of your federal tax return, you can claim up to $5000 for the purchase of a new home, thus resulting in a maximum credit of $750 (the credit is calculated at the lowest tax bracket of 15%).
Can two people claim the credit?
If you purchase with your spouse, common-law partner, or even a friend, then either one of you can claim the credit (or share it). However, the combined total cannot exceed $750.
Persons with disabilities
Persons with disabilities can claim the homebuyers’ tax credit even if they are not first-time buyers. If you are eligible for the disability tax credit, then you should be able to purchase a home and claim the credit, providing that the home was purchased for the purposes of increased accessibility.
Additionally, if you have a family member with a disability who will be living in the home, you can purchase a home for them and claim the credit yourself.
What other rebates or credits are available?
First-time homebuyers should also be aware of the HST new housing rebate offered in Ontario. This is different from the homebuyers’ tax credit. If you are purchasing a new home from a builder, consider exploring whether you qualify for this housing rebate.
HST New Housing Rebate
The GST/HST New Housing Rebate was introduced to help homeowners deal with the cost of buying a new home. Provided a purchaser meets certain criteria, he/she may be entitled to offset up to $24,000 of the provincial taxes, and up to $6000 of the federal taxes paid on closing.
2. Homebuyers’ Plan
If you’re a first-time homebuyer or builder with a registered retirement savings plan (RRSP), you may be able to withdraw those funds through the government-run Homebuyers’ Plan (HBP). This program allows for tax-free withdrawals totaling $35,000 from any and all RRSPs you own, to be paid back within a 15-year period. The specific requirements for program eligibility, RRSP withdrawals, and eventual repayment of funds are discussed in detail below.
The following conditions must be met to be eligible for the HBP:
- First-Time Homebuyer: In the four years prior to your home purchase, you or your spouse or common-law partner cannot have resided in a home that either of you owned. Note that this condition is waived if you are a person with a disability or are helping a related person with a disability buy or build a home and meet all other conditions.
- Written Agreement: You have a written agreement to buy or build a housing unit located in Canada which you will ultimately own. Such units include existing homes and those being constructed but excludes any housing that provides only a right to tenancy in the unit.
- Canadian Residency: You must be a resident of Canada when the funds are withdrawn from the RRSP(s), and up to the time the qualifying home is bought or built.
- Occupancy Intentions: In the one-year period after the house is bought or built, you must intend to occupy it as your principal residence. If you are helping a person with a disability, you must intend that that person occupies the home as their principal residence within that time frame.
- Previous Participation in the HBP: If you have previously participated in the HBP, you may be able to do so again if:
- The necessary four-year period has passed to again qualify as a first-time home buyer
- The repayable HBP balance on January 1st of the year of your second withdrawal is zero, and
- You meet all other eligibility requirements.
RRSP Withdrawal Conditions
Under the HBP, you can withdraw a maximum of $35,000 in either a single or series of withdrawals from your RRSP. This amount may be withdrawn from multiple RRSPs, so long as you are the owner of each RRSP. If you are purchasing the home with your spouse or common-law partner and are both otherwise eligible for the HBP, each of you can withdraw up to $25,000 from your separate RRSPs for a total of $50,000.
Note that your RRSP contribution composing the amount to be withdrawn must have been in the RRSP for at least 90 days. Otherwise, they may not be tax-deductible. Also, the home must be bought or built before October 1st of the year after the year of the withdrawal.
Note also that the RRSP withdrawal cannot be made if the home has been owned for more than 30 days by you, your spouse or common-law partner, or if applicable, the related person with a disability that you are helping.
Repayment of Withdrawn Funds
The HBP is structured as a loan and must be repaid in full within 15 years of the withdrawal from your RRSP. The first payment will be due two years after your withdrawal (or the first withdrawal of several, if applicable), and can be paid by making a contribution to your RRSP either in that year or in the first 60 days of the following year. You will be sent an annual Notice of Assessment from Canada Revenue Agency to summarize the amount you have repaid, the outstanding balance, and the required amount for your next payment.
3. First-Time Homebuyer Incentive
The First-Time Homebuyer Incentive (FTHBI) took effect on September 2, 2019 in Canada, but confusion continues to swirl. Let’s look at some of the basics of this program in order to clear up some of the misconceptions and clarify the obligations of both the buyer and the Government of Canada.
What is a shared equity mortgage?
The First–Time Homebuyer Incentive is a shared-equity mortgage designed to lower the monthly mortgage payments of a first-time buyer without increasing the amount they need to save for a down payment. The term shared equity means that the ownership of the property in question is shared between the two parties (in this case the buyer and the Government of Canada).
How much money does the government provide?
For buyers who qualify, the government puts up five percent of the price of a resale home, or either five or 10 percent of the price of a newly constructed home. The FTHBI is secured by a second mortgage on the title to the property.
No regular principal payments are required under the FTHBI. The loan is interest-free and it can be repaid at any time without incurring any prepayment penalties.
How does it help homeowners?
The FTHBI is intended to reduce a homeowner’s mortgage payments. Mortgage payments are reduced because the buyer is borrowing less money and, instead, making a larger down payment. As a result, the buyer will carry a smaller mortgage and benefit from lower monthly payments.
What’s the drawback?
Under the FTHBI, a buyer is effectively sharing his/her home’s price appreciation with the government. Repayment of the loan is not based on the dollar amount borrowed. Instead, the buyer must repay the same five or ten percent received through the FTHBI but calculated as a percentage of the home’s fair market value at the time of a sale. In other words, the government benefits from any increase in the equity of the home (and loses if equity goes down). As such, if at the time of resale, the home has increased in value, the buyer will need to pay back more than he/she borrowed. If the home has decreased in value, the buyer will pay back less than he/she borrowed.
Who can qualify for the FTHBI?
Prospective homebuyers must meet the following requirements to be eligible for the Incentive:
- You need to be a first-time homebuyer (i.e. you cannot have owned a home in the last four years)
- You must have an annual household income of no more than $120,000
- You have at least the minimum down payment of 5%. However, the total amount you put down (including the FTHBI amount) must be less than 20% of the home’s purchase price.
- You are borrowing less than four times your qualifying income.
4. Ontario Land Transfer Tax Refund
Do you have to pay land transfer tax on your first home in Ontario? As is the case in most other provinces, the answer is yes. To help with this financial burden, the Ontario government offers a refund on all or part of your land transfer tax, if you’re an eligible first-time homebuyer. Let’s look at how much is covered.
How much can a first-time homebuyer qualify for?
First-time homebuyers in Ontario can qualify for a rebate equal to the full amount of their land transfer tax, up to a maximum of $4,000.
Based on the Ontario land transfer tax rates, the rebate will cover the full tax amount of land transfer tax up to a maximum purchase price of $368,333. For purchase prices over $368,333, homebuyers will qualify for the maximum rebate, but will still owe the remainder of their land transfer tax.
Who is entitled to the refund?
To qualify for the Ontario Land Transfer Tax Refund for First-Time Homebuyers, you must meet the following criteria:
- You must be a Canadian citizen or permanent resident of Canada
- You must be 18 years of age or older
- You must live in the home within 9 months of purchasing it
- You cannot have owned a home before; and
- If you have a spouse, your spouse cannot have owned a home during the time he or she was your spouse.
How can a lawyer help?
There is a time limit to apply. A qualifying purchaser must apply within 18 months after the date of registration of the transfer of title. However, as most transfers of title these days are completed using electronic registration, qualifying purchasers can receive the refund of Land Transfer Tax at the time of completing the transaction, as opposed to applying for it after the transaction has completed. This means that if you are eligible for the Land Transfer Tax refund, you either do not pay Land Transfer Tax at all on your purchase, or you will pay a reduced amount on closing.
All of this filing is done upfront with your lawyer during the purchase as it must be shown that you are a first-time homebuyer.
What happens if you are buying a property with someone else?
The rules vary depending on whether the purchasers are spouses of one another. If the purchasers are not spouses, the amount will be reduced if one (or more) of the purchasers is not a first‑time homebuyer. The refund will be proportionate to the interest acquired by the individuals who qualify.
For example, where a parent who is not a first-time homebuyer, and a child who is a first-time homebuyer, purchase a home with equal 50/50 interests, the child may claim 50% of the land transfer tax refund.
Buying your first home with a spouse
When it comes to spouses, the rule is all or nothing. To qualify for the rebate, your spouse cannot have owned a home during the time you have been spouses of each other. In other words:
- If you are qualifying spouse and your partner has owned a home before becoming the spouse, but not while being your spouse, you can claim the maximum refund amount applicable to your transaction. In other words, you can claim the refund for your interest and as well as your spouse’s interest (i.e. up to the maximum amount of $4,000).
- However, if you are a qualifying spouse and your partner owned a home while you were spouses of each other, then you do not qualify for the rebate. This applies even if you did not live in the house together.
Your partner’s eligibility depends on whether you are spouses as defined in section 29 of the Family Law Act. Please refer to the Definitions section for the meaning of spouse.
Can you requalify for the refund?
Unfortunately, the answer is no. Ontario does not allow you to re-qualify as a first-time homebuyer, as you might be able to do under the Home Buyers’ Plan.
When purchasing your first home in Ontario, always consult with your real estate lawyer to ensure that you qualify for the various rebates and credits available to you. If you are a first-time homebuyer looking to claim a rebate or tax credit and have questions regarding your eligibility, contact the real estate lawyers at Merovitz Potechin LLP.