First Time Home Buyer Tax Incentives

The government has provided a number of incentives for first-time home buyers. These measures will help offset some of the costs of purchasing your first home and provide you with some of the cash to make a down-payment.

The Home Buyers Plan is a federal government program that allows for you to withdraw penalty-free from your RRSP account. This will give you access to some of your savings without having to pay tax on the withdraw as would normally occur if you pre-maturely withdrew from your RRSP account. Regularly payments are made to repay the amount to your RRSP, but it does allow for you to access additional cash to make your purchase.

There is a First-Time Home Buyers’ Tax Credit available since January 27, 2009 that is a non-refundable credit of $5,000 for home buyers who have acquired their first home. The credit is determined by multiplying the lowest personal income tax rate by $5,000. This credit is non-refundable so the government will not pay you the money if you are already in a refund position, but if you currently owe taxes it will reduce your taxes owing.

If you are purchasing your first home in Ontario, you may also be eligible to receive a refund of part of your Land Transfer Tax. If you have entered into an agreement to purchase a home after December 13, 2007, then the refund is applied for all newly constructed or resale homes. Homes acquired before 2007 are only eligible for the refund on newly constructed homes. However, a condition of this refund is that you have not previously owned a home ANYWHERE in the world, not only Canada.

As well, the home must be used as a primary residence and not as a rental property. The maximum refund is $2,000. The time frame is eighteen months to apply for this refund after the transfer date.

Annual GST/HST Filers Must Beware of Large Payment at Year-End

Although we have transitioned from a 5% Goods & Services Tax (GST) to a 13% Harmonized Sales Tax (HST), the process of instalment payments has not changed. However, the consequences of not paying correct instalments or paying instalments late have substantially increased.

While the threshold to begin owing instalments for GST/HST remains at $3,000, many GST/HST registrants who were not paying instalments in the past may find themselves at the $3,000 threshold with HST and need to begin making instalment payments.

In order to avoid interest charges on GST/HST instalments, one must pay instalments at least in the amount of the prior year GST/HST owing. For example, if you (your company) owed $4,000 in GST last year, and you pay $1,000 in instalments for each quarter this year, then you will not be charged interest for under-paying your instalments. Instalment payments are due within one month after each quarter.

However, by only paying instalments equal to your prior year GST owing, then at the year-end you will owe a lump-sum payment of HST that will represent the additional 8% (from 5% to 13%) of HST you have collected during the year. Therefore the $4,000 in GST you may have paid in a prior year, may balloon to $10,400 of HST in the current year.

Companies who do not plan ahead to leave enough cash on hand to pay the HST collectible to the CRA at this time will find themselves in a difficult situation. It is extremely important to ensure you can make this payment as CRA will begin to charge you interest compounded daily for the outstanding amount. Interest will be charged on overdue balances and/or late or insufficient payment.

Companies may want to set up a separate savings account to collect the GST/HST collectible in order to ensure that the cash is available at year-end. Alternatively, you may choose to increase your instalments throughout the year (current instalment x 2.6 to account for the 8% tax increase) in order to prevent a single large payment from paying only the minimal required instalments.

Home Buyer Plan Conditions

The Home Buyers Plan “HBP” is a Canada Revenue Agency “CRA” tax program that allows for certain individuals to withdraw money from their RRSP without penalty in order to buy or build a home.

In order to be eligible for this program, you must be a first-time home buyer or using the withdrawal to buy or build a home for a disabled related individual.

If you do own the home before the withdrawal, it cannot be for more than 30 days. And if the home is not yet purchased or built, you have until October of the year after the withdrawal to have the home bought or built.

This home MUST be used as a primary residence and NOT a rental property. If the CRA finds that you have withdrawn from your RRSP to purchase a rental property, they will add the withdrawal to your income and you will pay additional taxes as if the HBP were income.

It is not enough to have a pre-authorized mortgage to use the HBP. A written agreement must be in place that details the purchase offer or a contract with a builder or contractor.