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Tax-protected savings options that first-time home buyers should know

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Jamie Golombek: RRSP Home Buyers’ Plan Is So Secretive, Even The CRA May Struggle To Explain It

Starters of a home can make a down payment with the Tax-Free Savings Account and the Registered Pension Savings Plan via the Home Buyer’s Plan. Photo by Gerry Kahrmann/Postmedia Network

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Last month’s federal budget sparked strong interest among potential homebuyers in the proposed launch of the Tax-Free First Home Savings Account (FHSA), a newly registered account to help individuals save for their first home. While many Canadians struggle to understand the mechanics and potential opportunities that will be available with the FHSA, keep in mind that the plan won’t kick off until 2023 and at a proposed annual contribution cap of just $8,000.

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However, for anyone considering buying a home in 2022 or 2023, the FHSA won’t come soon enough. That’s why it’s important to consider the two other main sources Canadians currently use to fund a down payment: the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) through the Home Buyers’ Plan (HBP).

The TFSA limit for 2022 is $6,000 and, assuming you were at least 31 years old and had been a resident of Canada since 2009 (the year the TFSA began), your cumulative TFSA limit is $81,500, with any withdrawals that you may have made the plan be ignored. Since the advent of the TFSA, this savings has become the dominant way some Canadians put aside extra money for a major purchase, such as a first home. The added flexibility of withdrawing the money for a down payment tax-free and then repaying the amounts withdrawn in a future year makes TFSAs an extremely flexible option.

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But for some current first-time homebuyers, the TFSA savings may not be enough and so Canadians continue to use their RRSPs through the HBP to help fund that down payment. In summary, the HBP allows individuals to withdraw up to $35,000 from an RRSP to buy or build a first home without paying taxes on the withdrawal. Amounts withdrawn under the HBP must be repaid to an RRSP over a maximum period of 15 years, starting in the second year following the year of withdrawal. Amounts not repaid in any given year, as required, must be included in income.

But the HBP rules can be tricky and, if you’re not careful, can get you in trouble, as a Toronto taxpayer recently discovered. The taxpayer’s story began in 2015 when she agreed to buy a pre-construction condominium in Toronto. Her agreement provided for an end date of December 2015.

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Wanting to participate in the HBP, the taxpayer withdrew $20,000 from her RRSP in 2015 and used that amount to pay the down payment. Due to construction delays, including those related to construction claims filed against the property, her occupancy date was postponed to December 2017.

In early 2016, the taxpayer contacted the Canada Revenue Agency to explain the closing delays and was told she could withdraw an additional $5,000 as part of her HBP and use that to cover closing costs. to pay. (The HBP limit was $25,000 in 2015 and wasn’t increased to the current $35,000 limit for withdrawals after that date until March 2019).

In 2017, the taxpayer withdrew another $5,000 from her RRSP, which she assumed also fell under the HBP, and used the money to help her with her closing costs. The purchase of the apartment was finally completed in May 2018.

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The problem, however, is that under HBP law, the taxpayer’s $5,000 second RRSP withdrawal was not considered an “excluded amount” since it was not withdrawn in the same year as her first $20,000 HBP withdrawal, or in the following year. As a result, the CRA reassessed taxpayers for the 2017 tax year to include the $5,000 as a regular RRSP withdrawal, subject to tax, rather than as an additional tax-free withdrawal under the HBP, which could be repaid over a period of one year. 15-year period.

The taxpayer objected to the CRA’s assessment and the case went to court in March 2022. The taxpayer argued that if she had been given the correct information by the CRA official that her second HBP withdrawal was due in the year after her first, she could have made that $5,000 second withdrawal in 2016 and used it toward the purchase closing costs of the condominium.

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The judge was extremely sympathetic to taxpayers, acknowledging that the HBP provisions “were written decades ago and predate the modern reality of a red-hot housing market in cities like Toronto and Vancouver.” The judge also agreed that, in the taxpayer’s particular circumstances, “the application of the two-year period and the resulting tax costs do not appear to it to be appropriate, reasonable or fair from a tax point of view.”

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That said, the judge’s hands were tied in that court “must apply applicable law and cannot choose not to do so out of concern for fairness, fairness or justice.” With reference to an earlier case: “The court is not free to make exceptions to statutory provisions on the grounds of fairness or equity. If the applicant finds the law unfair, his redress lies with Parliament, not the Court.”

While he had no choice but to dismiss the taxpayer’s case, the judge suggested the taxpayer file a waiver notice with the CRA. The CRA defines a waiver order as “an extraordinary measure that enables the government to grant full or partial exemption from a tax, fine or other debt under certain circumstances, when such exemption is not otherwise available under existing laws. ” Each request for waiver is assessed on its own merits to determine whether collection of the tax or enforcement of the fine is unreasonable or unfair, or whether waiver is in the public interest. To help CRA officials make that assessment, guidelines have been developed about when waivers can be granted. These include instances of extreme hardship, mishandling or advice on the part of CRA officials, financial setbacks coupled with mitigating factors, or unintended results of legislation.

Given the CRA’s role in providing false HBP information to taxpayers, as well as the delay in closing the condo, which was completely out of the taxpayer’s control, this case is crying out for tax relief.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the General Manager, Tax & Estate Planning at CIBC Private Wealth in Toronto.

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This post Tax-protected savings options that first-time home buyers should know was original published at “https://financialpost.com/personal-finance/taxes/these-are-the-tax-sheltered-savings-options-first-time-homebuyers-need-to-know-about”

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