Buying Your First Home In Canada? You'll Want to Read This.

When it comes to real estate, it’s been a decade of highs and lows. And we’re not just talking about prices.

We’ve heard from many potential buyers - both first time and those looking to get back into the market - who have felt their hope of homeownership dwindle as prices rose exponentially and more recently, interest rates surged alongside inflation.

If you’re one of the people who fall into this category, the government does have several solutions that could make home ownership more achievable.

The Home Buyer’s Plan (HBP)
If you’re hoping to buy your first home in Canada, the first program you’ll want to investigate is the Home Buyer’s Plan (HBP). This plan works with eligible RRSP accounts, allowing you to withdraw up to $35,000 without tax penalties to help pay for a home.

The program is fairly straight forward but there are a few important details to note:

First, not all group RRSP’s and locked-in retirement plans will allow withdrawals so you would want to consult with your financial institution to ensure you could, in fact, use your account for this purpose.

Second is that you will have to repay the funds to the RRSP account within 15 years (the timer begins the second year after you withdrew the money. Ie. if you remove the money in 2022, you would start repayments in 2024).

In other words, this would not be a cut and run situation. If you chose this route to purchase a home, you would need to budget for both the costs of home ownership and the repayment of your RRSP as any missed payments would be taxed as RRSP income.

Other important details are that the home must be a principal residence that will be occupied by you or a related person with a disability within one year of buying or building it. So if your plan is to buy an investment property or similar, this will not work for you.

You must also be a resident of Canada from the time you withdraw the RRSP funds through to the date of purchase, and must have proof of purchase in the form of a written agreement in order to withdraw the funds.

The Tax-Free First Home Savings Account (FHSA)
Details about the Tax-Free First Home Savings Account (FHSA) are still being rolled out but the idea so far puts it somewhere between an RRSP and a TFSA.

It will allow Canadians under 40 years of age to save up to $40,000 in the account, which can then be withdrawn tax-free when the time comes to purchase a home.

The major drawback here is that it isn’t set to come into play until 2023 and has an annual contribution limit of $8000 up to a maximum of $40,000. So for those hoping to save and buy in the next few years, this may not be the best option.

That said, it can be combined with savings from a regular TFSA to make for a larger sum within a shorter amount of time. Like the HBP, any funds removed from the First Home Savings Account would not be taxed as long as it is put toward the purchase of a home.

Perhaps the biggest benefit of the FHSA is that unlike the HBP, there is no need to repay money removed from the account. The funds would however, need to be used to purchase a home within 15 years of opening the account. If, by chance you do not use some or all of the money in the FHSA at the end of the 15-year period, you can transfer the funds to an RRSP account instead.

For those purchasing a home with a spouse or partner, both the HBP and FHSA allow couples to use their individual accounts and combine the funds for a down payment/deposit. That would mean a total of $70,000 for the HBP accounts and a total of $80,000 if using the FHSA. While two individuals can combine their savings, the government has stated that only one type of account - either the HBP or FHSA - can be used at a time.

First-Time Home Buyer Incentive
In addition to the accounts discussed above, the Government of Canada also rolled out the First-time Home Buyer Incentive, which provides 5-10% of the home purchase price to help home buyers increase their down payment.

The loan comes interest-free but it does need to be repaid within 25 years or at the time the home is sold. It is also very important to note that this program is considered a shared equity agreement, meaning the government technically owns a percentage of your house and you therefore must repay the percentage of the property’s current market value NOT the dollar amount borrowed.

The eligibility requirements are as follows:

  • Must be a Canadian citizen, permanent resident or legally authorized to work in Canada
  • Must be a first-time home buyer (either never owned a home or haven’t owned or lived in a home owned by a spouse or common-law partner in the last 4 years)
  • Must have enough money to pay the minimum down payment
  • Must be pre-approved for a mortgage that is worth at least 80% of the property’s value (this ensures it is covered by mortgage insurance), and
  • Must have a maximum household income of $120,000. The exception to this is Toronto, Vancouver and Victoria where the maximum household income is $150,000.

If you do qualify, the government will provide the following:
  • 5% of the purchase price of an existing home
  • 5 or 10% of the purchase price of a new construction home
  • 5% of the purchase price for a new or resold manufactured or mobile home

Home Buyers Tax Credit
Those who buy a first home to be used as a principal place of residence can claim $5000 on your income tax return (Line 31270). If you have a spouse or common-law partner, you can split this amount between the two of you but the total must not exceed $5000.

This will lower your taxes owed by about $750 but (sadly) even if you owe less than $750 for the year, you will not see any cash in hand as it is a non-refundable tax credit.

Those buying in 2022 and beyond will want to keep an eye on this credit as the government recently proposed increasing it to $10,000 or up to $1,500 back in tax credits.

Land Transfer Tax Refund
Every home purchase in Canada is subject to a land transfer tax (we know, we know. More taxes!) but first-time buyers may be eligible to receive a refund of up to $4000 on that amount.

The refund applies to all types of homes but the following exception applies; if a couple or parent/child is purchasing the home and one of them is not a first-time homebuyer, the refund will only apply to the person purchasing for the first time. Ie. If you, a first time homebuyer and your spouse or parent, a previous home owner, each put 50% down on a home, your land transfer tax refund would be reduced to $2000.

In either case, still a good chunk of change back in your pocket.

GST/HST New Housing Rebate
This applies to not just first time homebuyers but anyone who has purchased a new construction home or one that has been substantially renovated by you or a builder. As with the other refunds and accounts, to be eligible, the home must be used as a principal residence.

The amount of the rebate will vary but it does allow you to recover some of the GST or federal portion of the HST paid on the home. Be prepared to keep invoices and documents on hand for up to six years after you move into the home as the CRA may ask for proof of occupancy at any time during that period.

We understand buying a home can be daunting - especially when you're doing it for the first time. That's why we're here to help you each and every step of the way. If you'd like to chat about how to get into your first home, reach out any time. We are always happy to chat!