Tax-sheltered savings options first-time homebuyers need to know about

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Last month’s federal budget sparked much interest among prospective homebuyers in the proposed launch of the Tax-Free First Home Savings Account (FHSA), a new registered account to help individuals save for their first home. While many Canadians scramble to understand the mechanics and potential opportunities that will be available with the FHSA, we need to keep in mind that the plan is only set to launch in 2023 and at a proposed annual contribution limit of only $8,000.

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For anyone contemplating buying a house in 2022 or 2023, however, the FHSA won’t come soon enough, which is why it’s important to consider the two other main sources Canadians are currently using to fund a down payment: the Tax-Free Savings Account (TFSA) and, the Registered Retirement Savings Plan (RRSP) via the Home Buyers’ Plan (HBP).

The TFSA limit for 2022 is $6,000 and, assuming you were at least 31 and a resident of Canada since 2009 (the year the TFSA began), your cumulative TFSA limit is $81,500, ignoring any withdrawals you might have made from the plan. Since the advent of the TFSA, this savings vehicle has become the dominant way some Canadians have been setting aside extra cash for a large purchase such as a first home. The added flexibility of being able to withdraw the funds for a down payment, tax-free, and then recontribute the amounts withdrawn in any future year, make TFSAs an extremely flexible option.

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But for some current first-time homebuyers, TFSA savings may not be enough and thus Canadians continue to tap into their RRSPs, via the HBP, to help fund that down payment. To recap, the HBP allows individuals to withdraw up to $35,000 from an RRSP to purchase or build a first home without having to pay tax on the withdrawal. Amounts withdrawn under the HBP must be repaid to an RRSP over a period not exceeding 15 years, starting the second year following the year of the withdrawal. Amounts not repaid in a particular year, as required, must be included in income.

But the HBP rules can be tricky and, if you’re not careful, can land you in trouble as one Toronto taxpayer recently found out. The taxpayer’s saga began back in 2015 when she agreed to purchase a pre-construction Toronto condominium. Her agreement contemplated a December 2015 completion date.

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The taxpayer wished to participate in the HBP, and consequently withdrew $20,000 from her RRSP in 2015 and used that amount to pay the deposit. Due to construction delays, including those involving construction claims filed against the property, her occupancy date was delayed until December 2017.

In early 2016, the taxpayer contacted the Canada Revenue Agency to explain the delays in closing and was told that she would be able to withdraw an additional $5,000 amount as part of her HBP and use it to pay the closing costs. (The HBP limit was $25,000 in 2015 and was only raised to the current $35,000 limit in March 2019, for withdrawals after that date).

In 2017, the taxpayer withdrew a further $5,000 from her RRSP, which she assumed was also under the HBP, and used the funds to help her with her closing costs. The purchase of the condo ultimately closed in May 2018.

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The problem, however, is that under the HBP legislation, the taxpayer’s $5,000 second RRSP withdrawal was not considered to be an “excluded amount” since it was not withdrawn in the same year as her initial $20,000 HBP withdrawal, or in the following year. The result was that the CRA reassessed the taxpayer 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 paid back over a 15-year period.

The taxpayer objected to the CRA’s assessment and the matter went to Tax Court in March 2022. The taxpayer argued that had she been given correct information by the CRA official that her second HBP withdrawal had to be made in the year following her first, she could have made that $5,000 second withdrawal in 2016 and used it towards the purchase closing costs of the condominium.

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The judge was extremely sympathetic towards the taxpayer, acknowledging that the HBP provisions “were written decades ago and predate the modern reality of a red-hot residential construction 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 cost to her do not appear from a tax policy point of view to be appropriate, reasonable or just.”

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That being said, the judge’s hands were tied in that court “has to apply the applicable law and cannot choose not to do so out of concerns of fairness, equity or justice.” Citing a prior case, “It is not open to the Court to make exceptions to statutory provisions on the grounds of fairness or equity. If the applicant considers the law unfair, his remedy is with Parliament, not with the Court.”

Although he had no choice but to dismiss the taxpayer’s case, the judge suggested that the taxpayer apply to the CRA for a remission order. The CRA describes a remission order as “an extraordinary measure that allows the government to provide full or partial relief from a tax or penalty, or other debt, under certain circumstances, when such relief is not otherwise available under the existing laws.” Each remission request is considered “on its own merits to determine whether collection of the tax or enforcement of the penalty is unreasonable or unjust, or if remission is in the public interest.” To assist CRA officials in making that assessment, guidelines have been developed as to when remission may be granted. These include cases of extreme hardship, incorrect action or advice on the part of CRA officials, financial setback coupled with extenuating factors, or unintended results of the legislation.

Given the CRA’s role in providing incorrect HBP information to the taxpayer, as well as the delay in the condo’s closing, which was wholly outside the taxpayer’s control, this case cries out for tax remission.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.

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