First Time Home buyer - Take advantage of these tax benefits!
Updated: Dec 25, 2022
RRSP contribution and tax season is creeping up on us. For those who don't know, the last day to contribute towards your RRSP for 2020 is March 1st, 2021. As for your 2020 personal tax return, they are due April 30, 2021.
If you were a first time home buyer for 2020 or if you are looking to purchase a home for the first time in 2021, make sure you are on the lookout for the following tips so you can maximize your tax refund!
Home Buyers’ Amount (ie. First Time Home Buyer's Tax Credit)
This is a relatively simple tax credit that many people don't seem to know about! Basically if you bought a home in Canada and you didn't own a home for the past 4 years, you can claim $5000 non-refundable tax credit on your tax return for the year you purchased your home.
This means equates to a tax credit of up to $750 ($5000 x 15%), which can be received as a tax refund if you had paid more than $750 in taxes in the year. Unfortunately, as it's non-refundable, if you haven't paid taxes/don't owe taxes more than $750 in the year, you won't be able to enjoy this benefit.
Refer to the following CRA page for more information:
Home Buyers’ Plan
This is essentially a loan program with people with RRSPs. For those who are unfamiliar with an RRSP or Registered Retirement Savings Plan, it's a personal savings plan that allows you to save on a tax sheltered basis. The main benefits of the RRSP are:
1) Contributions made to your RRSP can be deducted from your gross income (provided it's within your contribution limit - watch out for over-contribution penalties!)
2) The income you earn is sheltered from tax (until you withdraw the funds, ideally at retirement when you are in a lower tax bracket)
3) Take advantage of government programs that allows you to withdraw from your RRSP tax-free if it's towards your first home or for your education (given certain requirements, which will be discussed below).
Depending on which tax bracket you are, making RRSP contributions on annual basis can be a way to get a large tax refund as well as be able to invest it tax free for retirement!
Let's say you make $60k a year - you are in the 20.50% tax bracket (let's ignore provincial tax rates for now) and made $10k in RRSP contributions. This means, you can get up to $2,050 back in tax refunds (ie. 10k x 20.50%)!
Now, let's say that you made contributions to your RRSP account over the past few years and was able to grow it tax-free from receiving investment income, etc. You have saved up enough money in your RRSP and your savings to put a down payment on a home - in this case, you can participate in the Home Buyer's Program!
This program allows you to withdraw up to $35,000 from your RRSP, without triggering any taxes. This allows you to have gotten refunds from your RRSP contributions in the past, as well as withdrawing it tax-free! Think about all the savings!
However, there is a catch - you need to repay the $35,000 over 15 years (ie. $2,333.33 per year), and start repaying two years after the withdrawal (ie. if you withdrew from your RRSP in 2020 as part of the Home Buyer's Plan, you can start repaying back in 2022).
If you don't end up repaying your RRSP as part of the Home Buyer's Plan, you would need to include in your income of $2333.33 annually, which may be result in additional tax owing of $478.33 (ie. 2,333.33 * 20.50%), based on example above.
There are also certain requirements to be eligible for Home Buyer's Program, such as:
1) First time home buyer (ie. you didn't occupy a home you owned in the past 4 years)
2) A written agreement to buy the home (ie. accepted offer letter for the home you are purchasing)
3) You are a resident of Canada