This post was updated on April 10, 2013
If you’re like many Canadians, your house is your biggest investment. Owning your own home allows you to build wealth over time and can protect you from inflation. There are also tax benefits associated with home ownership.
Let’s start with the most significant tax perk – the principal residence exemption. If your house qualifies as your “principal residence,” you will not have to pay tax on any capital gain you make when you sell it. (It’s worth noting that if you lose money selling your house, you also cannot claim the loss on your tax return.)
Your “principal residence” is the place where you and your family live at some time during the year. It can be a house, condominium, cottage, trailer or other structure. But if you own more than one home, you can only designate one property per year as your principal residence.
If you are a first-time homebuyer, you may qualify for the homebuyers’ tax credit (HBTC). The credit of $5,000 is worth $750 in tax savings. You will qualify as a first-time homebuyer if you or your spouse or common-law partner has not owned another home in the current year or any of the four previous calendar years.
If you are saving towards a down payment on a home, consider using a tax-free savings account (TFSA). If you’re a Canadian resident older than 18 years of age, you can contribute up to $5,000 per year to this registered account. [Update: Beginning in 2013, this amount is now $5,500.] Earnings in the plan are not subject to tax, so your savings can accumulate and grow more quickly. Unused contribution room can be carried forward. When you are ready to buy a house, the amounts withdrawn from a TFSA are not included as income for tax purposes (nor were the amounts deductible when they were contributed to the account). The amount you take out of a TFSA can be put back in at a later date when you have the funds – but you have to wait until the following year.
Another source of savings that can be tapped by first-time homebuyers is your registered retirement savings plan (RRSP). Under the RRSP homebuyers’ plan (HBP), you can withdraw up to $25,000 tax free from your RRSP to buy or build a qualifying home for yourself or a related person with a disability. Once again, a first-time homebuyer is someone who did not own their own home in the last five years. As a couple, you can withdraw a maximum of $50,000. You have to repay the money to your RRSP within 15 years. Finally, you can’t withdraw money from an RRSP that is less than 90 days old or you will have to pay tax on it.
In the next post, we’ll look at the advantages of using a registered education savings plan to save for your children’s education.