First-Time Home Buyers’ Tax Credit
If you acquire a qualifying home, you might qualify for a home buyers’ tax credit (HBTC), which is a non-refundable tax credit worth up to about $750. Generally, to be eligible for the HBTC, the following conditions must be met:
- You, (or your spouse or common-law partner) must acquire a qualifying home; and
- Neither you nor your spouse or common-law partner owned and lived in another home in the year of purchase or in any of the four preceding calendar years.
If you are a person with a disability or are buying a qualifying home for a related person with a disability, you may not need to be a first-time home buyer. However, the home must be acquired to enable the person with a disability to live in a more accessible dwelling or in an environment better suited to the personal needs and care of that person.
A qualifying home is a housing unit located in Canada acquired after January 27, 2009 which can be an existing home or one that is being constructed. Single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes, or apartment buildings all qualify. A share in a co-operative housing corporation that entitles you to possess and gives you an equity interest in a housing unit located in Canada can also qualify. However, a share that only provides you with a right to tenancy in the housing unit will not qualify. The home must be intended to be used as your principal place of residence, or the principal place of residence of the person with the disability, within one year after acquisition to qualify.
This credit may be claimed in the year the qualifying home is acquired. Either you or your spouse or common-law partner can claim this non-refundable tax credit or you can share the credit. However, the total of both claims cannot exceed $750.
Note that even though the eligibility conditions for the HBTC are similar to the Home Buyer’s Plan, they are not connected. Being eligible for the HBTC will not affect your participation in the Home Buyer’s Plan.
Principal Residence Exemption
Most of us know that Canada provides an exemption from taxation for capital gains realized on the sale of a “principal residence”. As simple as this may sound, the rules can be complex.
- The gain on the sale of your “principal residence” is not tax-free. The gain is taxable to you in the year of sale except to the extent the gain is offset with your “principal residence exemption”.
- A principal residence is a housing unit ordinarily inhabited in the year for which it is being designated by you as a principal residence. This does not require the housing unit be lived in by you on a full-time basis throughout the year but generally it means you must have lived in it at some point in the year.
- The principal residence includes the land around the housing unit subject to certain limitations. Generally a maximum of half a hectare of land will be considered to be part of the principal residence but there are exceptions to this rule.
- Since 1981, only one property may be designated as a principal residence in any particular year for you, your spouse and your minor children.
- Where the gain from the sale of your personal residence results in business income or “capital cost allowance recapture” as opposed to a capital gain, that income cannot be offset by your principal residence exemption.
- You can designate a rental property as your principal residence, subject to certain limitations, if you resided in the property before or after the rental period and filed the appropriate tax elections.
Contact a Chartered Professional Accountant if you have questions about how best to utilize your principal residence exemption or if you are considering selling a property and you are not sure you can claim your principal residence exemption.
Change in Use Rules
If, during the year, you begin to use your residence or former residence as a rental property, you have what is called a “change in use” which results in a deemed disposition of the property at its fair market value at the time. Similar rules apply when you have a change in use of a rental property or a former rental property to a residence. The change in use could lead to a significant and unexpected income tax liability. Special elections are available to avoid or defer the deemed disposition in certain circumstances.
If you have a change in use of a property you should consult a Chartered Professional Accountant to understand the income tax implications and make sure the required elections are filed.
Rental Income
If you rent out all or a portion of your house you may deduct certain expenses connected with earning that rental income. These expenses include the proportion of your property taxes, mortgage interest, repairs and maintenance, insurance, light, heat, other utilities, and various other expenses that relate to the rental space on your house. You may not deduct the principal portion of your mortgage payments or any costs of construction, renovation, or alteration that are capital in nature.
You may claim depreciation (called “capital cost allowance” for income tax purposes) on any depreciable assets in your rental property (i.e., building, furniture and fixtures, etc.). If, however, you sell your house and the proceeds allocated to the depreciable assets are in excess of their depreciated cost (the original cost plus additional cost less the “capital cost allowance” deductions), you have to report as income in the year the recapture of the previously deducted capital cost allowance. This capital cost allowance recapture is taxed in the year of disposition in the same way as rental income; it is not a capital gain and it is not offset by the “principal residence exemption”.
Care should be taken before claiming a deduction for capital cost allowance on a rental property as the deduction cannot increase or create a rental loss. The capital cost allowance deduction could be merely deferring tax to a higher income year when the property is sold. Be aware that, claiming a deduction for capital cost allowance on your house might jeopardize your ability to claim the “principal residence exemption” to offset a future sale of the property.
Seek the advice of a Chartered Professional Accountant when considering investing in a rental property or turning a portion of your home into a rental property so that you know the income tax implications, the deductions available to you, and the implications of claiming a deduction for capital cost allowance.
Foreign Property Reporting Requirements
Canadian residents are required to report their income on a worldwide basis. In addition, every individual must indicate on their personal income tax return whether they own “Specified Foreign Properties” with an aggregate cost of $100,000 or more. To determine the cost of foreign properties acquired in a currency other than Canadian dollars, use the exchange rate in effect at the time the property was purchased. If you own Specified Foreign Properties with an aggregate cost more than $100,000 you must complete and file Form T1135 by your tax return due date (April 30 of the following year for many individuals, otherwise June 15 for self-employed individuals). Individuals do not need to complete this statement for the year in which they first became a resident of Canada, but they still need to report on their Canadian income tax return for that year the foreign property income earned after becoming a resident of Canada.
The Canada Revenue Agency has implemented changes to Form T1135 for the 2015 and later tax years. The changes allow taxpayers who held specified foreign property with a total cost amount more than $100,000 but less than $250,000 throughout the year to report under a new simplified reporting method. This reporting method allows taxpayers to simply check a box for each type of property they held. For taxpayers who held specified foreign property with a total cost of $250,000 or more throughout the year, the current detailed reporting method will apply. However, under the current detailed reporting method, taxpayers are allowed to report the aggregate amounts for specified foreign property held in accounts with registered securities dealers and Canadian trust companies rather than providing the detail of each such property. This reporting method requires taxpayers to provide the aggregate fair market value of the property in each account on a country by country basis.
Specified Foreign Property does not include property that is purely for personal use and generates no income. If the foreign property (for example, a vacation home) is not used to generate income, then it does not have to be reported as foreign property. Foreign property used exclusively in an active business, foreign property held through a Canadian mutual fund, and foreign property held through an RRSP are also exempt from this reporting requirement.
Other foreign property reporting may be required where you own foreign corporations, have transferred or loaned funds to a non-resident trust, or received distributions from or borrowed funds from a non-resident trust.
The foreign property reporting requirements are complex, and failure to comply with the reporting requirements can result in significant penalties. Contact a Chartered Professional Accountant to help you understand the reporting requirements and identify tax-planning opportunities for foreign tax credits.
