New Home Buyers

TS Notes is a blog series in which complex ideas, news, or facts are broken down into bite-size and condensed pieces to make understanding easier. Each post explores how these concepts impact your life on a more practical level using normal everyday words.

This post explores how the recently announced Federal Budget will impact home affordability.

The Rise of House Prices

House prices have risen by over 25% in Canada in 2021 compared to 2020* - making them near impossible to buy for the average family.

Included in the new budget are items that will try to address Canada’s very hot housing market. In addition to adding an estimated 106,000 new housing units in Canada through the Housing Accelerator Fund and the Rapid Housing Initiative, the budget has items that aim to help first-time home buyers, Canadians aged 65+ or have disabilities, and Canadians living in multigenerational homes. The Federal government also announced that there is a ban on foreign investors’ purchasing property for the next two years.

For first-time homebuyers, the budget uses 2 key strategies to make homes more affordable. If you are wondering who qualifies as a first-time homebuyer, they are defined as someone who hasn’t purchased a home anywhere in the world. One strategy is by doubling the first-time homebuyers’ credit to $10,000 on a qualified home purchase in Canada.

The second strategy is a Tax-Free First Home Savings Account (FHSA). The FHSA helps first-time homebuyers to save money for purchasing their first home. Starting January 2023, Canadians can contribute $8,000 annually to the FHSA, up to a lifetime limit of $40,000. However, each year’s $8,000 limit does not carry forward. For example, if you created your FHSA account in 2023 and contributed $4,000 for 2023, you’ll still only be able to contribute $8,000 for 2024, not $12,000. The contributions are deductible and the withdrawals from the account and any earnings in the account would be tax-free.

To open an FHSA, individuals must be 18 or older, and can only take part in the program once. The account must also be closed within 12 months of the first withdrawal — aka the purchase of the home. If the funds in the FHSA aren’t used in a qualifying first-time home purchase within 15 years of opening the account, the funds can be transferred to an RRSP (Registered Retirement Savings Plan) or RRIF(Registered Retired Income Fund).

For individuals who are 65 or older, or qualify for the Disability Tax Credit, the budget has also doubled the Home Accessibility Tax Credit to $20,000 for eligible renovations.

Similarly, there is the Multigenerational Home Renovation Tax Credit - for renovations to add a secondary dwelling unit in a home for individuals with disabilities or 65+. Any work done after January 2023 may receive a 15% tax credit, up to $50,000.

Finally, in another bid to cool the housing market, the Federal government is trying to discourage people from buying houses just to resell. Any property that is sold within 12 months of purchase will be fully taxed, compared to the exception for selling a principal residence. There are exemptions for individuals who sell their home because of a new job, disability, additions or deaths to their family, divorce, bankruptcy, or other similar situations to help distinguish individuals who are selling their principal residence from those who are flipping properties for quick profits.

* Source: Canada’s housing market is breaking records at an alarming rate