Tax-Free First Home Savings Account

The introduction of the Tax-Free First Home Savings Account (FHSA) is arguably the most significant proposal. Come 2023, residents of Canada will be able to open an FHSA. The total contribution room is $40,000, with a yearly contribution limit of $8,000. So if you regularly contribute the yearly limit, your FHSA will be maxed out in five years.

The significant advantage of the FHSA is that it’s tax-free and it lowers your taxable income. For example, if you contribute $5,000 to your account, your taxable income for the year is reduced by $5,000. The money invested within the account is also tax-free when you withdraw from it. Basically, it combines the benefits of both a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP).

There’s no denying the benefits of less taxable income, but you need to consider how you would invest your down payment.

Most people who are saving for a home don’t want to put their money into any risky investments since they’ll need it in the near future, so any capital gains (profit) or interest earned will be minimal. Even if you were to be more aggressive with your investment strategy, there’s no guarantee that you would even keep pace with the year-over-year increase in real estate prices.

Even though there’s a lot to like about this account, nothing about it will make housing more affordable.

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Home Buyers’ Tax Credit extension

Currently, the First-Time Home Buyers’ Tax Credit (HBTC) allows people purchasing their first home to get up to $750 in tax relief. This non-refundable credit is calculated by multiplying the credit amount ($5,000) by the lowest personal income tax rate (15 per cent in 2022). This gives you a one-time $750 tax reduction which can be applied to you, or shared with your spouse or common-law partner.

Under the 2022 budget, the HBTC will be doubled to $10,000, so the maximum non-refundable credit will be $1,500. Let’s be real, an additional $1,500 isn’t going to move the needle. Also, if you don’t owe income tax the year you buy your home, you don’t get anything since the HBTC is a non-refundable tax credit.

Also, if you don’t owe income tax the year you buy the home, you don’t get anything since the HBTC is a non-refundable tax credit.

A ban on foreign investments

As part of the new budget, foreign buyers will be banned for two years. In theory, this sounds good. Presumably, it will mean fewer buyers in the future and more homes available for Canadians.

The foreign-buyer ban doesn’t apply to refugees, foreign students, foreign workers or foreign citizens who are permanent residents of Canada. In other words, there are still ways for many foreign buyers to get into the Canadian real estate market.

It should also be mentioned that there are loopholes that will likely be exploited. Foreign buyers may simply choose to have a Canadian family member or friend purchase a home for them. They could also potentially set up a corporation within Canada to handle their real estate transactions.

A few provinces in Canada, such as Ontario and B.C., already have a foreign buyer tax of 20%. Despite the tax, the average home selling price in the Greater Toronto and Vancouver areas is over $1.3 million. An outright ban on foreign buyers probably won’t do much.

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Making flippers pay their share

Under current rules, when you sell your primary residence, all of the gains are tax-free. If you sell an investment property, you’re paying a capital gains tax of 50%. So if you made a profit of $100,000 from selling your investment property, only $50,000 would be added to your taxable income.

Under the new budget, the government is specifically targeting property flippers who resell their properties in less than 12 months. If that were to happen, their gains would be fully taxable.

The idea is that since property flippers will have to pay higher taxes, they may be less likely to purchase additional future properties. That would allow people seeking primary residences a chance to buy these homes instead.

While that sounds great in theory, house flippers could follow the rules and avoid this new tax.

They could move in for 12 months and claim the property as their primary residence so that taxes don't apply. Alternatively, they could just rent it out for a year before they sold it. Also, they could set up a corporation to buy properties since business income in a corporation is taxed at a much lower rate.

Taxing assignment sales

One other announcement in the budget that’s worth highlighting is taxing assignment sales.

Currently, when buying a pre-construction home, you’re technically purchasing a contract. You can assign that sales contract to another buyer at a higher price before the home is finished. This is known as an assignment sale. You could basically profit from this sale without ever taking possession or moving into the home.

If your intention when buying the home was to live in it, Goods and Services Tax/Harmonized Sales Tax (GST/HST) would not apply if you made an assignment sale. This might happen where you bought a home years ago as a single person, but as your occupancy date approached, you were already married and had a child, so the space no longer fit.

However, this was really just an honour system, so anyone could have easily lied and said they planned on living in it to avoid taxes. The new rule would now make all assignment sales taxable for GST/HST purposes.

Paying more taxes may deter some housing speculators, but it’s unlikely to make a significant difference.

This is nothing new

Over the last decade, just about every government has put in new regulations to make housing more affordable in their yearly budget. However, prices keep going up.

The reality is unless a government is willing to make some drastic changes, for example banning or heavily taxing investment properties, the price of real estate isn’t likely to fall in a meaningful way.


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Barry Choi Moneywise Contributor

Barry Choi is a Toronto-based personal finance and travel expert who makes frequent media appearances. When he's not educating people on how to be smarter with money, he's earning and burning miles and points for luxury travel.

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