Canadian homeowners can find a number of ways to use their home to reduce their tax bill this year and into the future says CIBC’s tax and estate planning expert, Jamie Golombek.
In the first of a series of tax tips this month, Mr. Golombek looks at how Canadians can take advantage of often overlooked available credits, deductions and exemptions on their home to minimize their tax bills.
“With spring in the air, house-hunting season is in full bloom,” notes Mr. Golombek. “Whether you’re looking at buying your first home or you’re already a homeowner, there are programs and strategies out there to help you manage your tax costs.”
Mr. Golombek’s report, called “Home, Sweet Home” identifies three areas Canadians should look at when preparing their taxes this year: tax credits, repayments under the Home Buyers’ Plan and how best to claim the sale of a vacation property. He also focuses on how to make your mortgage interest tax deductible for future years.
Home Buyers’ Tax Credit (line 369) – This new non-refundable tax credit is worth $750 to “first-time home buyers” who purchased a home after January 27, 2009.
“For the purposes of this credit, you are considered a first-time home buyer if neither you nor your spouse or partner owned and lived in another home in the calendar year of purchase or any of the four preceding calendar years,” says Mr. Golombek.
The credit is also available for the purchase of a home either by, or on behalf of, an individual eligible for the disability tax credit if the home enables the disabled individual to live “in a more accessible dwelling or in an environment better suited to the personal needs and care of that person.”
While either partner can claim the Home Buyers’ Tax Credit, it is limited to one credit of $750 (as opposed to $750 for each spouse or partner).
Home Buyers’ Plan Repayments (HBP) – This plan currently allows a first-time home buyer to withdraw up to $25,000 from his or her RRSP to purchase or construct a new home without having to pay tax on that withdrawal. Amounts withdrawn under the HBP must be repaid over a maximum of 15 years or the amount not repaid in a year is added to the participant’s income for that year.
“If you participated in the HBP previously and were required to make a repayment for 2010, be sure to designate a portion of your RRSP contributions as a HBP repayment on Schedule 7 of your personal tax return, under “PART B – Repayments under the HBP,” notes Mr. Golombek.
Provincial property tax credits – Residents of Quebec, Ontario or Manitoba may get some additional tax relief on their property taxes. Quebec provides a refund for property tax paid during the year (line 460 of the Quebec Provincial tax return), while both Ontario (Form ON 479) and Manitoba (Form MB 479) provide a tax credit for property tax or rent paid during the year.
Make your mortgage interest tax deductible
If you have a mortgage and also have non-registered investments, you may wish to consider making your mortgage interest expense effectively tax-deductible by paying off mortgage debt with your non-registered funds.
“This technique has been employed by many Canadians who own non-registered investments and are advised to liquidate these investments and use the proceeds to pay off their mortgage,” notes Mr. Golombek. “The investor would then obtain a loan secured by the newly replenished equity in their home, and use the loan for earning investment income, thus making the interest on the loan fully tax-deductible.”
However he cautions that “before doing so, be sure to speak with an advisor to discuss any tax consequences of selling your non-registered investments along with any prepayment fees for paying off your mortgage early.”
Claiming the principal residence exemption when selling your home
If you own more than one home and sold one of them in 2010 you need to determine if you should be claiming the principal residence exemption (“PRE”) on that property to shelter it from capital gains tax. A principal residence can include either your main home or a vacation property, even if it’s not where you primarily live during the year as long as you “ordinarily inhabit” it at some point during the year.
A cottage is considered to be ordinarily inhabited by someone, even if that person lives in that property for only a short period of time during the year such as the summer months, as long as the main reason for owning the property is not for the purpose of earning income.
“Generally, the decision to claim the PRE when you sell a property as opposed to “saving it” for the disposition of your other property will depend on a number of factors,” says Mr. Golombek. “These include the average annual gain on each property; the potential for future increases or decreases in value of the unsold property; and the anticipated holding period of the unsold property.”
Further Mr. Golombek points out that if you sold a home in 2010, a conscious decision should be made as to whether the gain should be reported.
“Failure to report will result in the assumption (by the Canada Revenue Agency) that the “sold property” has been designated as your principal residence for the years you owned it, precluding you from using the PRE in the future on the sale of your other property, at least during the overlapping years.”
Mr. Golombek notes that homeowners also need to assess the impacts of a current, immediate tax liability today versus a tax liability payable later – say upon death – on the sale of their other property.
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