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Home buyer incentives

The federal government has provided multiple financial incentives to encourage builders to build more new homes to meet the demands of both homeowners and the rental market. This includes repurposing federal land to build new homes, removing the Goods and Services Tax (GST) on new rental housing construction and additional low‑cost financing for rental housing construction. The following are additional measures intended to make home ownership more affordable and long‑term rental more available.

Crackdown on non‑compliant short‑term rentals

One of the perceived barriers to affordable long‑term rental is the proliferation of short‑term rentals such as Airbnb and Vrbo. Short‑term rentals used to be limited to 1 or more rooms in a home that were rented out by the homeowner. Now it is common to see entire homes rented out on a short‑term basis, meaning these units are removed from rental housing inventory. Many municipalities have regulations prohibiting short‑term rentals (30 days or fewer) in other than the primary home of the owner, but these rules are not always enforced.

For example, Toronto’s regulations require registration of such properties and the collection of a 6% Municipal Accommodation Tax.

No more than 3 rooms can be rented, and records must be kept as to the number of nights they are rented and the price paid. It is also necessary to keep track of whether the entire home or individual rooms have been rented.

Similar regulations exist in other Ontario municipalities.

Under rules announced in the 2023 Fall Economic Statement, short term rentals that are non‑compliant with municipal restrictions will not be able to claim rental expenses. In today’s high interest rate environment, the inability to claim expenses such as mortgage interest may be a significant deterrent to some owners and cause them to reconsider the use of the property.

The following are federal and provincial measures to ensure first‑time home ownership is more affordable. Some will be familiar to you, but others may come as a surprise.

First-time home buyer incentives

When it comes to the first‑time home buyer incentives listed below, you need to confirm you qualify as a first‑time home buyer. In Ontario, a first‑time home buyer is someone who hasn’t owned a home previously here or anywhere else in the world. If you have received your first home as a gift or inheritance, the Ontario government will not consider you a first‑time home buyer.

The requirements are different for the various tax incentives, and it is necessary to review the rules carefully to ensure you qualify.

Ontario land transfer tax rebate

If you qualify as a first-time home buyer in Ontario, you could be eligible for the provincial land transfer tax rebate. The rebate is up to $4,000 for homes priced over $368,000. The land transfer tax is not applicable for homes priced below this value. This can make quite a difference when budgeting for your new home.

To qualify for the refund, you must:

  • Be at least 18 years old
  • Be a Canadian citizen or permanent resident of Canada
  • Live in the home you’re purchasing within 9 months
  • Apply within 18 months of registration

If you’re married, you’ll also need to take into account your partner’s property history because it could affect your ability to claim the refund. If your partner acquired a home individually while you’ve been married, then neither of you would be eligible for the tax refund. But, if your partner’s property was purchased or inherited before you got married, you could still be able to claim some of the refund.

First-time home purchase rebate (Toronto)

As a first-time home buyer, you could qualify for a rebate of up to $4,475 if you're purchasing a new-build or a residential resale property in Toronto. All of the same requirements for the Ontario land transfer tax rebate apply for this rebate. It is possible to qualify for both.

The Home Buyers’ Plan

The Home Buyers’ Plan (HBP) is a program offered by the Canadian government to help first‑time home buyers get into the market. If you’re eligible, you can withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) towards the down payment on your first home. If you and someone else are buying a home together, you can withdraw from your individual RRSPs a combined $70,000. The withdrawal is tax‑free as long as it’s paid back within 15 years, or included in income the amount which should be repaid.

To qualify for the HBP, you must:

  • Be a first-time homebuyer
  • Be a resident of Canada
  • Use the home within a year of purchasing it or building it

A first-time home buyer for the purpose of the HBP is someone who has not lived in a home you or your partner had owned in the year of purchase and the 4 prior calendar years.

The First-Time Home Buyer Incentive

The First-Time Home Buyer Incentive has been discontinued. The deadline for new or updated submissions is midnight ET on March 21, 2024. Taxpayers who are able to submit the application by March 21, 2024 may be eligible for the incentive if closing date is 6 months from time of application approval (for existing homes) or 18 months from the time of application approval (for existing home). Applications received before the deadline will be processed promptly. No new approvals will be granted after March 31, 2024.

The First-Time Home Buyer Incentive is a shared equity program with the Canadian government and can help you if you're struggling to come up with a down payment. Eligible Canadians can apply for a loan worth either 5 or 10% of a home’s purchase price, but there’s a catch.

When you eventually pay back the loan, you’ll be required to pay the equivalent of 5 or 10% of the property’s then current value. While it’s a great tool to help Canadians get into the market, the downside is you don’t know how much your home’s value will be in the future, and you will be paying the government a percentage back ⁠–⁠ not a set amount. Let’s say you purchased a home for $600,000 and borrowed 5% of the value for the down payment, which would be $30,000. You would owe the government 5% of the final sale price. So, if you held on to the home for 8 years and sold it for $950,000, you would have to pay the government back $47,500 (5% of $950,000).

First-Time Home Buyer’s Tax Credit (HBTC)

The tax credit was introduced as part of Canada’s Economic Action Plan 2009 to assist Canadians in purchasing their first home. It was created to help recover closing costs like legal expenses, inspections and land transfer taxes that can add up for first-time home buyers. The rebate amount was doubled to $1,500 in 2022 (i.e., 15% of $10,000). The credit may be split between spouses.

To qualify for the home buyers’ amount, you must:

  • Buy an eligible home
  • Include it with your personal tax return under line 31270 of your schedule 1
  • Be a resident of Canada
  • Intend to live in the home within 1 year of purchase

A first-time home buyer for the purpose of the HBTC is someone who has not lived in a home you or your partner had owned in the year of purchase and the 4 prior calendar years. You can qualify for both the HBP and the HBTC for the same home as long as you qualify under both sets of criteria.

GST/HST new housing rebate

The GST/HST new housing rebate is available to Canadians who buy a newly built home, significantly renovate an existing home or rebuild a home that was destroyed. If you qualify, the rebate allows you to recover some of the Goods and Services Tax (GST) or the federal part of the Harmonized Sales Tax (HST) you paid toward these purchases.

In addition to the various better‑known incentives described, there are other local homeowner programs offering financial assistance and support to encourage first‑time home buyers to settle in the area. Many of these programs have generous repayment terms.

Home affordability is a major issue for most new home buyers. Location of your new home may impact the incentives available, and the ultimate cost of the home. The attractiveness of the different incentives may vary depending on whether you prefer a cash rebate (generally a lower amount) instead of mortgage assistance. The cost of the home is substantially lowered if you qualify for more than one incentive. It is important to weigh these options when you decide on the affordabililty of a home. Don’t miss any incentives which you may be eligible for. Many of the programs have criteria that are independent of each other and you may be eligible for more than one.

Don't miss any incentives

Vacant Home Tax (VHT) update for Toronto properties

In 2023, Toronto homeowners faced two sets of reporting requirements related to properties that may not have been fully occupied as residences in 2022:

  1. Reporting under the federal Underused Housing Tax (UHT)
  2. The city of Toronto’s Vacant Home Tax (VHT) Declaration

The two reporting requirements have much in common, and it’s understandable if some taxpayers are unclear about the difference between the two. In both cases, reporting is based on the previous year’s occupancy status (i.e., the 2023 filing was based on 2022 occupancy status).

There may be substantial penalties for failing to file one or both of the reports. The UHT penalty for failure to report is a minimum of $5,000 for individuals and $10,000 for other property owners. A property owner who fails to file the declaration for VHT is deemed to own a vacant home and will be assessed the VHT at 1% of the assessed value of the property, which is subject to an appeal process to have the VHT reversed.

Over the last few months, the focus had been on the Underused Housing Tax (UHT) and its 2022 filing deadline, which has been extended a number of times, most recently to April 30, 2024. It may be easy to forget the VHT declaration is about to be due. The online portal for 2024 is already live and can be used to make declarations for 2023 vacancy status.

The overview that follows will only highlight the main changes made to the VHT since last filing season.

To make the annual declaration, the owner will need a 21‑digit assessment roll number and a customer number, which can be found on your property tax bill or property tax account statement. A property that is occupied for longer than six months in the previous year by the owner or a tenant will be exempt from tax. For the upcoming 2024 filing season, a tenant includes anyone who leased the property to operate a business for a term of greater than 30 days and tenants who occupy a property as a personal residence. There are also specific exemptions to the tax, including homeowners in long‑term care, properties undergoing repairs or renovations or a vacancy caused by the death of the owner.

The requirement to satisfy the exemption for a property undergoing repairs and renovations has been changed from “obtaining an opinion from the Chief Building Official and Executive Director, Toronto Building” to a requirement that repairs or renovations are being actively carried out without unnecessary delay.

Each residential property owner must file a VHT declaration. This is different from the UHT, which exempts certain individuals (such as Canadian residents and citizens) from filing the return.

While multiple owners of one property may all have UHT filing obligations, only one VHT declaration is required for each property. It should also be noted that no VHT declaration is required if:

  • the property is not yet assessed
  • the property is classed as multi‑residential, commercial or industrial
  • the property is classified by MPAC as vacant land, parking space or a condominium locker

A new exemption is provided for newly built housing inventory that is vacant, which applies for up to two consecutive taxation years.

Owners of properties subject to the tax will be issued a Vacant Home Tax Notice at the end of March, and payment will now be due in three instalments on May 15, June 17 and July 15, 2024, rather than the earlier deadlines, which fell at the beginning of those months.

For properties in 2022 and 2023, a VHT of 1% of the Current Value Assessment (CVA) will be levied on all Toronto residences that are declared, deemed or determined to be vacant for more than six months during the previous year. For example, if the CVA of your property is $1,000,000, the tax amount billed would be $10,000 (1% of $1,000,000). To date, the UHT rate remains 1%.

For vacancies in 2024 and future taxation years, a tax of 3% of the CVA will be levied on all Toronto residences that are declared, deemed or determined to be vacant for more than six months during the previous year. For example, if the CVA of your property is $1,000,000, the tax amount billed would be $30,000 (3% of $1,000,000).

The tax is based on the property’s occupancy status and CVA for the previous year. For example, if the home is vacant in 2023, the tax will be calculated using the 2023 CVA and will become payable in 2024. If a declaration is not submitted by the deadline, the property will be deemed vacant, and it will be subject to the Vacant Home Tax. As a result, it is costly to miss the filing deadline, which has been changed from the second business day of February to the last day of February.

Effective Jan. 1, 2024, a fee of $21.24 will be charged for failing to submit a declaration of occupancy status by the declaration deadline. This fee is intended to defray the costs of administering the declaration program.

The City of Toronto has collected approximately $54 million in VHT on 2,161 declared units and 17,437 deemed vacant units. However, the numbers are expected to be lower once all the appeals in progress are resolved. Even if the assessed VHT is ultimately reversed, the appeal process is stressful and costly, making it a wise idea to file the relatively simple declaration on time.

Putting tax in perspective

Separation or divorce: Navigating tax pitfalls in property transfers

There are several tax considerations to examine when transferring property from one spouse to another after a separation or divorce. Partners may not spend much time dealing with the tax considerations since it is assumed a property will qualify as a principal residence and there will be no tax consequences arising from the transfer. It may come as a surprise this is not always the case.

Consider the following example.

John and Jane Doe owned their Toronto home together since 2010. The purchase price was $600,000.

In January 2023, the couple separated. John stayed in the home while Jane moved to Calgary to be closer to her family. The property was worth $1,500,000 at the time of separation.

The couple plans to transfer the home to John’s sole name while settling the couple’s property rights, and John plans to transfer assets or cash of $750,000 to Jane. The tax implications of a transfer of property other than real property have been discussed in a separate article, where it is assumed a taxable capital gain may result. However, where the property is personal‑use real estate, the couple’s expectation may be a tax‑free transfer. Any unanticipated tax consequences will affect the amount John should pay Jane in the division of property.

In advising the couple concerning the division of property, it is important to know the couple’s history of ownership of any real estate that may have been used as a home.

  • Did John or Jane own a second home at any time between 2010 and 2023 (14 full or part years)? This may include a cottage or other home used seasonally.
  • Was the property sold or is it still owned?
  • If sold, was the disposition reported on the tax return in the year of sale?
  • If the property was sold after 2016, was a Form T2091 filed to designate any part of the ownership of the second property as a principal residence?
  • Has Jane purchased a new home in Calgary?

The answer to these questions may affect whether the transfer of the property to John will be eligible for the principal residence exemption. We will assume Jane and John only owned one property. To qualify for the principal residence exemption on the transfer of Jane’s 50% interest of the home to John, the following steps need to be taken:

  • Jane and John must jointly elect to transfer Jane’s 50% of the property at its fair market value of $750,000 (50%). Without the election, the property will be transferred at $300,000 (50% of the cost), and no gain will result (see previous article for a more in‑depth analysis). Although a transfer without the election (i.e., at cost) does not trigger any immediate tax, it also does not increase John’s cost for the purpose of any future capital gain and may affect the amount of eligible principal residence claim.
  • In addition to the election to transfer the property at fair market value, Jane must designate the property as her principal residence for each year of eligible ownership by filing Form T2091 and reporting the capital gain on her return of the year of transfer. Jane may designate only 13 years, as the formula provides a “plus one” year to take into consideration that more than one property may be owned in the year of purchase or sale. Jane will be disqualified from the principal residence exemption claim if she fails to report the sale on her return.
  • Jane must not have designated any other property as her principal residence for the same years. This should be included as a condition of the transfer of property.
  • John must not designate any other property as his principal residence for the same years. This should be included as a condition of the transfer of property.

What if John and Jane owned a cottage from 2015 and the property is still owned by both of them (nine full or part years of ownership)? The cottage’s cost was $300,000, and its value is $1,000,000. John and Jane plan to put the cottage on the market and sell it as soon as possible.

The potential gain per year of ownership of the Toronto home ($900,000 total gain/14 years of ownership = $64K per year) is lower than the potential gain per year of ownership of the cottage ($700,000/9 years of ownership = $78K per year). It is more advantageous for John and Jane to designate the cottage as their principal residence for 2016‑23, (i.e., 8 plus one equals 9 years) and the Toronto home for 2010‑15 (6 plus one equals 7 years). The steps outlined previously should be amended to take this into consideration.

Professional assistance is required to appropriately sort out the tax implications of the principal residence designation. Talk to a Segal GCSE advisor for more information.

Solutions on your side

Changes in Alternative Minimum Tax

High income earners who take advantage of certain “tax preference” arrangements often find they cannot eliminate all of their taxes as a result of the Alternative Minimum Tax (AMT). The AMT calculation method is designed to ensure everybody applies at least a minimum tax rate to income that is less affected by tax breaks such as capital gains.

In Budget 2023, the Government of Canada introduced some changes to the AMT formula that may impact decisions concerning personal charitable donations, particularly large gifts. AMT is currently calculated as follows:

Flat tax rate (15%) x [taxable income for AMT purposes ⁠–⁠ flat tax exemption of $40,000] ⁠–⁠ allowable refundable tax credits

From 2024, the minimum tax rate will be increased from 15 to 20.5%.

The $40,000 exemption will be increased to the top of the third tax bracket. This is currently $165,430, but it will increase in 2024 to an estimated $173,000.

InOnly 50% of the refundable tax credits, including the donation tax credits, will reduce the amount of AMT.

Although the above changes apply to all capital gains, the impact is felt more acutely with respect to donations of publicly listed securities.

Under the current rules, capital gains resulting from donations of listed public securities are not added to taxable income for AMT purposes. Under the proposed rules, there will be an add back of 30% of the capital gain derived from donations of publicly listed securities. The table below highlights one example:

 

Current rules

Proposed rules

Regular taxable income

$2,000,000

$2,000,000

Add back of capital gain resulting from donation of publicly listed securities with FMV $2,000,000

0

$600,0001

Taxable income for AMT purposes

$2,000,000

$2,600,000

Exemption

($40,000)

($173,000)2

Charitable tax credit

($494,964)3

($247,482)4

AMT tax rate

15%

20.5%

AMT

0

$243,986

Basic federal tax

$141,842

$141,842

Applicable tax

Basic federal tax

AMT

Increase in taxes payable

N/A

$102,144

  1. 1 30% of capital gain from donation of publicly listed securities.
  2. 2 The 2024 exemption is subject to inflation adjustment, which is estimated to be approximately $173,000.
  3. 3 Tax credit claimed based on 75% of net income.
  4. 4 2024 donation tax credit will be reduced by 50%.

Interestingly, no comparable changes have been proposed with respect to corporate donations. Under some circumstances, corporate donations would appear the more attractive way to go. A donation of publicly traded securities through a corporation eliminates the capital gain on the disposition of the securities, allowing a deduction of the value of the securities and increasing the capital dividend account balance, which allows a tax‑free distribution from the corporation to the shareholder. Individuals should consult their tax advisors to determine whether it is advisable to switch to a corporate donation strategy.

Planning strategy

Based on the current proposed rules, those who are planning to make a donation of assets with capital gains should make those donations in 2023, rather than 2024. The donation can be carried forward to 2024 if there is insufficient income in 2023 to fully utilize the donation credit in 2023. This would avoid the application of the new AMT rules.

Minimum tax, maximum insight

Unique reporting obligations for lawyers’ trusts

We previously sent out articles about the new expanded trust reporting rules and the new form Schedule 15 (as part of the T3 trust reporting) that will require certain trusts to file tax returns and provide information about “reportable entities,” which include beneficiaries, trustees, settlors and persons with the ability to exert influence over trustee decisions (“protectors”) of a trust. The first reporting under these rules will be March 30, 2024 (not March 31, 2024, due to 2024 being a leap year).

Trust accounts for lawyers

Lawyers are in a unique situation in that they often have trust accounts for their clients. The legislation exempts a lawyer’s general trust account. These would be funds that are required under the professional conduct rules ⁠–⁠ as well as federal or provincial rules ⁠–⁠ for a purpose that is regulated under these rules. However, all trust accounts are not created equal.

Trust funds that are not exempt

Trust accounts that would not be exempt could be the following:

  • Retainer funds
  • Trust settlement amounts
  • Proceeds from the sale of real estate
  • Withholding taxes being kept in trust until the Canada Revenue Agency (CRA) provides a compliance certificate
  • Investment funds being administered by the lawyer on behalf of the client(s)

Possible exemptions

For those trust accounts not automatically exempt, they could be exempt if they meet one of the following conditions:

  1. The trust account has been in existence for less than three months as of December 31 of the year in question
  2. The trust owns property with a fair market value of less than $50,000 throughout the taxation year. The assets can only be:
    1. Cash
    2. Certain debt obligations, and
    3. Listed securities, such as public companies, mutual funds and segregated funds

Information to be reported

  • Trustees: The lawyer or law firm
  • Beneficiaries: Those for whom the funds are being held
  • Settlors: Entities/individuals who transferred in the funds
  • Any individual with the ability to influence a trustee’s decision ⁠–⁠ this could be an advisor who is not a trustee, beneficiary or settlor

The information that will have to be provided for each of the above is:

  • Name
  • Type of entity
  • Address
  • Date of birth (if applicable)
  • Jurisdiction of residence
  • Taxpayer identification number (e.g., Social Insurance Number, business number, trust account number or taxpayer identification number used in a foreign jurisdiction)

Filing notes

If an entity ceased to be a reportable entity in the tax year, the information is still required but won’t be carried forward to the next tax year. That is, if there was a trust account in existence for six months during the year, it would have to be reported even if it didn’t exist as of December 31 of the year in question. It is the CRA’s position the trustees must make best efforts to obtain required information from beneficiaries.

There is a section of the form to provide information about beneficiaries the trustee cannot list by name. This could be relevant where trust funds are being held as part of a lawsuit where the beneficiaries of the funds have not yet been determined.

Penalties for non‑compliance

Failure to file penalties

Failure to file the required information discussed above will result in a penalty of $25 per day, with a minimum penalty of $100 to a maximum of $2,500.

Additional penalties

If it is deemed the failure to file was made knowingly or because of gross negligence, there were false statements or a failure to respond to a CRA demand to file, there will be an additional penalty equal to the greater of $2,500 or 5% of the fair market value of all the property held by the trust. As an example, if there are funds with a fair market value of $20 million held by the trust, this gross negligence penalty could be $1 million per year!

The cost of non-compliance is significant. If you think you or your firm would be affected by these rules, please contact us.

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