In April 2022, the Federal Government of Canada announced their budget for 2022. The top priority of the budget is the housing market in Canada. We have seen substantial growth in the housing market in the past 20+ years. This growth has made it difficult for many Canadians to own their own home. The Government of Canada is trying to change that, and the first step is in the 2022 Federal Budget. Below are a couple of the policies the Government will implement by 2023.
Tax-Free First Home Savings Account
Budget 2022 proposes to create the Tax-Free First Home Savings Account (FHSA), a newly registered account to help individuals save for their first home. Contributions to an FHSA would be deductible, and income earned in an FHSA would not be subject to tax. Qualifying withdrawals from an FHSA made to purchase a first home would be non-taxable.
To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, the individual must not have lived in a home that they owned either:
▪ at any time in the year the account is opened, or
▪ during the preceding four calendar years.
The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000. The annual contribution limit would be available starting in 2023. Unused contribution room cannot be carried forward, meaning that an individual contributing less than $8,000 in a given year would still face an annual limit of $8,000 in subsequent years.
Amounts are withdrawn to make a qualifying first home purchase and would not be subject to tax. Amounts withdrawn for other purposes would be taxable. Individuals would be limited to making non-taxable withdrawals with respect to a single property in their lifetime.
Home Buyers’ Tax Credit
First-time homebuyers who acquire a qualifying home can obtain up to $750 in tax relief by claiming the First-Time Home Buyers’ Tax Credit (HBTC). Any unused portion of the HBTC may be claimed by an individual’s spouse or common-law partner if the combined total does not exceed $750 in tax relief.
Budget 2022 proposes to double the HBTC amount to $10,000, which would provide up to $1,500 in tax relief to eligible homebuyers. Spouses or common-law partners would continue to be able to split the value of the credit if the combined total does not exceed $1,500 in tax relief. This measure will apply to acquisitions of a qualifying home made on or after January 1, 2022.
Residential property flipping rule
Property flipping involves purchasing real estate to resell the property in a short period to realize a profit. Profits from flipping properties are fully taxable as business income, meaning they are not eligible for the 50% capital gains inclusion rate or the Principal Residence Exemption.
The Government is concerned that specific individuals who flip residential real estate are not properly reporting their profits as business income. Instead, these individuals may be improperly reporting their profits as capital gains and, in some cases, claiming the Principal Residence Exemption.
Budget 2022 proposes introducing a new deeming rule to ensure profits from flipping residential real estate are always subject to full taxation. Specifically, profits arising from dispositions of residential property, including a rental property that was owned for less than 12 months, would be deemed business income. The new deeming rule will not apply if the disposition of property is in relation to death, household addition (e.g., the birth of a child, adoption, care of an elderly parent), separation, personal safety, disability or illness, employment change, insolvency or involuntary disposition.
A ban on foreign investment in Canadian housing
To ensure that Canadians, instead of foreign investors own housing, Budget 2022 announces the Government’s intention to propose restrictions prohibiting foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational residential property in Canada for two years (with certain exceptions). The Government will continue to monitor the impact that foreign money is having on housing costs across Canada and may come forward with additional measures to strengthen the enforcement of the proposed ban, if necessary.
The housing market in Canada will not be a quick fix. Also, when dealing with many heavily indebted Canadians, it would be wise not to make quick, rash decisions that can affect the market. However, the 2022 Federal Budget is a step toward making homeownership more affordable for Canadians. Now time will tell to see if the measures being put in place will work.