CRA relaxes first-time homebuyer rules for separated couples

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With residential actual property gross sales slowing in latest weeks and market values dropping in a few of Canada’s hotter city markets, some first-time homebuyers are taking a better take a look at their funds to find out if now could be the best time to leap into homeownership. For a lot of, the determinative issue might very nicely be the quantity they’ve saved for a down fee.

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Whereas we proceed to await particulars of the deliberate launch of the Tax-Free First Home Savings Account in 2023, many first-time homebuyers are presently turning to their Tax-Free Financial savings Accounts (TFSA) and, in some instances, to their Registered Retirement Financial savings Plans (RRSP) by way of the Residence Consumers’ Plan (HBP), to provide you with a lump sum for a down fee.

A latest technical interpretation letter from the Canada Revenue Agency sheds some optimistic mild on how the lately amended HBP guidelines may also help some separated or divorced {couples} use their RRSPs to purchase a house. However earlier than leaping into the brand new guidelines, let’s overview the fundamentals of the HBP.

As a reminder, the HBP permits a “first-time homebuyer” to withdraw as much as $35,000 from an RRSP to buy or construct a primary dwelling with out having to pay tax on the withdrawal. Quantities withdrawn underneath the HBP have to be repaid to an RRSP over a interval not exceeding 15 years, beginning the second 12 months following the 12 months of the withdrawal. Quantities not repaid in a specific 12 months, as required, have to be included in earnings.

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So, what precisely is a first-time homebuyer? You’re thought-about a first-time homebuyer if, within the four-year interval prior to buying a house, you didn’t occupy a house that you just owned, or one which your present partner or common-law accomplice owned. That 4 12 months interval begins on Jan. 1 of the fourth calendar 12 months earlier than the 12 months you withdraw funds out of your RRSP underneath the HBP, and ends 31 days earlier than the date you withdraw the funds. For instance, if you’re withdrawing the funds underneath the HBP on July 31, 2022, the interval is from Jan. 1, 2018 to June 30, 2022.

The excellent news for taxpayers who’re separated, divorced or skilled a common-law partnership breakdown, is that the definition of first-time homebuyer was relaxed as of 2020. Below the brand new guidelines, the Revenue Tax Act now permits a person who wouldn’t in any other case be thought-about a first-time homebuyer underneath the HBP on the time of the withdrawal to be thought-about a first-time homebuyer if, on the time of withdrawal, they’re dwelling separate and aside from their partner or common-law accomplice due to a breakdown of their marriage or common-law partnership for a interval of no less than 90 days, and so they started dwelling separate and aside within the 12 months of HBP withdrawal or within the 4 previous calendar years.

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In a latest technical interpretation launched final month, the CRA was requested in regards to the software of this rule in a selected situation, as follows. Mr. X and Ms. Y have been common-law companions for the previous six years. The household dwelling they reside in is owned solely by Mr. X. Mr. X and Ms. Y determined to separate, however proceed to each reside within the household dwelling, though they now take into account themselves “separated” as of June 1. Specifically, they sleep in separate rooms, they don’t have shared social actions, and they don’t establish themselves as a pair. Thus, though they reside underneath the identical roof, they thought-about themselves to be roommates. They reside collectively “solely to reduce the monetary impression of their separation and to permit Ms. Y the time to discover a new residence that she’s going to buy and occupy as sole proprietor.”

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Ms. Y needs to take part within the HBP by withdrawing $35,000 from her RRSP in September (greater than 90 days after the date of separation) to buy a brand new property in respect of which she has made an accepted supply to buy. The CRA was requested if it might affirm that she is eligible to take part within the HBP.

The CRA responded that it’s the Company’s long-standing position that two individuals can live apart while remaining under the same roof. That being the case, every situation will come right down to a query of reality that may solely be decided by taking a look at all circumstances. Assuming they’ve been dwelling separate and aside for 90 days, the CRA confirmed that Ms. Y would, certainly, be eligible to take part within the HBP.

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The CRA was then requested whether or not its reply could be completely different if the couple was legally married (versus dwelling as frequent legislation companions), however not legally divorced, but not thought-about themselves to be a pair, whereas nonetheless dwelling underneath the identical roof for the explanations above. The CRA confirmed that the reply could be the identical, and that Ms. Y may take part within the HBP.

Lastly, the CRA was requested to think about the state of affairs the place Mr. X and Ms. Y have been co-owners of the household residence, and Ms. Y wished to take part within the HBP to both purchase a brand new residence of her personal or purchase out Mr. X’s share of the present residence. As soon as once more, in every of those eventualities, the CRA confirmed that Ms. Y may entry the HBP to both purchase a brand new dwelling or purchase out her accomplice’s share of the household dwelling.

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Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto.

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