There are many considerations when purchasing real estate. The mortgage rate. A down payment. The property location. However, when reviewing the list, many purchasers often forget to include taxes. But if you want to make your money work for you, knowing how to take full advantage of Canada’s tax incentives is critical.
“Canada has a very complicated tax system, so it’s very important to consider your taxes before you make an investment or buy your own property,” says Tina Lu, a principal at Manning Elliott LLP. “But there are some tips and tricks.”
In partnership with Manning Elliott, we look at how Canadians can save money when entering the real estate market, whether they’re looking for a primary residence or an income property.
First-time home buyers
According to Lu, incredible tax incentives and rebates exist for those looking to purchase their first home. They include the First-Time Home Buyer Incentive, the Home Buyers’ Amount, and the Home Buyers’ Plan (HBP), which is a program that allows you to withdraw up to $35,000 from your RRSPs to put toward buying or building a home.
As of April 1, 2023, the Canadian government also launched a First Home Savings Account. The registered plan allows Canadian residents 18 years and older to save up to $40,000 for their first home tax-free. The program can result in massive tax savings for a couple when combined with the HBP.
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“That’s $150,000 tax-free for your down payment if a couple is able to contribute enough to their savings,” Lu says.
She adds that many people don’t realize a first-time home buyer doesn’t necessarily mean a purchaser who has never owned property. If you haven’t owned any property for the past four years, you, too, may qualify as a first-time home buyer.
Parents helping children
Manning Elliott partner Matthew Ko reveals there are also plenty of tax incentives for parents who wish to help their children when it comes to purchasing their first home. He says those who buy a home as a principal residence can still rent it out for up to four years and save on tax—so long as they’re not living in another property they own.
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“Many people don’t appreciate the full tax exemptions available,” he says. “Young people can stay with their parents to save more money and create a cash flow and still treat the property as their home for tax purposes. So over those four years, the appreciation in value isn’t taxable.”
Investment properties
If you’re looking to get into the investment property business, Lu reveals it can sometimes be hard to get a mortgage on a rental property. However, if you’ve paid your principal residence down to a certain level, you may be able to use that to your advantage if you refinance the property.
“Say you can get an extra $300,000 on the principal residence,” she says. “You can use that money as a down payment to buy an apartment as an investment property.”
Ko adds that the interest on the equity you take out also becomes tax deductible against your rental income. Meanwhile, given the high prices in many markets nationwide and current mortgage rates, Ko says investors may likely experience a rental loss in the first couple of years. That, too, can work to your benefit at tax time.
“You can use that rental loss to offset other income, like job employment income or any other income,” he adds.
Working with professionals
Given the complexity of the Canadian tax system, the housing market, and all of the different ways you can take advantage of incentives, rebates, and exemptions, both Lu and Ko recommend speaking with a professional. They can help determine all the ways you can make your money work for you before purchasing real estate. At Manning Elliott, advisors work with clients and their families to determine personalized plans that align with their long-term goals.
“A home can be the biggest investment of a lifetime, whether for your own home or an investment property,” Ko says. “We look at all these different programs and tax incentives available and map it out to make it the most tax efficient on a personalized level over the next five, 10 years.”
For more information on how you can maximize your personal tax strategy visit Manning Elliott.