CRA relaxes first-time homebuyer rules for separated couples

Jamie Golombek: Recently revised rules ease the definition of a first-time homebuyer for some separated couples

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With residential property sales slowing in recent weeks and market values ​​plummeting in some of Canada’s hottest urban markets, some first-time homebuyers are taking a closer look at their finances to determine if now is the time to jump into home ownership. For many, a good determining factor may be how much they saved for the down payment.

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As we continue to await details of the planned launch of a tax-free first home savings account in 2023, many first-time homebuyers are currently turning to TFSA and, in some cases, registered retirement. Savings Plans (RRSP) via Home Buyers Plan (HBP), to come up with a lump sum for the down payment.

A recent technical explanation letter from the Canada Revenue Agency sheds some positive light on how recently revised HBP rules are helping some separated or divorced couples use RRSPs to purchase a home. But before moving on to the new rules, let’s review the basics of HBP.

As a reminder, HBP allows “first-time home buyers” to withdraw up to $35,000 from the RRSP to purchase or build a first home without having to pay tax on the withdrawal. Amounts withdrawn under the Credit Facility must be returned to the RRSP over a period not to exceed 15 years, beginning with the second year following the year of withdrawal. Amounts not paid in a given year, as required, must be included in income.

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So, what exactly is a first-time home buyer? You are considered a first-time homebuyer if you have not occupied a home owned or owned by your current spouse or common-law partner during the four-year period prior to purchasing a home. This four-year period begins on January 1 of the fourth calendar year prior to the year in which you withdraw funds from the RRSP under HBP, and ends 31 days prior to the date you withdraw funds. For example, if you withdraw funds under the HBP on July 31, 2022, the period will be from January 1, 2018 to June 30, 2022.

The good news for taxpayers who are separated, divorced, or who have experienced the breakdown of a common law partnership, is that the definition of a first-time home buyer has been relaxed as of 2020. Under the new rules, income tax law now allows an individual who is not otherwise considered a first-time home buyer under HBP at the time of withdrawal to be considered a first-time home buyer if, at the time of withdrawal, they are living separately and apart from their spouse or common-law partner due to the breakdown of their marriage or common-law partnership for at least 90 days, and they begin living separately and separated in the year of withdrawal from HBP or In the previous four calendar years.

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In a recent technical explanation released last month, the Telecommunications Regulatory Authority was asked about the application of this rule in a specific scenario, as follows. Mr. X and Mrs. Y have been common law partners for the past six years. The family home they live in is owned solely by Mr. X. Mr. X and Mrs. Y have decided to separate, but they still live in the family home, although they now consider themselves “separated” as of June 1. They sleep in separate rooms, do not have common social activities, and do not identify themselves as a married couple. Thus, although they live under one roof, they consider themselves roommates. They live together “just to minimize the financial impact of their separation and to allow time for Mrs. Y to find a new home to buy and occupy as a sole proprietor”.

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Mrs. Y wishes to participate in HBP by withdrawing $35,000 from her RRSP in September (more than 90 days after the date of separation) to purchase new property for which she has made an acceptable offer to buy. The TRA was asked if it would confirm that it was eligible to participate in the HBP programme.

The Communications Regulatory Agency responded that the agency’s longstanding position is that two people can live separately while remaining under the same roof. That being the case, each scenario would turn into a matter of fact that could only be determined by considering all the circumstances. Assuming they had been living separately and independently for 90 days, the CRA confirmed that Ms. Y would indeed be eligible to participate in the HBP programme.

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The TRA was then asked if its answer would be different if the couple were legally married (as opposed to living as common-law partners), but not legally divorced, and yet no longer consider themselves a married couple, while still living under the same roof for the couple. The reasons above. The CRA confirmed that the answer would be the same, and that Ms. Y could be involved in HBP.

Finally, the CRA was asked to consider the situation in which Mr. X and Mrs. Y were co-owners of the family residence, and Mrs. Y wished to participate in HBP either to acquire new accommodation of her own or to purchase Mr. . X share of the current dwelling. Again, in each of these scenarios, the CRA asserted that Mrs. Y could access HBP to either purchase a new home or buy her partner’s share of the family home.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is Managing Director, Tax and Estate Planning with CIBC Private Wealth in Toronto.

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