Saving Money on a Purchase
by Richard Bell
Buying real estate in the Lower Mainland is expensive, but there are some government programs that may reduce the financial burden.
***This article was updated to reflect changes in these programs***
B.C. First Time Home Buyer Property Transfer Tax Exemption
***updated*** Property Transfer Tax is a provincial tax payable on the purchase of property in BC. It is calculated as follows:
- 1% on the first $200,000;
- 2% on the portion greater than $200,000 up to and including $2,000,000; and
- 3% on the portion greater than $2,000,000.
So, for a $400,000 property, Property Transfer Tax would be $6,000. That’s a lot of tax!
Recognizing that the tax may be an obstacle to home ownership, the provincial government provides an exemption for “first-time” buyers. But not everyone who has never owned a home is a first-time buyer under the Act.
You have to satisfy a number of requirements to qualify for the exemption:
- You must have never owned a principal residence anywhere in the world
- You must have lived in BC for at least the 12 consecutive months immediately before the date of registration of transfer of the property
- You must be a Canadian citizen or permanent resident
- ***updated*** The fair market value of the property must be less than $500,000
- You must actually live in the Property
However, if you pass away or the property is transferred pursuant to a separation agreement or court order, you still keep the exemption.
But what happens if you are buying with another person and you qualify for the exemption but the other person does not. You may want to consider registering title as tenants in common with a 99% and 1% ownership split. The person who meets the first time buyer qualification would own 99% and therefore 99% of the property would be exempt.
A word of warning, the government audits exemption claims and if they determine that you filed a false claim you are charged a penalty equal to twice the amount of tax you should have paid.
***updated*** B.C. Newly Built Home Property Transfer Tax Exemption
Purchasers of newly built homes, including condominiums, receive a property transfer tax exemption if the fair market value of the property is below $750,000. There will be a partial exemption for newly constructed homes under $800,000.
This program is available to most purchasers, including new residents of BC, first-time home buyers, and previous property owners. To qualify for the exemption, the property must be 1.24 acres or less, you must be a Canadian citizen or permanent resident, you must move into the home within 92 days following registration at the Land Title Office, and you must continue to occupy the property as your principal residence for the remainder of the first year.
Federal Home Buyers’ Plan (“HBP”)
The Home Buyers’ Plan is available to “first time buyers”. Unlike the Property Transfer Tax Act, a purchaser can qualify as a “first time buyer” more than once if they or their spouse have not owned a principal residence for approximately four years. The HBP allows a first time buyer to withdraw up to $25,000 from their RRSP’s without paying tax on the withdrawn amount. The funds must be in your RRSP for at least 90 days before withdrawal. The home being purchased must be a principal residence, it can be existing or in the process of being built. The RRSP must be repaid within 15 years with minimum payments per year being 1/15th of the amount withdrawn. If a buyer does not make the payment in any year, that amount is brought into income and is taxable. Locked–In RRSPs and group plans do not allow for withdrawals. Make sure to give your lender advance notice of at least two weeks to process the withdrawal.
Federal First-Time Home Buyers’ Tax Credit (“HBTC”)
The federal government provides a tax credit of up to $5000 to assist first-time home buyers. But this does not put up to $5000 in your pocket. The credit results in up to $750 in federal tax relief. So not a lot, but for first-time buyers every bit counts. The definition of a first time buyer is similar to the definition for the Federal Home Buyers’ Plan: an individual is a first-time buyer if neither the individual nor their spouse owned a principal residence in the year of the purchase or in the preceding four calendar years. This tax credit would be claimed on your tax return for the year in which you purchased the property.
Federal Goods and Services Tax (“GST”)
GST is payable upon the sale of new construction residential property, as well as substantially renovated property. The tax is 5% of the purchase price and is paid at the time of closing. There is a rebate available for buyers who are going to occupy as a principal residence or who rent out the property. The rebate is 36% of the GST payable provided the purchase price is $350,000 or less. For property purchases over $350,000 but under $450,000 there is a partial rebate which decreases on a straight line basis to zero at $450,000. A buyer of a principal residence needs to review their contract carefully to determine if the credit will be adjusted at the time of closing thereby allowing the buyer to just pay the net tax to the seller. If the seller does not allow the credit to be claimed on closing the buyer will need to pay the seller the full GST and submit for the rebate to Canada Revenue Agency. The problem for first-time buyers is that they may not have the extra cash and lenders will not normally finance an amount equal to the rebate. So read the contract carefully.
For buyers of new investment properties, the GST rebate rules in respect of the rebate amount and qualifying purchase price are the same as for individuals buying a principal residence, but the investor buyer needs to have become the owner and entered into a lease agreement before filing for the rebate. Processing of the rebate usually takes 2 to 4 months.