Article written by J. Bradley Berry, CPA at Mowbrey Gil, in the Quarterly Canadian Update, a newsletter published by
Canadian member firms
of
Moore North America
. This article on the Tax-Free Savings Account for First-Time Home Buyers, or TFSA, is part of our mission to be your partner in success by keeping you informed. If you or someone you know is looking to put some money aside to buy their first property, pay particular attention to this article.
With the Registered Retirement Savings Plan (RRSP) deadline fast approaching, some of you may be wondering what the new Tax-Free Savings Account for First-Time Home Buyers (TFSA) is all about. This Canadian government initiative combines the tax-deductible contributions of an RRSP with the withdrawal advantages of a Tax-Free Savings Account (TFSA) to help Canadians save for their first home.
Here are some key facts about CELIAPP:
- Contributions : Contributions to a TFSA are tax-deductible, as with an RRSP. This means that contributions can reduce the amount of income tax the contributor has to pay each year.
- Tax-free growth and withdrawals: Investment income generated by the TFSA-APP, as well as withdrawals made for the purchase of a first home, are tax-free, as are the advantages offered by the TFSA.
- Contribution limit: The government has proposed an annual contribution limit of $8,000 and a lifetime limit of $40,000.
- Eligibility: The CELIAPP is available to Canadian residents who are about to buy their first home. As a general rule, these are people who did not own their principal residence at any time during the year in which the account was opened, or during the four preceding years.
- Using TFSA funds: Withdrawals from a TFSA to purchase a first home are tax-free, provided the funds are used to buy or build a qualifying home in Canada within a certain period of time after the withdrawal.
- Combining with other programs: Individuals may be able to combine the TFSA-APP with other government programs designed to help first-time homebuyers, such as the Home Buyers’ Plan (HBP), which allows individuals to withdraw funds from their RRSPs to buy or build a home.
- Close the TFSA account: The account must be closed if the TFSA account holder does not use the funds to purchase a first property within a certain number of years of opening the account. Remaining funds can be transferred to an RRSP or RRIF or withdrawn, subject to tax.
The TFSA is designed to facilitate first-time home ownership by offering a tax-efficient way to save for a down payment. Prospective buyers should consult the latest information provided by the Canada Revenue Agency (CRA), or a financial advisor to understand how to integrate the TFSA-APP into their overall financial planning for the purchase of a property.
More questions? We’ve got the answer.
How do I open a TFSA?
To open a TFSA, you must be a Canadian resident and 18 years of age or older. Some establishments may require you to be an existing customer, or you may need to open a current account in order to open a TFSA account.
Opening an account is usually done online via your financial institution’s website, or by making an appointment with a financial planner. You will be asked to provide certain information, such as your social insurance number and valid identification. Here are the usual steps without consulting an advisor:
- Connect to your online banking
- Selecting the option to open a TFSA account
- Fill in the requested information
- Sending the secure online form and fee
It should be noted that some direct brokerage platforms also offer the option of opening a CELIAPP.
What's the difference between a TFSA and a TFSAPPSA?
The TFSA (Tax-Free Savings Account) is a flexible savings account that allows you to accumulate interest, dividend and capital gains income tax-free. It’s ideal for saving for short-, medium- or long-term goals, with no specific restrictions on the use of funds.
The CELIAPP (Compte d’Épargne Libre d’Impôt pour l’Achat d’une Première Propriété) is specifically designed to facilitate the purchase of a first home. It offers tax advantages similar to those of the TFSA, but with a few additional features:
- Like RRSPs, contributions are tax deductible.
- There are specific annual and lifetime contribution limits.
- Withdrawals are tax-free if used to purchase a first home.
How long can I keep a Celiapp?
The shelf life of a TFSA-APP is determined by several factors. The maximum duration of the TFSA is 15 years from the opening of the first contract. After this period, you must close your TFSA accounts.
However, other factors can shorten the life of a TFSA. It must be closed on the earliest of the following dates:
- December 31 of the year in which you turn 71;
- December 31 of the year of the 15th anniversary of the opening of the CELIAPP;
- December 31 of the year following the year of the first eligible withdrawal.
That’s why you should always plan to open your TFSA with these time limits in mind, to optimize your savings for the purchase of your first home.
CELIAPP or RAP?
Both plans are savings options for first-time homebuyers, but they have distinct characteristics:
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The HBP (Home Buyers’ Plan) lets you withdraw up to $35,000 tax-free from your RRSP to purchase your first home. The amount withdrawn must be repaid over 15 years.
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The TFSA, on the other hand, lets you save up to $40,000 tax-free, with no repayment obligation. This amount must be used to purchase a first eligible property.
These two plans can be combined for the purchase of the same property. The choice between the HBP and the TFSA will depend on your personal situation and savings objectives.
