Tax implications of Buying a new Home

All of us know the surge that we are going through in the housing market in Provinces like Ontario and British Columbia. I just want to analyse the tax implications of buying a new home.

New home that you may buy could either fall in the category of Principal Residence or not. Principal Residence could be any dwelling unit such as Detached home, Semi-detached home, townhouse, condominium etc. When you use the new home for your personal residence purposes, it is regarded as Principal Residence. Between two spouses, there is only one Principal Residence Exemption.

Tax implications:

1)      If you buy a new home that is your Principal Residence, you are entitled to a Federal tax credit break called “Home Buyers Amount” of $5,000 giving a tax break of $750 from the Federal tax liability.

2)      If you were renting before buying your new home, now you can no longer claim your rent for Ontario Trillium Benefits or any other rent based credit in other Provinces. However, you can claim the property tax paid during the year for the above credit in the province in which it is allowed. Of course, these benefits are income dependant. In the year of buying new home, you can claim both, the rent for the period of renting and property taxes paid during the year. This can be found from lawyer’s Statement of Adjustment Statement”.

3)      If and When you dispose off this Principal Residence, there will be no Capital Gains Tax liability under current rules.

4)      You may be able to claim proportionate Home Office Expenses as a deduction if you are running your self-employed business from this home. If you are employed and want to claim proportionate share of home office expenses, your employer must certify this for you in Form T2200. Depending on the tax situations, you may be able to claim the proportionate share of rent, utilities, insurance on home, property tax, interest on mortgage. Principal payment of mortgage is never allowed as a deduction since it only increases the value of your home.

5)      Please be careful that in trying to claim the above expenses, never claim proportionate share of Capital Cost Allowance (CCA) since claiming the same would amount to forgoing the Principal Residence status as per tax rule and at the time of disposition of your Principal Residence you may be asked to pay the proportionate tax on the Capital Gains earned.

6)      If the new home bought does not represent your Principal Residence and if you let it out for a rental income, you will be taxed on the net rental income earned from that home. In arriving at net rental income you can deduct, the rental expenses as described above for the area rented.

7)      Capital Gains earned at the time of disposition of home described in 6) above will be included at 50% of the amount of capital gains and you will be liable to be taxed at your marginal rate of taxation.

8)      If the new home that you bought is not your Principal Residence (and you already have another home as your Principal Residence), you can file an election to treat your new home as Principal Residence provided you have stayed in your new home for some time at least. This Election will be valid for 4 years. This Election is important in calculating your Principal Residence Exemption.     

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.