RRSP Contributions
March 1, 2023, is the deadline to make RRSP contributions to be eligible for a deduction in your 2022 personal tax return. Contributions made after this date will not be deductible against 2022 income. The contribution limit for 2022 is $29,210 although this may be less if you have an employer-provided pension plan or deferred profit-sharing plan. Your overall contribution room may also be reduced if you overcontributed in prior years, or higher if you haven’t maximized your past years’ RRSP contributions.
There is only a $2,000 margin for overcontribution errors. Beyond this amount, you will have to pay a 1% per month penalty tax on overcontributions. You should review your RRSP contribution room on the Notice of Assessment for your 2021 tax year issued to you by the Canada Revenue Agency (“CRA”).

TFSA Limit
The Tax-Free Savings Account limit was increased to $6,500 for 2023. Be sure to track your TFSA contributions since there are penalties for overcontributions and there’s no margin for error like with the RRSP. Although CRA does keep track of your TFSA contribution room, information on contributions you make to your TFSA is not automatically uploaded to CRA by your financial institution. The CRA receives this information only annually and it takes time for CRA to process this information. So be careful of this timing delay if you are verifying your TFSA contribution room through the CRA portal “My Account”.

First-time home buyers tax credit – also known as the Home Buyers Amount. This credit will be doubled from $5,000 to $10,000 as of 2022. At a 15% tax credit rate, this translates into $1,500 of tax savings for qualifying home buyers. You are a “first-time” home buyer if neither you nor your spouse/common-law partner, owned a home in the year you bought the new home, nor in any of the previous 4 calendar years.
If you have a disability, you might not have to be a “first-time” home buyer to qualify if the reason for the new home purchase is to live in a home that is more accessible and suited to your needs. Be sure to advise your Padgett advisor if you bought a home in 2022 and you think you may qualify. Also, be sure you’ve advised CRA of your change of address.

Home Accessibility Credit – this credit has also doubled. The amount of expenses eligible for credit for 2022 has increased from $10,000 to $20,000. At the 15% tax credit rate, this converts to $3,000 of tax savings on eligible expenses. This credit is to assist individuals to gain access to, or to be more mobile or functional in their dwelling, or reduce their risks related thereto. Modifications will generally qualify if the individual qualifies for the disability tax credit or is 65 years or older.

These expenses can be paid on behalf of yourself, or in some cases for certain dependents. The expenses should be of an enduring nature and integrated into the home. In general, if the item purchased will not become a permanent part of the home, it is not eligible. Of course, detailed invoices, agreements, and receipts need to be kept should the CRA want to verify the claim. The expenses will not be reduced by any federal or provincial government assistance provided. Examples of qualified renovations include grab bars and handrails, walk-in bathtubs or wheel-in showers, wheelchair ramps, widening doorways for wheelchair accessibility, or lowering existing counters and cupboards among others. The expenditures may also qualify for the medical expense tax credit, and some provincial credits as well (British Colombia, Ontario, New Brunswick, and to a lesser extent Quebec) – a potential double or triple claim.

Multi-Generation Home Renovation Tax Credit – this is a new tax credit effective January 1, 2023. Its purpose is to help taxpayers to care for adult relatives in their own homes by providing some tax relief on expenses incurred to build a secondary suite for the family member who is a senior, or an adult who has a disability, to move into. The secondary suite must be a self-contained housing unit that has a private entrance, kitchen, bathroom, and sleeping area. Additionally, the home being renovated must be inhabited or reasonably expected to be inhabited within 12 months after the end of the renovations. Routine repairs, appliances, electronic home-entertainment systems, security monitoring, housekeeping, and interest costs relating to the renovation won’t qualify for the credit. The tax credit is 15% of the expenses, a maximum of $50,000, which works out to a maximum credit of $7,500. The credit is also refundable. This means that if the tax credit is more than your taxes payable, you will get a refund.

This post originally appeared at https://smallbizpros.ca/

In Budget 2022, the federal government proposed the Tax-Free First Home Savings Account (FHSA). The most recent draft legislation has proposed April 1, 2023 as an effective date. Here is a summary of this new registered plan which is based upon the draft legislation to date: 

• The FHSA gives prospective first-time home buyers the ability to save $40,000 on a tax-free basis. It’s a bit of a hybrid between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).  Contributions would be tax-deductible like an RRSP, and withdrawals to purchase a first home – including the investment income earned in the plan – would be non-taxable, like a TFSA.
• To open a FHSA, you must be a Canadian resident who is 18 years of age or older. In addition, you must be a first-time home buyer. This means neither you nor your spouse has owned a home in which you lived in the year the account is opened or in the preceding four calendar years.
• The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. You can claim an income tax deduction for contributions made in a given year. Unlike RRSPs, contributions made within the first 60 days of a given year could not be attributed to the previous tax year. However, like RRSPs, you aren’t required to claim the deduction right away. Instead, you can carryforward non-deducted contributions and claim them in a later year if you are expecting to be in a higher tax bracket in the future. 
• You are allowed to carry forward unused portions of your annual contribution limit but only up to a maximum of $8,000.  For example, if you contributed $5,000 to a FHSA in 2023 you would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). So, unlike a RRSP and a TFSA, unused contribution room of prior years doesn’t carryforward except for a maximum amount of $8 000. 
• The FHSA can remain open for up to 15 years. So there needs to be some consideration as to when the FHSA should be opened to start saving. Starting too young may mean the account has to be closed before a home is purchased. However, any savings in the FHSA not used to buy a qualifying home can be transferred on a tax-free basis into an RRSP. It can also be withdrawn on a taxable basis. If transferred to a RRSP, it would not reduce the RRSP contribution room.
• One of the more recent changes made to the draft legislation is that you can now use both the FHSA and the Home Buyer’s Plan (HBP). The HBP provides for a tax-free withdrawal from your RRSP, up to $35 000, but the amount must be repaid into the RRSP in equal annual instalments over 15 years. Otherwise, the unpaid instalment amount is included in your taxable income for that year. The goal is to provide some cashflow for first time home buyers and eventually replenish the RRSP to continue the non-taxed investment growth to save for retirement.  With the FHSA, you can preserve your RRSP contribution room and contribute to the FHSA instead. Plus, unlike the HBP, the FHSA withdrawals don’t need to be repaid to avoid taxation, so that’s more tax advantageous. 
• Using both the HBP and the FHSA will provide a total of $75 000 of capital, plus the growth on the funds contributed to the FHSA.
• It’s also possible to transfer money from the RRSP on a tax-free basis to the FHSA subject to the annual contribution limits. Since those RRSP contributions were deducted for tax savings when contributed, you won’t get a deduction on the transfer to the FHSA. The advantage is that the withdrawal will be tax free, but without the requirement to repay it as with the HBP. That’s good on cashflow, but not great for saving for retirement as the RRSP doesn’t get replenished and the RRSP contribution room isn’t reinstated for the amount transferred to the FHSA. 

Bottom line, the FHSA provides some additional tax advantages and flexibility, but some tax planning relative to your specific case may be needed. 

This article was originally posted at http://smallbizpros.ca/good-reads/the-tax-free-home-savings-account/