The beginning of the year brings with it very good news for first-time home buyers. You will soon be able to take advantage of a new investment vehicle that combines the tax advantages of an RRSP and a TFSA, the TFSAPP.
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What is the CELIAPP?
As of April 1, 2023, Canadian taxpayers over the age of 18 will be able to contribute to this new tax-free savings account for the purchase of a first property (TFSAP). It is for any Canadian aged 18 to 71 who has never owned a home.
A taxpayer may contribute a maximum of $8,000 per year for a lifetime maximum of $40,000. Like the RRSP, the amounts contributed are tax deductible and the amounts invested in the TFSA accumulate tax-free, like the TFSA. When purchasing your property, the funds withdrawn will not be taxable, nor will your investment income, such as the TFSA.
Like the TFSA and the RRSP, this new plan will be offered at your financial institution as of April.
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Before going any further, here is a reminder of the main differences between the TFSA and the RRSP.
TFSA
The Tax-Free Savings Account (TFSA) is, as its name suggests, a savings plan that allows you to save money tax-free. It is an investment vehicle available to anyone over the age of 18 and withdrawals are tax free. The annual contribution limit is set at $6,500 in 2023 and contribution room is cumulative. If you do not reach your contribution limit one year, your unused rights are then transferred to the following year.
RRSP
The registered retirement savings plan is an investment vehicle that allows you to deduct the amounts saved from your taxable income. As its name suggests, this tool is mainly used to invest for retirement. It is available to anyone over the age of 18 and withdrawals are taxable. The only exception to the rule: you can withdraw a maximum of $35,000 from your RRSP tax-free for the purchase of a first home under the Home Buyers’ Plan (HBP). However, you must reimburse the amount used for the HBP in your RRSP within 15 years after your purchase.
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Is it possible to use the RAP and the CELIAPP?
Yes! This is an important amendment made to the bill that has the power to change the situation for first-time buyers.
In other words, you could save up to $35,000 in your RRSP and $40,000 in your TFSA, excluding returns on the latter. If you succeed in maximizing your contributions ($75,000) and your returns have increased this amount to $85,000, for example, you can withdraw the entire value of your plan as early as 2027 to apply it to your down payment.
“Patience can be a real advantage,” said Thomas Gaudet, Chartered Professional Accountant (CPA) and financial analyst at Altitude Financial Advisors.
“Those who accumulate the maximum per year in both their RRSP and their TFSA will come out big winners because they will have taken full advantage of the tax advantages offered by the two products.”
Can I transfer funds from an RRSP to a TFSA?
Yes! This is an excellent option for those who are more in a hurry to buy a house. You can transfer your RRSP to a TFSA with no tax consequences, unlike an outright withdrawal from an RRSP.
“The advantage is that when they withdraw their funds from their CELIAPP, they won’t have to put their money back in an RRSP like when they have an RAP,” adds Thomas Gaudet.
Just be sure to respect the TFSAPP maximum contribution limit of $40,000 and the annual limit of $8,000. Also keep in mind that this withdrawal will not restore the RRSP contribution limit.
What happens to the CELIAPP funds if I end up not using them?
Do not panic, you will not lose your precious money. You can transfer the accumulated amount to an RRSP without the contribution limits being affected.
To find out more about the ins and outs of this new regime, visit the website of theFinancial Markets Authority.
-With Andrea Lubeck
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