From a tax perspective, 2023 was the year of introduction of the tax-free savings account for the purchase of a first property (CELIAPP). If the new vehicle is aimed at homeownership, its scope is broader and is not devoid of interest for tax optimization, even for a person on the cusp of retirement.
First, a little review. Due to be officially launched in April 2023, CELIAPP got off to a difficult start, causing a major IT headache for the institutions having to offer it. Thus, many of them were not ready before the summer or fall, and some preferred to wait until 2024, explains Alexandre Demets, financial security advisor at Sun Life.
That said, the new account still has to demonstrate its relevance and defend its primary vocation. Perhaps an improved home ownership regime could simply have done the job, says the advisor, who mentions the existence of blind spots.
In terms of optimization, we can think of a person who does not want to become an owner. This can use CELIAPP as an investment vehicle. The returns accumulate tax-free, and the account will simply have to be closed after 15 years if no property has been purchased. The contributor can then transfer these amounts, without penalty, to a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). And for individuals who no longer have RRSP space, the CELIAPP used in this way provides the equivalent of an excess contribution sheltered from tax until the time of its withdrawal.
Here is another possibility. An eligible individual entering retirement could open a CELIAPP, say at age 60 or 65, contribute $8,000 per year for five years and transfer everything to their RRSP before age 71. The value of the RRSP would be increased and net income would have decreased in the meantime, which, ultimately, could have a favorable impact on certain programs (the old age security pension, the guaranteed income supplement and tax credits, among others).
Alexandre Demets also gives the example of parents who have contributed to the registered education savings plan (RESP), but are able to pay for their children’s studies. They may want to transfer the amounts accumulated tax-sheltered in the RESP to the CELIAPP when their child turns 18, then redirect everything into an RRSP 15 years later.
Moreover, “one can wonder if the CELIAPP is really an optimal vehicle for a young person who, moreover, pays little or no tax”. “Of course, he can postpone the deduction, but does he want to wait four, five or six years? And if an opportunity or event arises requiring a contribution of money, withdrawing CELIAPP funds for purposes other than the purchase of a first property is fully taxable, whereas a free savings account tax system (TFSA) has what I call “western doors”, allowing you to enter and exit without being taxed. »
And the financial security advisor asks himself these questions: “Is all this part of the genesis of the account? Will CELIAPP holders discover over the years that they did not make the right choice of financial vehicle? » Time will tell us.
A quick reminder of the main points of CELIAPP
Until we can answer these questions, let’s get back to the main account settings.
A Canadian resident aged 18 to 71 can contribute up to $8,000 per year to this fund, for a lifetime ceiling of $40,000. Like the RRSP, the contribution is tax deductible, and like the TFSA, the withdrawals made from it (here, for the purchase of a first property), including investment income , are non-taxable. The unused portion of the annual contribution limit can be carried over to the following year, up to $8,000. A big difference with the TFSA therefore concerns the unused contribution room, which accumulates and can be carried forward to subsequent years in this fund, but only for one year in the case of the CELIAPP.
Regarding the term “first property”, Ottawa specifies that the taxpayer must not be the owner or co-owner of a principal residence in which he or she lived at any given time during the calendar year or during the four years previous ones.
As previously stated, any savings that are not used to purchase an eligible home can be transferred to an RRSP or RRIF without tax consequences at the time of the transfer, regardless of the RRSP contribution room available. Such a transfer does not reduce the individual’s RRSP contribution limit and is not limited by it. Obviously, it would not restore the lifetime contribution limit to a CELIAPP.
Conversely, the transfer of funds is permitted from an RRSP to the CELIAPP, in a tax-free manner, subject to the annual and lifetime ceilings for contributions to a CELIAPP. Of course, this transfer is not deductible as a contribution to the account and does not restore the RRSP contribution limit. This transfer will have no tax impact. Even if this transfer of money from the RRSP to the CELIAPP will not allow new deductions, the sums used for the purchase of a first eligible property will not have to be repaid (unlike the RAP with the RRSP).
Other little beauties of CELIAPP noted in the reference document of the Ministry of Finance:
— as with the RRSP contribution, an individual can defer his deduction request to subsequent years, particularly during a year where his tax rate is at the maximum;
— unlike the RAP, the CELIAPP does not contain a rule of holding a minimum of 90 days within the plan so that the contribution is deductible.
And there is a CELIAPP-RAP complementarity that should not be disdained.