Following last week’s column, which focused on the CELIAPP, I received a question from one of our readers, Anna.
“As I want to help my two children have the cash required to acquire a property in the medium term, the CELIAPP is the perfect tool. I will provide them with the money necessary to contribute to the maximum of their TFSA and, at the same time, they will benefit from tax savings. However, the information I have read so far is a bit conflicting as to their eligibility. Here’s the deal: they are co-owners with their four cousins of a small chalet that their grandmother gave them. In some places I read that since it’s not their primary address it doesn’t affect their eligibility, while in other places it’s not specified, and I’m afraid then they are not eligible. Can you help me ? »
This possible confusion regarding TFSAPP eligibility as a “specified individual” is likely due to misinterpretation of principal place of residence, sometimes mistakenly confused with tax designation of principal residence, which is used for the exemption. for capital gain.
The main place of residence according to the CRA
First of all, remember that to open a TFSAPP, you must meet certain conditions in order to be considered a “specified individual”, ie first reside in Canada and be at least 18 years old. In addition, you must not, at any time during the calendar year preceding the opening of the account — or at any time during the four preceding years — have occupied a qualifying dwelling (or what would be a qualifying dwelling if it were in the Canada) as your primary place of residence. Note here that the notion of eligible dwelling also extends to property that would have been held jointly with another person or by the spouse or de facto spouse of the said individual during this same period.
The answer to Anna’s question can be found in the Canada Revenue Agency’s (CRA) definition of principal place of residence. According to the federal interpretation, the “principal place of residence” of an individual is the place where he regularly, normally or usually lives (source: CQFF). It is therefore necessary to be able to provide the facts proving that the chalet is only used occasionally and that the individual normally sleeps at another address.
In the case of our reader’s children, given their probable young age, it is easy to assume that their personal belongings are at a location other than the cottage and that they receive their mail at another address, for example . In the situation where they are older and/or in a couple, these factors would however extend to the immediate family, either the de facto spouse, the spouse or the children, which could block eligibility. Thus, unless Anna’s children live in the cottage, the fact that they own it and declare it temporarily as their principal residence for the purposes of the capital gains exemption would not prevent them from opening a TFSA.
Better sooner than later
You therefore understand that the real criterion to be retained in the case of the children of our reader is that they do not own their principal place of residence. On the other hand, this is information to be validated in the future according to their real project of ownership. Indeed, if a spouse is then involved in the acquisition, the latter could present a completely different situation and consequently “contaminate” the eligibility for the TFSA for tax purposes.
However, as underlined last week, in the worst case, the children will have benefited from a donation from their parents allowing a tax deduction against their income which can even be carried over to the years when the income is higher. Fifteen years after the opening, if the children have never been able to buy an eligible home, they can transfer the balance of the CELIAPP into an RRSP without reducing their contribution room.
Anna could also have her file validated by professionals – accountant or financial planner – who have all the tax and real estate information of the children, to be reassured. It is also always possible to request an opinion by calling the CRA.
Some additional interesting elements concerning the CELIAPP:
It’s better to open it when you’re young than too late. As children get older, they could unite their destiny with a de facto spouse or a spouse who already owns it, it is better to open the account as soon as you are eligible for it, even if the cash is not yet there to contribute.
Watch out for penalties. Penalties are provided for in the event of over-contribution. Unlike the RRSP, the TFSAAPP does not have a $2,000 excess that can be contributed without penalty.
Combine RAP and CELIAPP.For buyers who have a short or medium term project, it is very likely that both mechanisms will be used to constitute the down payment. However, since withdrawals from the TFSA will not have to be repaid after purchase, unlike the RAP, buyers whose project is long term or who do not have sufficient cash to contribute to both accounts should favor the TFSA. on the RRSP.
Financial planner, Sandy Lachapelle is president of the independent firm Lachapelle intelligent finances.