Some of us thought that this tax-free account for the purchase of a first property (CELIAPP), presented during the election campaign, was only window dressing. Well no ! Chrystia Freeland confirms that the government is moving forward with this case!
The version unveiled by the Minister of Finance has evolved from the project announced last fall. Better ? Questionable. In the end, I don’t see how this umpteenth registered account will change the dynamic for first-time buyers. In addition, it could be seen as a form of tax injustice.
The CELIAPP
The main points first:
Contributions to this account are limited to $8,000 per year and are eligible for tax deductions. The higher an individual’s tax rate, the more contributions will pay. Unused rights from one year cannot be carried over to the following year. Total contributions are capped at $40,000.
When the account is emptied in order to acquire a first home, the withdrawals are not taxable. Therefore, the aspiring owner benefits from a tax deduction at the time of deposit, without being taxed upon withdrawal. This is the particularity of the account, which combines the advantages of the RRSP and the TFSA.
To open a CELIAPP, you must not have owned your place of residence during the previous four years. In the preliminary draft, the Liberals had mentioned an age limit, 40 years, to use the accumulated sums. This detail skipped.
After opening a CELIAPP, you have fifteen years to buy a house, otherwise the account must be closed. Its contents will have to be withdrawn with tax or transferred to an RRSP.
Importantly, when using the CELIAPP, you cannot use the HBP. The latter allows you to withdraw from the RRSP up to $35,000 tax-free, but the amount must be repaid over 15 years. The RAP therefore risks losing its appeal. However, it retains an advantage: you can use it more than once in your life, whereas for the CELIAPP, you have only one chance.
It gets complicated
The purpose of this measure is to help households accumulate a down payment, the main challenge for first-time buyers. We could have increased the amounts of the HBP by $5,000, and we would have obtained a similar result.
The advantage of the CELIAPP is felt after the purchase of the house, because you don’t have to reimburse yourself over 15 years.
In my opinion, rather than creating another account (in addition to the TFSA, RRSP, RESP, etc.), it would have been simpler to increase the withdrawals allowed under the HBP from $35,000 to $50,000, and to extend the repayment period from 15 to 20 years. Thus, a couple could have withdrawn $100,000 from their RRSPs to make a down payment.
The complexity also comes from the possibilities of transfers between the TFSA and the RRSP. The contents of a TFSAPP can be transferred to an RRSP, without reducing the contribution room to the latter. Casually, Ottawa offers additional RRSP space of $40,000 for those who would open a TFSA without using it for a property.
The federal government will also allow those who do not have the capacity to save in the CELIAPP to transfer sums from their RRSP to the new account, without tax impact, at the rate of $8,000 per year. In that sense, however, there seems to be a catch. Transfers lead to the loss of RRSP rights, because you will not be able to put back the money that you directed to the TFSA.
Advice for the future: always open and maximize a TFSA before even thinking about an RRSP.
Other details remain to be clarified, indicates the federal.
A questionable tax gift
The CELIAPP is a square tax gift for households that can afford to buy their home.
All of a sudden, these households find themselves with $40,000 of untaxed income in order to buy real estate whose profits, on the day of resale, are sheltered from the tax authorities.
Double down !