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How to pay back the Home Buyers’ Plan (HBP)

Most of you know that when I bought my townhouse almost 4 years ago, I utilized the First Time Home Buyer’s Plan (HBP) to help with my down payment. For those unfamiliar with the HBP, it allows you to use up to $25,000 of your RRSPs towards the purchase of your first home – tax free!

This was a strategy I always knew I was going to use, so anything that was earmarked for my down payment, I threw into my RRSPs. Then, I would reinvest my tax refund back into my RRSPs for an even bigger gain. I also saved about $20,000 outside of my RRSPs, since the maximum you can take out is $25,000.

Related: How I saved for my down payment

You have up to 15 years to pay back the amount you’ve withdrawn, so for each year of your repayment period, you have to repay 1/15 of the total amount. So for example, I took out $25,000. My repayment every year is $1,666.67 ($25,000 / 15). Each year, you’ll get a Home Buyers’ Plan Statement of Account with your notice of assessment, which will include all the information you need – total HBP withdrawals, the amount you’ve repaid to date, your balance for the HBP, and the amount you have contributed to your RRSPs and designate as a repayment for the following years.

How to pay the HBP back

I use TurboTax every year to do my taxes, and it’s really straight-forward in how to pay it back.

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Just enter in all of your information, and TurboTax will do the rest for you. Honestly, it really took all the stress away from paying back the HBP, because at first, it seemed really confusing. Most online tax software is set up to handle HBP repayments in a user-friendly way. :)

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When you have to start repaying

Your first repayment starts the second year following the year you made the withdrawal.

You’re allowed to start making repayments earlier, but your years of repayment (15) will remain the same. Any repayments you make before your first repayment is required will reduce the amount you have to pay for the first year. That is, unless your early repayments are more than the minimum required payments for the first year, then the difference will reduce your HBP balance (and the remaining repayment amounts) over the 15 year repayment period.

Paying more or less than the minimum payment

If you want to pay more than the 1/15 required in any given year, you’ll still have to make your payments the next year, it’s just that the HBP in later years will be reduced.

However, if you want to pay LESS than the minimum required payment, the government will treat the amount you withdrew from your RRSP as income for that year. You’ll be taxed on it, and it won’t be pretty.

Important! You can’t withdraw any money from your RRSP that was contributed within the last 90 days. Consider the timing if you plan on utilizing the HBP for your first home.

What I love about the Home Buyers’ Plan is that you can use it for whatever you want. I used the entire amount for the down payment on my home, but you could use it for renovations, closing costs, or buying essentials for your home. It’s flexible, and that’s what makes it a good tool for first time home buyers.

Did you use, or are you considering using, the Home Buyers’ Plan for your first home?

Note: this post is sponsored by TurboTax Canada, but was written and edited by me.

Tax advice for homeowners

Note: this post is brought to you by my good friends over at H&R Block!

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Most people aspire to own their own home, but the financial burden holds many back. Luckily, there are revenue opportunities and tax breaks that take some of the sting out of those mortgage payments.

Buying your first home

The First Time Homebuyers Credit was created to help more Canadians to purchase homes. The credit is not based on the amount you actually spent. It’s a flat $5,000 amount which provides $750 in tax savings. And you can split the credit with your spouse or have one partner claim the entire amount.

If you have not owned a home in the previous four years, you qualify. The same is true of your married or common-law partner. And you also qualify if your spouse or common-law partner owns a home but you have not lived in it while you were in that relationship. This means one partner may qualify, even if the other does not.

You need to have documentation proving the home purchase in case the Canada Revenue Agency requests it, but it is not submitted with your return.

The Home Buyers Plan can also help. First-time purchasers can borrow up to $25,000 from their RRSPs to help with the down payment. You are allowed to pay the money back over 15 years. Failure to make repayments means the withdrawal is considered income and you will be taxed on the amount.

Selling your home

When you sell your principal residence, all the capital gain is tax exempt. If you sell a vacation property which you cannot designate as a principal residence, you will owe capital gains tax.

A principal residence is one you occupied at some time during the year. It does not have to be the home in which you spent the most time, so you may designate a cottage, for example. Only one property can be claimed as your principal residence, and only one can be selected per family unit.

If your land is larger than 0.5 hectares, the excess portion will usually not be covered by the exemption. In certain circumstances, the government may make an exception. There are also provisions for changing a rental property to a principal residence, or vice versa. See the CRA’s Principal Residence page for any forms you need.

Renting your home

Becoming a landlord—either by investing in a rental property or renting an apartment in your house—can provide welcome revenue, but it does have to be reported to the CRA.

For a rental property, you may claim expenses like mortgage interest, property taxes, insurance, utilities, condo fees, and repairs and maintenance. Expenses that cannot be claimed include repairs or renovations performed prior to renting a space. These costs are capital expenditures and will reduce your capital gain when you sell the property. The same is true of capital improvements you make after renting the property. There are also rules around claiming rental-related travel expenses. Details are here.

Those who rent units in their principal residence must pay capital gains on the portion being rented when the property is sold. A basement apartment that takes up 20 per cent of the square footage of a home results in a capital gain on 20 per cent of the sale price. However, if the space you are renting is not a self-contained dwelling, the capital gain will be covered by your principal residence exemption.

You can also claim some expenses when renting a room in your home. First, calculate the area used exclusively by the lodger and then claim the corresponding percentage of your related expenses. Second, you may be able to claim some expenses for shared spaces, based on factors including availability or the number of persons sharing the room. Three family members plus one lodger could result in a claim of 25 per cent for the use of shared areas.

If you need help preparing your tax return, consider an online program like H&R Block’s Tax Software (www.hrblock.ca), which will identify your tax situation and calculate deductions or credits as you go. Or if you would rather leave it to an expert, drop by an H&R Block office. A tax professional will even review your previous returns for free.

Tax tips for freelancers

As someone who has had a side business as a freelance writer/blogger/graphic designer for almost 10 years, I’ve realized there are plenty of advantages to working for yourself. You get to set your own hours, work from anywhere, take on as much or as little as you want, and the decision is up to you to decide who to work with. Freelancing has supplemented my income, and allowed me to travel the world! But honestly, tax season is the time of year that I always dread. There are so many receipts and paperwork to get through, so if you’re anything like me, you’ll try to push the filing deadline to the back of your mind.

But I’ve learned the hard way that waiting until the last possible moment to start on your tax paperwork will leave you stressed out. If you haven’t already done so, start organizing your receipts and invoices now – the last thing you want to do is stress yourself out and make mistakes to try and hit your filing deadline (which is April 30th).

Here are some tips to help you get all of the deductions that you qualify for:

Keep track of all receipts and invoices.

No matter how small or insignificant you think it is, make sure you’re saving every receipt and invoice. If you purchase something online – print the receipt and file it away. If you bill out for 15 minutes of work – make sure you keep a record of it, even if the invoice is only for $10.

Knowing exactly what receipts to keep can be important. For example, you might not think to keep receipts or records for furniture, postage, travel expenses for conferences, or interest on business related loans and bank charges – but portions of those expenses can all be deducted at the end of the year. Make sure to check out the Canada Revenue Agency website for a full list of what can be deducted.

Taking the effort to save all receipts and invoices will save you from headaches when you file your taxes, but it will also ensure that you have everything you need should you ever get audited.

Save for your taxes

It is extremely important that you set aside a portion of all the income you receive. It will save you from scrambling to come up with the money to pay your taxes when they come due. Based on the province that you live in, and the amount of deductions you will end up making, it’s hard to estimate how much of your income you should be saving for your taxes. A safe amount to put aside would be 30% of your gross income. You might end up paying a little more, or a little less, but at least you will have a starting point that you can adjust on an annual basis.

If your income exceeds $30,000 over the past four consecutive calendar quarters, you will need to register for a GST/HST account and start saving for that as well. GST/HST amounts vary by province, so make sure you know how much you should be saving.

Set up an RRSP

You won’t have a company pension plan to rely on, so you will have to save for retirement on your own. Contributing to an RRSP will lower your personal income amount, and you will end up paying less income tax because of it.

Here are 3 little things you can do right now in order to ensure next year’s tax season is easier on you:

  1. File your paperwork. If you have a shoebox full of receipts, take an hour each month to file and input the receipts into a spreadsheet. Staying on top of your receipts and invoices will keep your finances organized throughout the year, and will be easier to handle come tax time.
  2. Keep separate business bank accounts. It is significantly easier to figure out how much you’re actually spending on business-related expense if you hold a credit card and bank accounts specifically set up for your business expenses.
  3. Automatic RRSP contributions. RRSPs will lower your personal income amount, so have your bank automatically deduct a set amount of money out of your chequing account each month. You will end up paying less tax each year as a result.

Using an online tax program like UFile will make your life much easier. The software automates calculations, including child care expenses, tuition transfers, pension amounts (and pension splitting), as well as medical expenses and donations. This will ensure that your tax return is filed correctly and in your best interest – so you can spend more time working on projects or seeking out new clients. :)

What tax tips do you have for freelancers?

Note: this post has been sponsored by UFile, but all of the words are my own. 

About UFile Tax Software
UFile is the consumer tax program from Thomson Reuters, located in Montreal, Quebec.  It is a leading provider of tax preparation products and has served the professional tax community with personal and corporate tax products for more than 20 years. UFile products include UFile ONLINE (online tax software), UFile for Windows (UFile 4 and 12) and UFile PRO.  For more information, please visit www.ufile.ca, or you can follow them on Twitter @ufile.

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