The federal budget introduced almost $23 billion over six years in spending initiatives, including the first-time homebuyer incentive. But a lack of detail on the incentive, including its tax implications, leaves questions about its effectiveness to help young homebuyers.
With the incentive, eligible first-time buyers can access what are called shared equity mortgages, which are essentially loans of 5% or 10% (depending on whether the purchase is for an existing or new home, respectively), administered by the Canadian Mortgage and Housing Corporation (CMHC). The government said the loans would have to be repaid, likely at resale.
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In commentary, Sherry Cooper, chief economist at Dominion Lending Centres, said that while the loans are interest free, CMHC could potentially share in any capital gain or loss — receiving 5% or 10% of the sale price, not the purchase price.
Similarly, Moodys Gartner Tax Law highlighted on its website that it’s unclear how loan repayment would affect the calculation of capital gains on disposition. Also, the firm said questions remain about whether shared equity mortgage amounts are inducements under paragraph 12(1)(x) of the Income Tax Act, resulting in unclarity about whether there’s an implied notional interest benefit that should be taxable.
“Hopefully, Finance will consider these tax issues when they roll out the new program,” the firm said.
Details on the first-time homebuyer incentive are expected later this year, with the program in place by September 2019.
Incentive enough for high home prices?
Regional differences are also a factor in the incentive’s effectiveness, with Cooper describing the incentive as “meagre for young people living in our two most expensive regions.”
That’s because, to receive the incentive, eligible first-time buyers must have household incomes under $120,000, and the insured mortgage and incentive amount must not exceed four times annual income. As as result, a buyer’s maximum home price is limited at less than $500,000 with a 5% downpayment. That price likely remains a barrier for many young homebuyers in hot markets.
Last month, the national average sale price of a home was $468,350 — a figure “heavily skewed” by sales in the Vancouver and Toronto areas, says a report from the Canadian Real Estate Association (CREA). Excluding those two markets from calculations cuts close to $100,000 from the national average price, CREA says.
One positive aspect for clients is that the incentive “substantially” lowers the bar for the mortgage stress test implemented last year that ensures clients can keep up their mortgage payments if interest rates rise, Cooper said.
Along with the new incentive, the Canadian Home Builders’ Association would like to see adjustments to the stress test. In a release, it estimates that 147,000 potential homebuyers have been shut out of the market because of the test.
In the budget, the government says it will continue to monitor the effects of the stress test and may adjust them if economic conditions warrant.