The tax-free savings account for the purchase of a first property (TFSA) will undoubtedly be the vehicle of choice for accessing the real estate market.
Much has been made of its main features, but many details remain to be known.
In an analysis published Monday, the Chair in Taxation and Public Finance (CFFP) at the University of Sherbrooke lists the gray areas.
What we already know
Before exploring these nebulous aspects, let’s recall the major known elements of the CELIAPP.
- A maximum of $8,000 can be paid into it per year and the contribution room cannot be accumulated to be used all at once. Contributions will be capped at $40,000 for the duration of the account. No indexation mechanism is provided.
- Deposits will be tax deductible (like the RRSP), withdrawals will be non-taxable (like the TFSA) if they are used to purchase a first property.
- The money can be invested and the returns will accumulate tax-free.
- The account may remain open for 15 years, after which the sums deposited may be transferred to the RRSP (without reducing the contribution room to this account) or to the RRIF. We will also have the possibility of recovering our money with the tax at stake.
- To be eligible, one must not have owned their place of residence in the previous four years.
What we can’t wait to know
This is the main attraction of the CFFQ’s analysis which, in addition to identifying the missing details, informs us of its hypotheses.
Age. Regarding age, first. We know that we will be eligible from the age of 18, but we have no indication of the age limit. If it’s like the regular TFSA, there wouldn’t be. You could therefore open a CELIAPP at age 75 and enjoy all the advantages listed above. If so, it could give rise to some interesting tax strategies.
Excess contributions. With flat fees ($8,000 per year/$40,000 total), you’ll need to be distracted with something rare to smash through the ceilings. All the same, Ottawa will have to be dissuasive. The CFFQ bets on monthly tax of 1% per month on excess contributions, as for the RRSP and the TFSA.
Family heritage. For married couples, the RRSP is part of the family patrimony, not the TFSA. In this regard, the CELIAPP will no doubt be treated like its big brother. Remember, however, that the latter remains divisible between the spouses at the end of a union celebrated under the matrimonial regime of partnership of acquests.
Unseizability. Will the new real estate TFSA be able to be seized by creditors during a bankruptcy? The RRSP is exempt from seizure, unlike a TFSA, the contents of which are considered cash. It will probably be the same with the real estate account, especially since a house can be seized.
Deductions. You can deduct from your income the amounts contributed to the CELIAPP, such as the RRSP. However, it is not known whether it will be possible to use the deduction in a year subsequent to that of the contribution, as is the case with the RRSP. If Ottawa prevents the use of accrued rights all at once, it would be surprising if it allowed the contributions for previous years to be deducted all at once.
When will it be available?
The implementation does not look easy for financial institutions, on the contrary. The CFFQ recalls that a good amount of time passed between the unveiling of the Registered Disability Savings Plan (RDSP) and its arrival on the market.
The industry will be under federal pressure to comply as soon as possible, but it could still take time.
And that is the main unknown.
This does not prevent you from using the ordinary TFSA in the meantime.