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The savings account you are referring to is a first home savings account (FHSA). If you open one and contribute up to $8,000—the maximum annual FHSA contribution limit—this year and again in the new year, you’ll have up to $16,000 of tax deductible contributions that can be withdrawn tax-free for the purchase of an eligible home. In this way, you may be able to turn that same $16,000 into $19,000 to $24,000 depending on your tax bracket due to the tax deductions associated.
According to the Canada Revenue Agency (CRA): “You must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it” to take advantage of the FHSA withdrawal. As a result, a property you intend to live in and partially rent out could qualify for a tax-free withdrawal according to the FHSA withdrawal rules, but only if it is primarily used as your home and secondarily as a rental property.
Can a rental property be considered a primary residence?
Your home can be partially rented out, and you could still qualify for the full principal residence exemption meaning no capital gains tax on the future sale of the property if the following criteria apply.
- Your rental or business use of the property is relatively small in relation to its use as your principal residence.
- You do not make any structural changes to the property to make it more suitable for rental or business purposes.
CCA means depreciation. It helps you reduce the amount you would be taxed in the current year, but in the case of a property you want to qualify as your principal residence, the short term tax savings could cost you in the long run.
So, just be mindful, Priya. If you are renting out the upstairs and living in the basement, and the upstairs unit represents more than half of the square footage, you may run into a situation where some of the future appreciation of the property’s price is taxable.
Rental property income tax
Rental income is always taxable and rental expenses can be deducted against that income. Typical rental expenses include property tax, utilities, insurance, condo fees and maintenance. Mortgage interest and line of credit interest may also be deducted from income. If you are using part of your home for personal use and part for rental purposes, the personal use percentage is not tax deductible. So, you would need to prorate your expenses by square footage or another measure.
The tax rate for net rental income typically ranges from 20% to 50%, depending on your other sources of income, other tax deductions, and province or territory of residence.
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