2022-0932331E5 First-Time Home Buyer Incentive Tax Implications

Principal Issues: What are the income tax implications in respect of a reimbursement of an Incentive under the First-Time Home Buyer Incentive program in two situations. Specifically, CMHC is asking: 1. For reimbursements related to an Incentive repayment in respect of the sale of a property, will the reimbursement be treated as an adjustment to the proceeds of disposition (“POD”) of the property? 2. What would be the income tax consequences for reimbursements related to an Incentive repayment for refinancing or other reasons (unrelated to the sale of a property)?

Position: 1. No, the reimbursement does not adjust the POD previously received by the homebuyer in a prior year in respect of the sale of the property. The reimbursement received by the homebuyer will not be taxable under the Income Tax Act (the "Act"). 2. The reimbursement received by the homebuyer will not be taxable under the Act.

Reasons: In both scenarios, the Reimbursement is not a source of income under the Act. It will therefore not be included in the homebuyer's income and is not taxable under the Act.

Author: Foggia, Christina
Section: 3, 12(1)(x), 53(1), 53(2)(k), 54, 40(2)(b), definition of "government assistance" in 127(9)

XXXXXXXXXX                                                             2022 - 093233
                                                                                     Christina Foggia, CPA, CA

November 10, 2022

Dear XXXXXXXXXX:

Re: First-Time Home Buyer Incentive Program

This is in reply to your letter of April 4, 2022, wherein you requested our views concerning the income tax implications of a reimbursement received by a homebuyer under the First-Time Home Buyer Incentive (“FTHBI”) program.

The FTHBI program is aimed at providing financial assistance to first-time homebuyers (also referred to as a “homebuyer” or a “borrower”) with the purchase of a property that is to be occupied as their primary residence. A qualified homebuyer is provided with a portion of the purchase price of their home which enables them to reduce their monthly mortgage payment without increasing the amount that they must save for a down payment (the amount received by a homebuyer under the program is referred to as the “Incentive”). Under the program, a homebuyer must be considered a first-time homebuyer and must meet other eligibility criteria to qualify for the Incentive.

Based on the information that you provided, we understand that the FTHBI is a shared equity mortgage with the Government of Canada (the “Government”) that entitles the Government to share in the appreciation or depreciation of the market value (“MV”) of the home at the time the Incentive is repaid. Under the program, a qualified first-time homebuyer may be eligible for an Incentive that is either 5 or 10 percent of the purchase price of their home at the time of purchase. The Incentive is non-interest bearing and does not require ongoing repayments to be made by the borrower. A borrower must repay the Incentive in full after the earlier of 25 years from the purchase date of the property or when the property is sold based on the MV of the property at the time of repayment. As well, we understand that certain other circumstances may trigger a repayment of the Incentive and that a voluntary repayment is also allowed. A repayment in respect of a homebuyer’s shared equity mortgage will consist of the Incentive plus the shared equity amount.

Effective June 1, 2022, the FTHBI program terms were amended such that a homebuyer’s repayment amount, and more specifically, the Government’s shared equity gain or loss amount is capped at 8% per annum (not compounded) on the Incentive amount from the date of advance to the time of repayment. You explained that the cap on the shared equity gain amount applies with retroactive effect to the commencement of the program to all homebuyers regardless of when they signed a shared equity mortgage (“SEM”) agreement, while the cap on the shared equity loss amount only applies to SEM agreements entered into on or after June 1, 2022. Accordingly, reimbursements are required to be made to those borrowers who made a repayment of their shared equity mortgage in a prior year that included a shared equity gain amount in excess of the 8% annual cap.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Generally, an amount is taxable under the Act if it constitutes income from a source or if a specific provision of the Act applies to the type of payment. If the income does not fall within one of these sources of income, it is generally not taxable.

Ultimately, whether an amount received by a taxpayer needs to be included in income depends on the nature of the payment and the facts of the situation. Based on the information provided concerning reimbursements under the FTHBI program, we understand that amounts received by borrowers represent a reimbursement of a portion of the shared equity amount that was paid to the Government in a prior year (i.e., upon repayment of the borrower’s shared equity mortgage). Essentially, the amount received is a reimbursement of a borrowing cost incurred with respect to the purchase of the homebuyer’s personal residence. Thus, it is our view that the amount will not be included in the borrower’s income and is therefore not taxable under the Act.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley CPA, CA
Manager
Business and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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