RRSP Info

USE YOUR RRSP AS YOUR TAX DEDUCTIBLE DOWNPAYMENT

Are you one of the many Canadians whose down payment money for your first home is tied up in an RRSP?  Have you wondered if you’ll have to pay income tax on this money if it’s withdrawn for your home purchase?

What is the Homebuyer’s Plan (HBP)?

How does the HBP work?

To qualify as a first time home buyer, the purchaser must not have lived in a home owned by himself or his spouse in the last five years.  If both you and your spouse qualify under HPB, you can each withdraw up to $20,000 from your RRSPs for a total of $40,000.  There are no negative effects from removing funds from the RRSP – in short, individuals are able to withdraw monies from their fund without penalty!  While the Home Buyer’s Plan is positioned for first time home buyers, you can technically use it again as long as five years have passed since your name has been on the title of a house.

Are there any restrictions I should be aware of?

As you are using money from your RRSP which is money that is normally tax exempt until it is drawn on, this money must be paid back to your RRSP within 15 years.  This is commonly done by depositing one fifteenth of the amount withdrawn back to the RRSP over each of the following 15 years.  Failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum redeposit is not made.  Some other requirements are listed here:

• You must be a Canadian resident
• Your RRSP contribution must be in your RRSP for at least 90 days before you make a withdrawal
• You can’t have owned the home 30 days prior to the date of withdrawal
• You must intend to occupy the home as your principal residence
• You must have a written agreement to buy or build a home
• You have to be considered a first-time homebuyer.  You are not considered to be one if you or your spouse owned and occupied a principal residence at any time four years before the year (starting January 1) of withdrawal

What if I don’t have any funds in an RRSP?

Don’t worry about that, with the HBP, you can actually create a down payment!  If you are earning income, or you have earned income over the past years, you are still entitled to contribute to an RRSP as you can contribute retroactively.  Your previous year’s notice of assessment will detail what your eligible contribution limit is.  You can even use a tax refund if it is available prior to the closing date of your home purchase.

Consider this...

If you need help raising down payment money for your home, then you can “create” an eligible down payment using RRSPs and HBP.  Simply max out all your unused RRSP contribution from previous years – if you don’t have the funds, you can even take out a short-term RRSP loan to cover the amount.  After 90 days, simply repay your loan by cashing in your RRSPs and then sit back and wait for your income tax refund to come in the mail which you can use towards the down payment of your new home purchase.

Happy house hunting!