By Beverly Bird
Dreaming of a new home? Perhaps it’s time to take the big step. You’re tired of renting and you have a good job. Maybe you’re even thinking about starting a family. You have little savings tucked away so you’ve decided to buy a home. Then you realize how much money you’ll have to put down on the mortgage to avoid paying mortgage default insurance every month — that extra money you have to pay if you don’t put at least 20 percent down on your new home. Suddenly, your savings aren’t enough. The government can help you make up the cash shortfall, and it will save you some money in taxes, too. Canada’s Home Buyers’ Plan, affectionately known as HBP, allows you to dip into your retirement savings for the purpose of buying a home or building one.
Specifically, you can take up to $35,000 from your registered retirement savings plan, and up to $70,000 if you’re married (your spouse can use the same plan). In fact, you don’t even have to be married to get that double dip! You can buy a home with anyone and if that person also happens to have an RRSP, you can both tap into your own, up to $35,000 each.
Now let’s look at how all this works tax-wise. If you have an RRSP, you already know that the contributions you make to the plan are tax-deductible. After you contribute, the money you’ve invested grows tax-free. It’s a sweet way to fund your retirement, but you might be at an age where retirement isn’t even peering over the horizon at you yet and you need the money now. That’s OK because, under the terms of the HBP, there’s no tax penalty for taking the money out to buy or build a home.
The HBP gives you 15 years to pay the money back. So if you take $35,000, you have to pay back $2,333.33 a year over 15 years. There’s one small catch. Let’s say in year six, your life doesn’t go exactly as planned. Money is a little tight so you skip the payment to your RRSP this one time. You’ve just earned yourself an additional $2,333.33 in income for that year — if you don’t make the payment, you have to pay income taxes on the amount. But, keep in mind that contributions to your RRSP are tax-deductible. Say you’ve saved $15,000 but you need the full $35,000 for a down payment. You might consider contributing that $15,000 to your RRSP. Presto! You just earned yourself a $15,000 tax deduction. When you’re ready to close on your new home, you can withdraw the money and that tax deduction you took can help you fund the $2,333.33 you have to repay your RRSP in the first year if it means you get a refund.
Of course, there’s another small catch. Isn’t there always? You’ll need a little foresight. You can only withdraw RRSP funds that have been on deposit for at least 89 days. So if you want to take advantage of the tax deduction, you’ll have to plan on making the contribution at least three months in advance of closing on your new property. Additionally, the Canada Revenue Agency isn’t just going to take your word for it that you’re using the money to buy or build a house. You’ll have to provide a signed contract to prove where the money is going. And if you’re thinking about buying a house over the border in the United States, rethink where you’re going to get your down payment. The HBP only applies to properties located in Canada. Other than these small restrictions, you can have your cake and eat it, too. You get tax savings and a new roof over your head. Happy house hunting!
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About the Author
Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling “Comes the Rain” and “With Every Breath.” Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy, and estate law. She covers many legal topics in her articles.