My friends at Dominion Lending Services offer this information on how you could start a RRSP today and withdraw that money after 90 days to assist in purcahsing a home within the next 5 months.
Read on:
Should you use your RRSP’s to purchase a new home?
This type of question goes through the minds of many Canadians who are buying a home. The Home Buyer’s Plan allows qualified home buyers to use up to $25,000 in each of their RRSP’s to purchase a home. In order to qualify for the Home Buyers’ Plan you must be considered a First-Time Home Buyer.
An overview of the Home Buyers’ Plan
You and your spouse/partner can each borrow up to $25,000 each from your RRSPs to purchase a home, as long as the funds are accessible. For example, if you have a "locked-in" RRSP, or if your funds are in a Guaranteed Investment Certificate that does not mature for three years, you may not be able to access your funds. Furthermore, RRSP contributions must remain in the RSP for at least 90 days.
If you are withdrawing funds from your RRSP to purchase a home, you must be registered as one of the owners of the property. Once the funds are withdrawn you must complete your purchase of the home by October 1 of year following the withdrawal. The home must also be used as your principal residence within one year after buying or building it.
RSP Home Buyers Plan
If you have decided to purchase a home but don’t have a downpayment or perhaps you do have a downpayment but would like to increase your downpayment, or maybe you need to buy furniture and appliances, but you don’t have the cash, then consider using the RSP Homebuyers Plan (HBP). The HBP allows you to withdraw up to $25,000 from your Registered Retirement Savings Plan (RRSP’s) to buy a home for yourself, without having to pay income tax.
But I don’t have $25,000 in my RSP!
Take out a homebuyers RRSP Loan!
How does it work?
Your financial institution will lend you $25,000, if you have the contribution room, for 90 days and deposit the $25,000 into an RSP. Under the new rules of the HBP, you can borrow your unused RSP contribution limits to obtain an income tax refund for use as a downpayment on a home. After the 90 days, the bank is repaid by your collapsing the RSP (so your cost is basically 3 months interest).
What good is that? I won’t have a loan, an RSP or money for a downpayment?
True, but you will have an Income Tax Receipt for $25,000 to deduct from your taxable income when you file your tax return this year and depending on your marginal tax rate, this should generate an income tax refund anywhere from $5,000 to $8,000 which can help to purchase a home!!
That sounds too good to be true! What’s the catch?
The Government requires you to put this $25,000 back into your RSP but they give you 15 years to do it! If your minimum repayment is not made, then the payment is taxed as income for the year it is due. The repayment of 1/15th of the amount withdrawn must be made by the RRSP contribution deadline of a given year. You must contribute the minimum repayment back to your RRSP each year, but you can also repay the entire amount at any given time. Your repayment period starts the 2nd year following the year the withdrawals were made. However, the repayments are not tax deductible like the original RRSP contributions; and they do not use up the RRSP contribution room.
Deciding whether to use the Home Buyers’ Plan becomes a lifestyle choice. If you are certain that it is the right time to purchase a home, and you have the opportunity to utilize the Home Buyer’s Plan, then it’s perfect.
The good new is, at the end of 15 years, you will have increased your Net Worth and you have a home possibly for less money and at less cost than you would have had by waiting!! This is a great window of opportunity open from now until the RSP deadline for contributions in March!
Further information can be found by visiting the Revenue Canada Website at http://www.cra-arc.gc.ca/menu-e.html
If you have any further questions, please don’t hesitate to contact us !
Rita Nicholson, 519-636-2946
Leanne Schonberger, 519-532-7084
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