Using RRSPs for Down Payments
By on Apr 07, 2008
When a housing market is strong and interest rates are low, it's only natural that many renters would consider buying. After all, in this instance often what you are paying in rent is approximately the same or not much less than what you could be contributing to a mortgage. Coming up with a worthy down payment, however, could be a problem.
In order to maximize your down payment, you might want to consider using your Registered Retired Savings Plan (RRSP). If a first-time homebuyer, the Home Buyer?s Plan (HBP) allows you to use funds previously invested in RRSPs to contribute to your down payment. Because RRSPs are protected from being taxed, most people use them annually to reduce the amount of income tax paid. If you withdraw that money then it becomes taxable again, the HBP is an exception to that rule.
As a first-time homebuyer you can deduct up to $20,000 in funds from your RRSP on the condition that money goes towards purchasing a home ($40,000 per couple). Not only that, but you won't have to pay tax on the funds provided you pay the amount back over 15 years. Each year after the initial deduction, you are obligated to pay back 1/15 of the total amount until you've contributed it all back to your RRSP again. You can pay more than your minimum amount, but not less, otherwise the missed contribution becomes taxable. You have until the start of the second calendar year following the purchase of your home to begin making payments. But after that, you must budget your RRSP contribution in order to make the most of the HBP.
If you decide to pay more than your minimum, your balance will be adjusted accordingly. In any year of repayment, if you pay back more than you are required, your new repayment amount is recalculated over the remaining years left on the 15-year repayment schedule. That means if you use $15,000 in RRSPs to buy a home, you are required to repay $1,000 of it each year for 15 years. However, supposing you decide to repay $5,000 your first year, your amount is recalculated and your new repayment becomes $714 for the next 14 years.
Although the HBP is fairly straight forward, it's important to determine what an actual first-time homebuyer is. You are not considered a first-time home buyer if you or your spouse or common law partner owned a home that you occupied as your principal place of residence during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal. However, if you are a disabled person, or you are buying or building a home for a related disabled individual or helping such a person buy or build a home, you do not have to meet this condition.
Another condition worth noting is that you must buy or build the home before October 1 of the year after the year of the withdrawal. For example, if you withdrew funds from an RRSP in March 2004, you must buy or build the home before October 1, 2005.
For more information about the Home Buyer's Plan call your local Tax Services Office or go to www.ccra-adrc.gc.ca and look for the guide RC4135. With this plan, the move from renting or living at home to buying is more than just a possibility.
