CRA’s got a great deal for you.
…now that’s a sentence you don’t hear every day.
Regardless of your opinions on RRSPs, it’s hard to dispute the merits of Revenue Canada’s Home Buyers Plan (HBP). Available for first-time home buyers, it allows you to borrow up to $25,000 from your RRSP – tax free – to help finance the purchase of a new (or used) home. If you have a spouse or common law partner who also qualifies, you may each withdraw up to this $25,000 maximum. Even in our current, crazy-expensive real estate world, a $50,000 down payment can fetch you a pretty snazzy shack. Plus you can take your sweet time paying that baby back: 15 years, no interest.
I’d like to see Leon’s “Ho Ho Hold the Payments Event” beat that!
Even though you must – at a minimum - spread the payments out evenly over a 15-year period, there is no penalty if you elect to pay it back faster. Ironically, the repayment terms for the Home Buyer’s Plan are likely more flexible than those of the mortgage it was used to back.
Want to wait until after the place is furnished or the renos completed before you start settling up? No problem. The loan repayment period doesn’t actually kick in until the second year after you borrow the funds. Check out the easy-to-understand example of this repayment plan in action on CRA’s website: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/rpymnts/xmpl-eng.html. That’s right. I just typed “easy-to-understand” and “CRA” in the same sentence.
Have a bad year and need to skip a payment? The 1/15th that you do not repay that year will simply be added to your income at tax time. And your HBP balance will be reduced accordingly. Sweet.
There are a few “catches” to qualify but – truthfully - they are not that challenging:
1. You have to be a Canadian resident. In the words of the great Bruce Springsteen, “We take care of our own.”
2. You have to confirm – in writing - that you are using the RRSP money to buy or build a home for yourself or a related person with a disability and that - in either case - the home will be a primary residence. Investment properties and cabins need not apply.
3. You actually have to live in the home by October 1st of the year following the withdrawal or at least be able to prove that you have an ownership agreement in place by then or a payment made to the contractor in excess of your HPB withdrawal. An Advisor (and a competent builder) can help with this rule.
4. You have to meet CRA’s definition of a “first timer.” That’s not to say you have never owned a home before, just that it was more than four years prior to the current year. It’s almost as if the first home purchase never even happened and you get a second chance. Wouldn’t it be nice if we could do that with other things in our past? But I digress…
5. You can’t owe any money to CRA from participating in a previous Home Buyer’s Plan. That’s right…you can use this neat little gadget more than once in a lifetime. I told you it was great.
6. The person who will benefit from the RRSP proceeds (aka: the homeowner) must also be the person who owns the RRSP itself (aka: the annuitant). The exception being if you are using the money to help purchase a home for a disabled relative (a pretty fantastic exception, if you ask me).
7. The money has to sit in the RRSP for only 90 days before it can be withdrawn under the Home Buyer’s Plan. Use that time to start shopping for your dream home or to wait for your tax refund from CRA.
This last point is perhaps my favourite feature of all. One contribution. Multiple benefits. Not only is an RRSP contribution guaranteed to reduce your taxable income in the year you choose to claim it, but it also has the potential to yield you a tax refund. If you are already in a low tax bracket, save the deduction for a time in the future when your income is higher and the potential for tax savings is even greater. Either way, you can use the RRSP contribution itself for a down payment now and save the taxes whenever you choose.
Move over Payless. There’s a better BOGO in town.