Canadian Money Forum banner
1 - 3 of 3 Posts

·
Registered
Joined
·
9 Posts
Discussion Starter · #1 ·
Hello all,

I'll preface this post by saying that I am not totally familiar with the income tax process as I have never filed my own taxes, or been all that involved in my personal finances in general for that matter. This is something that I am looking forward to doing in the future as I have found this whole process of planning on becoming a first time home owner interesting and insightful. The extent of my knowledge is based on the past week of research so please bear with me haha. Unfortunately for this question I cannot seem to find an answer so I am posting here.


Here is my situation:


My timeline for purchasing my first home is over 90 days to ~6mo from now (potentially longer if I don't find something suitable) and want to take advantage of the first time HBP as much as I can. I am trying to figure out if I should make "last minute" contributions to an RRSP or not...

I am 24 and over the years I have always made sure to max out my TFSA contributions but unfortunately, due to some poor advice (and lack of research/understanding on my part as well) I have not contributed ANYTHING to my RRSPs.

At this time I have more than enough savings and other investments to put $25k into my RRSP (immediately) to take advantage of the HBP.


1. Would dumping $25k into an RRSP, right now, all at once be worth it if I end up buying a house within the next 3-6mo?

2. If I wanted to withdraw all $25k under the HBP would I have to declare that $25k in RRSP contributions come tax time? OR am I able to carry forward any unused contributions that don't benefit me based on this years income but still withdraw that $25k for the down payment?

3. If I do have to declare all $25k in respect to question #2. above, would it be smarter for me to only contribute an amount I need to bring me into the lower tax bracket come tax time? (assuming I want to use what I don't contribute for the down payment)

4. Note: I'm not totally sure if I correctly understand how I would be affected at tax time. I get that any RRSP contributions are deducted off your annual income for that year. But is it worth it to contribute more into an RRSP if you are already in the lowest tax bracket or save those contributions for future years when they could benefit you more?

I am not a high earner and my annual salary is say $55k/yr for this example.

I sincerely apologize for all the questions and thank you to anyone who helps in advance.

Much appreciated,
Dev
 

·
Registered
Joined
·
11,215 Posts
... 1. Would dumping $25k into an RRSP, right now, all at once be worth it if I end up buying a house within the next 3-6mo?
Not enough info to figure this out.

At a high level, the trade off is that one gets to use the more than the $25K (the full $25K plus any tax refund) but one has to pay back the $25K on a schedule or be taxed on the minimum repayment amount. It works out to be a second loan where the growth of one's retirement $$ are being reduced by the withdrawal then slow payback.

Where mortgage rates are high while the purchase price of the house is low and expected growth in the RRSP is small - it likely works in your favour. Change any of these and it may not be worth all that much compared to skipping it to use the after-tax $25K or making a RRSP contribution to have a tax refund to use.


... 2. If I wanted to withdraw all $25k under the HBP would I have to declare that $25k in RRSP contributions come tax time? OR am I able to carry forward any unused contributions that don't benefit me based on this years income but still withdraw that $25k for the down payment?
I think you mean "RRSP deduction". Contributions have be reported on the tax return for the year they are made, whether one chooses to deduct those contributions from that year's income or future year's income.

As long as one has $25K to withdraw in the RRSP, the HBP withdrawal can happen. The repayment schedule will be tied back to when the HBP withdrawal was made.
https://www.canada.ca/en/revenue-ag...rsps-related-plans/what-home-buyers-plan.html
https://globalnews.ca/news/3265272/rrsp-home-buyers-plan-vs-tfsa/


...3. If I do have to declare all $25k in respect to question #2. above, would it be smarter for me to only contribute an amount I need to bring me into the lower tax bracket come tax time?
This lines up with my suspicion you are interested in the RRSP deduction instead of the contributions.

Deductions from income are what will lower one's tax level and possibly generate a refund. The question for the deduction is what is it costing you by skipping a refund? Can you carry the mortgage etc. given that the potential refund has been pushed to a future tax year, where one's income is unknown? It may be higher generating a bigger refund or it may be lower.

In the meantime, no RRSP deduction from income means one has added another mortgage without any benefit. The $25K seems to be in after-tax dollars so whether one uses the RRSP/HBP or not, the full $25K is available, correct?


... 4. Note: I'm not totally sure if I correctly understand how I would be affected at tax time. I get that any RRSP contributions are deducted off your annual income for that year ...
Actually, you need to do more learning/reading ... RRSP contributions have to be recorded on the tax return for the year the contribution was made on schedule 7. Part of the form records the contributions while another part designates how much is to be used in that tax year and how much is carried forward to be used in another tax year.
https://www.canada.ca/en/revenue-ag...neral-income-tax-benefit-package/5000-s7.html

If you for example, record a $25k RRSP contribution in 2017 where $5K is deducted from 2017 income, the remaining $20K will be carried forward. At some future year, one would then choose to deduct some or all of the carried forward RRSP contribution from the future year's income. You will have to keep notes to remember that it is available to deduct in a future tax year (tax software will help with this). The NOA will have a line item for the RRSP contributions made that are available for deduction but it is easy to forget or be confused by CRA's wording.


... But is it worth it to contribute more into an RRSP if you are already in the lowest tax bracket or save those contributions for future years when they could benefit you more?
Depends on one's estimates. How much one's income is expected to go up matters as well as what one expects the benefit of having use of the tax refund is.

If in doubt where TFSA contribution room is available, making a TFSA contribution is a safer bet. Any growth is Canadian tax free where it can be withdrawn in the future to make the RRSP contribution at a higher income/tax level.

The HBP changes the factors a bit as there is the $ a refund would allow to be used to reduce the mortgage.


Cheers
 
1 - 3 of 3 Posts
This is an older thread, you may not receive a response, and could be reviving an old thread. Please consider creating a new thread.
Top