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RRSP or down payment for house dilemma

2K views 19 replies 10 participants last post by  Jamesdean 
#1 ·
Hello Everyone,

I am in a unique situation where I have room in my RRSP but I have also want to provide down-payment for my house. Unfortunately, I can not choose both, now I am in the dilemma of should I save/defer tax by adding in my RRSP or pay tax and keep money for my down-payment in February? Could someone share their opinion. Also, I wan to know can I use RRSP account for my house down-payment.

Cheers,
DD.
 
#2 ·
If this is your first home, you can use the First Home Buyers Plan. Put the money in there for the tax deferral and remove it (after the prescribed time) for you downpayment. You have to pay it back over 15 years, and there is a limit on how much you can put int.
 
#3 · (Edited)


There is a maximum amount on this.

Not certain if two people, co-owners, can each use this program to effectively double the amount.

We considered this progam a few years ago. We were not first time home owners BUT we had no owned a home for several years and thus qualified for the program.

I know of someone who used it to enhance their down payment in order to just nudge them over the CMHC insurance level-a significant saving/premium avoidance.
 
#6 ·
The HBP is somewhat useful if used properly. You (and a partner) can withdraw up to $35,000 each for a first time purchase. Not sure what your RRSP consists of but you will be foregoing growth in your portfolio the longer you take to repay yourself.

Some bankers have gotten creative where they will sell you an RRSP loan, contribute the amount to a registered plan triggering a tax deduction and then withdraw the contribution under HBP to pay back the loan. You end up with a large tax return (outcome will vary) and you having 15 years to pay back your RRSP account. I don't recommend this scheme.

Where the HBP gets tricky is most people either forget or grow tired of their repayment. Avoiding this triggers tax penalties and lingers a long time. This further penalizes your savings growth.

The best advice I can give you is to balance both RRSP contributions and money set aside in a TFSA for a DP. If you have a lump sum and wondering where to place it - well that's easy. If you need a home, buy it. If not, save it.
 
#7 ·
Re: HBP withdrawal used to repay RRSP contribution loan scheme is not recommended.

I wouldn't recommend or do it either. If CRA follows the money as part of an audit, I suspect they will point out the money wasn't used to buy/build a qualifying home, making it ineligible for a HBP withdrawal. It would likely then be a regular RRSP withdrawal with CRA tacking on potentially years and years worth of interest and penalties for the taxes that were not paid.


Re: Where the HBP gets tricky is most people either forget or grow tired of their repayment. Avoiding this triggers tax penalties and lingers a long time.

A good reminder but it's really no different than remembering annual bills or carried over tax numbers. IOW, being prepared is what is needed.

The tax penalty is not as cut and dried as is being described. One can choose to report the minimum HBP repayment amount as income on line 12900 instead of making the HBP repayment.

If the amount was $35K then dividing by 15 years gives a minimum HBP repayment of about $2334. At a 30% MITR, the choice is repay $2334 or pay $700 in income tax.

'Course paying the tax means one has effectively made an RRSP withdrawal without the intermediate step of paying the withholding tax and where the funds have previously been spent on the house.


I'd have to run the numbers to check but it wouldn't surprise me that the indexing on the tax brackets plus slow income growth might have made it better overall for the early years of my HBP repayments to have been reported as income instead of repaying it.


Cheers
 
#18 ·
I wouldn't recommend or do it either. If CRA follows the money as part of an audit, I suspect they will point out the money wasn't used to buy/build a qualifying home, making it ineligible for a HBP withdrawal. It would likely then be a regular RRSP withdrawal with CRA tacking on potentially years and years worth of interest and penalties for the taxes that were not paid.
There's no actual requirement that you use the money for your downpayment, the requirement simply is that you are buying a home. So you could use it to buy a car if you want, and as long as you also buy a house in the required time frame you are good.
 
#16 ·
The biggest reason not to use the Home Buyers Plan is that you lose the tax free growth you get investing the money in your RRSP. Depending on your current and projected income, you might also want to save your RRSP room for when you are in a higher income bracket.

But it doesn't seem like you are thinking about that so I personally think it makes sense to consider putting money into the RRSP for the purpose of the HBP. The HBP is basically an interest free loan. Do pay attention to the rules though, particularly the 90 day withdrawal rule.
 
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