Our previous newsletter detailed the CMHC First-Time Home Buyers Incentive Program. Continuing with the trend of purchasing a home as a prospective buyer, we have detailed another underused resource that is often overlooked, the RRSP Home Buyers’ Plan. Many individuals feel as though the RRSP Homebuyers’ Plan doesn’t apply to them because they may have other forms of savings, or don’t have anything held within their RRSP’s. Unfortunately, many of those who are discounting the application of the RRSP Homebuyers’ Plan stand to gain the most from using the program.
If you, or someone you know is thinking of purchasing their first home, feel free to pass this information on. Any member of our team will be happy to create a plan of action towards home ownership that accounts for all available resources.
What is the RRSP Home Buyers’ Plan?
One option to assist with the down payment on a home is the RRSP Home Buyers’ Plan (HBP). If you meet all of the eligibility conditions, you can withdraw funds from your RRSP without immediate tax implications to purchase or build a home. After a two-year period, the amount withdrawn must then be “paid back” over the next 15 years through one of two ways. Traditional repayment requires you to put 1/15th of the withdrawn amount each year back into your RRSP accounts. If you do not make a repayment into your RRSP for a given year, you must add repayment amount into your income for that year and pay the associated tax.
The typical strategy with RRSPs is to contribute during your higher earning years to defer taxation into the future years when your income is usually significantly lower. Most first-time home buyers are in the early stages of their career and therefore may not have funds saved within their RRSP. Even if a home buyer has not been saving for their home purchase within their RRSP, they still have the option to take advantage of the RRSP HBP so long as funds have been within the RRSP for at least 90 days. This allows a potential home buyer contribute savings into their RRSP when they know they will be purchasing a home, temporarily hold their down payment within their RRSP account, receive the RRSP contribution and associated tax refund/reduction, and use the RRSP HBP to cover all or a portion of their down payment.
Recent Changes
The 2019 Federal budget increased the HBP withdrawal limit from $25,000 to $35,000 to provide qualifying first-time home buyers with greater access to their RRSP savings to purchase or build a home. This is available for withdrawals made after March 19, 2019.
The other part of their recent changes to the HBP is to extend access to individuals who experience a breakdown of a marriage or common-law partnership. Those individuals will now be permitted to participate in the HBP, even if they do not meet the first-time home buyer requirement. This is available for withdrawals made after 2019.
Strategies
For many clients who are incorporated, this allows them to defer the tax burden on a portion of their down payment. Funds can be withdrawn from a corporation, contributed into an RRSP, held for 90 days, then withdrawn as part of the Home Buyers’ Plan without any immediate tax implications. Compared to an alternative situation where the entirety of a down payment would be added to personal income, this frees up additional funds that would otherwise be allocated towards tax.
There is also an opportunity for some tax savings through use of the RRSP Home Buyers’ Plan when purchasing a home as a couple. Many professionals with corporations find themselves unable to distribute funds to their spouse under new Tax on Split Income (TOSI) restrictions announced in the 2018 Federal Budget. When buying a home, a large down payment would require withdrawals from a corporation to be allocated to the one spouse, subsequently incurring significantly higher tax rates than if the withdrawals could be split between the two partners.
The RRSP HBP does allow for withdrawals from a spousal RRSP. Assuming the professional has enough RRSP contribution room, they would be able to withdraw funds from the corporation in their own name and contribute $35,000 into a spousal RRSP, as well as their own. After 90 days, the spouse would be able to access the funds as part of the RRSP HBP. As these funds are deemed loans and not withdrawals, tax attribution does not apply. Upon repayment, the spouse has the option to pay 1/15th of the HBP withdrawal back into an RRSP in their own name or have the repayment amount added to their income for the year. If the spouse is in a lower marginal tax bracket, their corresponding tax on non-repayment would be lower than the marginal tax rate of their professional spouse when the funds were removed from the company.
Overall, there are significant advantages to this program for first-time home buyers but there are also many considerations depending on each individual situation. Purchasing a first home is a major life decision and programs such as the HBP are designed to assist in this purchase. If you are considering purchasing your first home, our office can assist in structuring your home purchase in the most efficient and tax-efficient way.