Using
Your RRSP- "Home Buyers Plan"
The
Federal Home Buyers Plan allows first time home
buyers to withdraw up to $20,000 from their
RRSP for the purpose of buying or building a
qualifying home. The primary benefits are that
the RRSP issuer will not withhold tax on the
amount nor will you have to claim the amount
as income. The amount must be repaid to the
RRSP within 15 years with a minimum annual payment
of 1/15th of the amount withdrawn. If a repayment
is not made for a given year the minimum repayment
is included as taxable income for that year.
Participation
To participate you have to withdraw the amount
from your RRSP using form T1036 Applying To
Withdraw An Amount Under The Home Buyers Plan.
Give the completed form to the RRSP issuer along
with the certification that you meet or intend
to meet certain conditions as follows:
Conditions
-
You
have to make your withdrawal request in
the same year you wish to participate in
the Home Buyers Plan
-
You
cannot have previously participated in the
plan in previous years.
-
You
have to be a resident of Canada
-
You
have to enter into a written agreement to
buy or build a qualifying home
-
You
can withdraw a total of $20,000. Multiple
withdrawals are allowed. Each of you and
your Spouse can participate in the Plan
and withdraw $20,000 from your own RRSPs.
-
You
have to be considered a First Time Home
Buyer
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A qualifying home is a housing unit located
in Canada. Existing homes and homes under construction
are both qualifying homes and can be either:
-
Single Detached Family Homes
-
Semi
Detached
-
Town
Home
-
Mobile
Home
-
Condominium
Unit
-
Apartment
in a Duplex, Triplex, Four-plex or apartment
building.
-
A
Share in a Cooperative Housing Corporation,
provided the share entitles you to posses,
and gives an equity stake in, a housing
unit.
First Time Home Buyer
You are considered a first time home buyer if
you have not owned a home while you occupied
it as your principal place of residence for
five years. At any time in the fifth calendar
year since you last owned a home you can qualify.
Recent
Improvements
The
1998 budget now allows Canadians to use the
homebuyers plan again. The applicant must have
no outstanding balance on any previous Home
Buyer Plan loans and must re-qualify for the
program again. This means the home owner must
re-qualify as a first time home buyer by not
owning for the prescribed period. The effective
date of the changes is 1999.
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Should You Take Money Out of Your RRSP For
A Home Purchase?
Withdrawing
$20,000 from your RRSP under the "Home
Buyers Plan" can be viewed as a loan from
your RRSP to yourself. Some call this a zero
interest loan but of course the actual cost
of the loan is exactly what the funds would
have earned if they had remained in your RRSP.
You will forego these earning if you take the
funds out and use them for a down payment. On
the other hand if you don't withdraw these funds
you will be forced to borrow the required down
payment.
Lets
assume you have $20,000 in your RRSP at an average
annual rate of return over the next 15 years
of, say 8%. In 15 years your $20,000 will have
grown to $63,443, an increase of $43,443. As
such if you withdraw these funds under The Home
Buyers Plan, while you won't suffer taxes, you
will forego these earnings.
Most
financial advisors will counsel you to borrow
to invest in your RRSP because the "overall"
rate of return from your RRSP is greater than
the cost of borrowing the money. The cost of
borrowing $20,000 in a catch up loan over 15
years is usually in the neighborhood of Prime,
plus or minus a percentage point, depending
on the risk of the RRSP investment. Assume a
cost of 7.5% over the 15 year amortization of
the loan. The interest paid to borrow $20,000
would be $13,372. If we also assume a 35% tax
rate, you would have to earn $20,572 of gross
income in order to net out these interest costs.
We
can now compare the before tax cost of borrowing
- around $20,572 - with the before tax return
this $20,000 would earn in your RRSP - around
$43,443. Clearly it makes sense to borrow to
invest in your RRSP. Conversely, it should also
make sense to leave the money in your RRSP and
borrow your down payment, one being the same
as the other.
In
reality, no mortgage lender will finance 100%
of your purchase price. In addition, your lender
will qualify you for a larger mortgage, based
on gross income, if your debts are lower and
don't include a large personal loan for the
down payment. A personal loan or second mortgage
is a debt that squeezes the maximum mortgage
amount you will qualify for if it puts you above
the lenders target debt service ratios.
In
addition withdrawal under the Home Buyers Plan
may be more cost effective than borrowing if
this borrowing cost also includes a CMHC fee.
This fee can dramatically push up your effective
interest rate. If you're just shy of a conventional
down payment of 25% it may be wise to withdraw
the remainder from your RRSP to avoid paying
mortgage insurance fees.
The
best approach is to withdraw from your RRSP
under the Home Buyers Plan, get all the financing
you qualify for, and then once the mortgage
is funded borrow to replenish the RRSP if you
can afford the payments. Remember you'll also
have to pay back your RRSP 1/15th each year.
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Tips
Pay back the minimum 1/15th required each year
if you borrow through the home buyers plan.
Repayments do not trigger another tax savings.
All savings above the minimum 1/15th repayment
should be designated 'contributions ', rather
than repayments, and invested into your RRSP.
You'll receive the tax savings on these amounts
each year.
Always
invest as much as you can in your RRSP, even
if you have to borrow, but be sure you can afford
to carry the loan.
Withdraw
the money from your RRSP only if you have no
other source of non RRSP savings.
Saving
Your Down Payment Using your RRSP
To
accumulate $20,000 in a non RRSP savings plan,
assuming an 8% return and a marginal tax rate
of 35%, you would have to invest $3,605 each
year for the next five years. This would mean
earning $5,546 in gross income each year in
order to net out this $3,600 in after tax savings.
Rather
than spending this $5,546 in gross income each
year on a non RRSP investment, you could invest
this same amount into your RRSP. With yearly
RRSP contributions of $5,546, you will accumulate
about $32,536 in five years. You will also receive
tax savings each year in the amount of $1,941.
Another way to look at it is that you could
accumulate the required $20,000 down payment
in about 3 1/3 years by choosing the RRSP savings
approach. IT ALWAYS MAKES SENSE to save through
an RRSP, whether the savings will be for a house
or retirement.
Other
Plans
Tax-Free
RRSP Withdrawals for Lifelong Learning
Canadians
will be eligible to make tax-free withdrawals
from their RRSPs to support lifelong learning.
Individuals will be able to withdraw tax free
up to $10,000 per year from their RRSPs, with
a maximum of $20,000 over a four-year period.
To preserve retirement incomes, these withdrawals
will be repayable over 10 years.
More
tips:
What
if I want to sell my home before I have paid
off the RRSP loan?
You do not have to repay the remaining balance
if you sell your home before your scheduled
payments are complete. And you are not required
to continue to own the home until the amount
borrowed is repaid.
In
some situations, outstanding repayment installments
have to be reported as income by the borrower:
When
you leave the country. If a taxpayer ceases
to be a resident of Canada, "the balance
of withdrawals made under the plan and not yet
repaid must be repaid within 60 days of ceasing
residency, or must be included in the individual's
income for that year."
If
you die. When an individual dies with an
outstanding Home Buyer's Plan repayment balance,
"the outstanding amount must be included
in the deceased's income for the year. There
is an election that may be made in certain circumstances
to allow a spouse of the deceased to effectively
take over the deceased's obligations with respect
to repayment installments."
When
your RRSP matures. If you have an outstanding
Home Buyer's Plan repayment balance at the end
of the year in which you turn 69 - the deadline
for collapsing an RRSP - this outstanding amount
must be repaid before year end or be reported
as income on your tax return.
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