Saving up for the down payment for your first home often feels like an impossible task but the good news is that a Registered Retirement Savings Plan (RRSP) can be a great source of funding for your mortgage down payment and can help you achieve your dream of home ownership much sooner.
The idea behind saving for a down payment within your RRSP is this: If you make a contribution to your RRSP account this will generate a tax refund. The size of the refund from Canada Revenue Agency (CRA) depends on how much you contributed and what your income was for the last year. If you take this refund and deposit it to your RRSP account your savings will grow much quicker as compared to saving after tax dollars within a regular savings account.
An additional benefit of saving within an RRSP is that the federal government’s Home Buyers’ Plan (HBP) allows Canadian residents to withdraw money from their RRSP on a tax free basis to buy or build a qualifying home. Keep in mind the investments within your RRSP must allow for the withdrawal. In order to participate in the HBP you must be a first time home buyer, a person with a disability or you are helping a related person with a disability buy or build a qualifying home. A first time home buyer also includes those persons who did not own and occupy a home at any time within the last four calendar years. If only one of the partners owned a home in the last four years, the other partner may still be considered a first time home buyer and eligible for the tax free withdrawal.
Under the HBP you can use up to $25,000 of your RRSP savings ($50,000 for a couple) to help you finance your down payment on a home. Your RRSP contributions must be on deposit for at least 90 days before withdrawing and you must have a signed agreement to buy or build a qualifying home. You do not have to make the withdrawal(s) all at one time but they need to be made all within the same year.
In essence, you can think of the RRSP withdrawal as making a tax free loan to yourself. CRA requires that the loan is repaid within a 15 year period with the repayment to start two years after you have purchased the home. For example, if you bought a home in 2018 and withdrew $25,000 from your RRSP account, your minimal annual repayment would be $1666.66 (which is calculated by dividing $25,000 by 15) and would start in 2020.
If you do not make the annual minimum payment the amount that you owe will be added to your taxable income for that year. If you have previously participated in the HBP you may be able to do so again if your HBP balance is zero and you meet all the other conditions. Keep in mind that CRA views it your responsibility to make sure that all the eligibility requirements of the HBP are met. Further information can be found on the Government of Canada’s website at www.cra-arc.gc.ca/hbp/.
Of Prime Interest is a collaboration of mortgage professionals and we welcome your questions. Trish Balaberde (250-470-8324) , Darwyn Sloat (250 -718-4118) and Christine Hawkins (250-826-2001)