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Home Buying

RRSPs - More Than Retirement!

May 06, 2009

Over the past number of years, the government has introduced two alternative uses of Registered Retirement Savings Plans: 1st time Homebuyer’s Plan and the Lifelong Learning Plan.
Both warrant consideration.

HomeBuyer’s Plan (HBP)

The HBP allows each borrower, who has entered into a contract to buy or build a home, to withdraw up to $25,000 from their RRSP for any purpose. No withholding tax is deducted. An RRSP provides the benefit of a tax refund which can create a down payment, add to a down payment or provide funds required for some other purpose such as lawyer fees and other closing costs. Eg. A $5,000 RRSP contribution x 32% (marginal tax rate) = $1,600 Refund.

Certain terms and restrictions apply. Funds ’borrowed" must be repaid to an RRSP within 15 years or the portion of the RRSP not repaid (1/15th) must be included in your current income come tax time. Applicants must not have owned a home in the past 5 years and funds must be on deposit 90 days prior to withdrawing funds. The home must be owner/occupied so the plan cannot be used to purchase a rental property.

Lifelong Learning Plan (LLP)

The LLP allows the applicant to withdraw RRSP funds for her own or for her spouse’s education (provided the educational program is of at least 3 months in duration). The maximum amount that can be withdrawn over 4 calendar years is $20,000. Not more than $10,000 can be withdrawn in any one year from RRSP. These funds are repayable over a period of 10 years subsequent to the completion of your educational program. There is no limit to the number of times a person can qualify as long as the previous RRSP withdrawal is repaid. This plan is similar to the Home Buyer’s Plan in that the funds must be on deposit for 90 days before any withdrawals are made.

Strategies to help you take advantage of these programs:

  1. Young people should start contributing to an RRSP as soon as possible. For those young adults who take a year or two off prior to continuing their education, contributions to an RRSP will reduce taxes payable and will usually generate a tax refund. When these young adults pursue their post secondary education, they can then withdraw the funds under the LLP. If the person decides not to go to school, the funds can then be used to purchase a first home or to finance retirement.
  2. Married couples should consider spousal RRSP contributions, especially if one spouse may have reduced income in the future. As the HBP and LLP ultimately require repayment, these funds should be withdrawn from the RRSP belonging to the spouse with the lowest income. To best illustrate this strategy an example appears below:

Joe and Mary, recently married, would like to purchase their first home. They are both employed and making the same income. They would like to start having children in about 2 years time. They have $10,000 to invest. Joe makes a spousal RRSP contribution of $5000 to Mary’s name. Mary also makes a regular RRSP contribution of $5,000 to an RRSP in her name. Both contributions together generate a combined income tax refund of $3,200 (32% marginal tax rate). After 90 days, Mary withdraws her RRSPs (a total of $10,000) under the HBP to assist the couple in purchasing their first home. Joe and Mary decide to use the income tax refund for closing and renovation costs.

Two years later, Joe and Mary have their first child, Precious. Mary decides to stay home with Precious while Joe is employed full time. Each year, $666.67 or 1/15 of the HBP is repayable. If Mary decides not to repay her RRSP, $666.67 would be included as current income in her yearly tax return. The tax consequences of non-repayment is now minimal as Mary has no other income. This would not be the case if Joe had to make an RRSP repayment, as he would be taxed at his highest marginal tax rate.

The biggest drawback to both programs, is the loss of the compounding effect due to withdrawing the funds from an RRSP for the HBP and LLP. This "loss" has to be weighed against the goals of buying your first home and pursuing post secondary education.

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