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Using your RRSP? It can be all or part of your down payment. The rules have changed in recent years , so if you think you know them, double check here!
In February of 1992, the Canadian Federal Government introduced the “Home Buyers’ Plan” (HBP), which allows RRSP plan holders who are also first time home buyers to use up to $20,000 of their RRSP to apply to the purchase of their home. The plan, extended twice, is in effect as of July 1997 until further notice.
Buyers who have not owned a property in the last five years.
Up to two partners in the home can combine their RRSP’s for a total maximum of $40,000.
The only subsequent requirement is that they pay the withdrawals back into their plans (without further deductions) over a maximum of 15 years.
Failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.
The Home Buyers’ Plan enables you to borrow money to top up your RRSP plan using accumulated RRSP eligibility limits. If your tax assessment notice indicates you are eligible for $18,000 in contributions in the current year, and you already have $4,000 in a self-directed plan, you are allowed to borrow — subject to credit approval – the $16,000 to buy the RRSP required to bring you up to the $20,000 Home Buyers’ Plan limit.
Then you can claim the eligible deduction against your current year’s income in order to get a large tax rebate. You can use the rebate to pay down the loan or apply it to the cost of buying the home. Here, of course, the amount of tax you’re paying each year is an important factor.
If the $16,000 deduction in this example results in a $5,000 tax rebate, it can be used as you see fit. If, on the other hand two partners each earning $80,000 per year take their maximum RRSP of $20,000 each in the current year, they could net a total of $15,000 or more in a tax rebate. You are then allowed to withdraw up to the $20,000 maximum from the RRSP 90 days after topping up or creating the plan, subject to the re-deposit requirements described above.
If you’re planning to borrow the money for the maximum RRSP, you could end up disqualifying yourself for a mortgage because your monthly payments will be too high. Your “total debt servicing ratio” – the proportion of your gross income required to service both the home related costs and other monthly obligations – may exceed the usually acceptable monthly maximum of 42%. Another $600 per month could well make the difference in whether or not you’ll qualify for a mortgage.
Call us today 250-862-1806 so that we can further explain this unique program to you!
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