The Homebuyer’s Two-Step: How a little fancy footwork with your RRSPs can save you thousands — painlessly

If you’re planning to put a down payment on a house or condo, make sure you’re taking full advantage of the Home Buyers’ Plan.

If you have less than $35,000 RRSPs and plan to supplement your down payment with other, non-RRSP savings, you can ‘detour’ those non-RRSP savings temporarily into your RRSP, thereby earning a significant tax benefit.

RRSP Basics

Income you put into your RRSP’s are “tax-deferred.” That is, the income isn’t taxed in the current year and instead is taxed down the road when you withdraw it again from the RRSP.  When you take the money back out of your RRSP, it is treated as if you just earned the income and you pay income tax on it – except in certain circumstances. Purchasing a home as a first-time buyer is one of those exceptions.

A first-time home buyer can withdraw up to $35,000 from their RRSP under the Home Buyers’ Plan (HBP), without having to pay income tax on it. (He or she eventually does have to return that money to the RRSP, but can take up to 15 years to do it.)

The great thing about the HBP is the way it gives you the opportunity to get all the benefits of an extra RRSP tax benefit, without feeling the pain of an extra contribution. It can do that because whatever non-RRSP savings (or other funds) you were planning to put towards your down payment can go into your RRSP first (‘detour,’ as we call it), earn the tax benefit, and then come right back out under the HBP.

Example: Doing the Down Payment Detour

Louis plans to buy a house in the next few months. He has $25,000 in his RRSPs, and his brother is prepared to lend him an additional $10,000 for his down payment. Because Louis earns $80,000 per year, he’s being taxed at a rate of 31% (federal and provincial taxes combined).

After confirming that he’s got enough of a RRSP deduction limit to do it, he decides to ‘detour’ the loan from his brother, putting it into his RRSP to top it up to $35,000, before he buys his house. As with any RRSP contribution, this saves him income tax. In Louis’s case, it saves him $3,100 in tax (31% of $10,000).

Four months later Louis takes the full $25,000 out of his RRSP under the Home Buyers’ Program, and uses it as a down payment. He still gets that $3,100 in tax benefits, even though his savings were only in the RRSP for a brief period.

The Last-Minute Limits
Be aware, however, that ‘detouring’ funds into your RRSP at the last minute (i.e., less than 90 days before you pop them back out again under the HBP) doesn’t work. This is because of some limits the Canada Revenue Agency puts on that sort of manoeuvre.

While the specifics are a little complicated**, the rule of thumb is this: ‘detouring’ can only get you a tax advantage if you do it more than 89 days before your HBP withdrawal. Do your detouring before that, or don’t bother doing it at all. Note, however, that you can withdraw funds under the HBP up to 30 days after purchasing your house. So if the detour happens at least 60 days before you buy, you’re in the clear.

What if…?

“This isn’t my first house. I’m not a ‘first-time buyer’, am I?”
In most cases, you need to be a ‘first-time home buyer’ by government standards in order to qualify for the Home Buyers’ Plan (HBP). But even if you’ve owned a home in the past, you may still be a ‘first-time home buyer’ according to the Canada Revenue Agency (CRA).

According to the CRA, a first-time home buyer is someone who has not “at any time during the period beginning January 1 of the fourth year before the year of the [Home Buyers’ Plan] withdrawal and ending 31 days before the withdrawal… owned a home that [he/she] occupied as [his/her] principal residence.” However, if you lived with a spouse or common-law partner during that period and he/she owned your principal residence, and if you’re still with that spouse or common-law partner, you’re not considered a first-time home buyer.

“There’s no time; I’m buying my house next month.” (or: “I bought my house last week.”)
It’s too late to detour, but if you wish you’d taken advantage of the HBP, you still can. You can withdraw funds under the HBP up to 30 days after purchasing your house.

[This is related to another interesting fact: you don’t have to spend the money on a house. So long as you’re eligible for the HBP (i.e., you will soon buy, or have recently bought, a home) you can make an HBP withdrawal and spend the money any way you like. Just remember that, as with all HBP withdrawals, you will have to pay the money back into your RRSP, in installments over the the course of 15 years.]

“Dang! I don’t even have an RRSP!”
Then get one, jefe!

If you’re going to buy a house, that is. If your annual income is under $50,000 and you’re not planning to buy a house soon, it might not be the best option. Contrary to popular belief, RRSPs aren’t for everyone. But that’s a whole other Two Minute Tip.

Read about: RRSPs and low-income Canadians

“Okay, I’ve got my RRSP and I’m ready to go. What now?”
To learn more or apply for the Home Buyers’ Plan, visit the HBP page at the Canada Revenue Agency website.

** “A little more complicated” is an understatement. In the inimitable prose of the Canada Revenue Agency: “You cannot deduct the amount by which the total of your contributions to an RRSP during the 89-day period just before your withdrawal from that RRSP, is more than the fair market value of that RRSP after the withdrawal.” (CRA publication RC4135(E) Rev.04: Home Buyers’ Plan (HBP))