The Federal Governments "pay-equity" cheques to qualifying recipients will arrive sometime in April. Up to $10,000 can be transfered to an RRSP (tax free), provided you filled out the proper forms. If you have more than $10,000 coming to you, and if you have room within your RRSP, you may apply to transfer more than $10,000 to your RRSP, without income tax deductions. Those of you who plan on then using your RRSP for a down payment should read this reprint.
As you may already know, you can use your RRSP to fund the down payment on a home. There are some rules to follow to qualify under the Federal Governments Home Buyers Plan (HBP):
1) You must be considered a first time buyer. The definition of a first time buyer is one who has not owned his/her own residence in the last 5 years. You may use the HBP more than once, provided there is no outstanding balance owing under the last one.
2) You must use the funds in the year of the withdrawal. The funds must be in a vehicle that will allow such a withdrawal (check with your RRSP trustee).
3) You must repay your RRSP at the rate of 1/15th the amount borrowed per year over the next 15 years. The first mandatory payment though is two years after your acquisition through the HBP.
4) You must be a resident of Canada.
5) There is no written obligation to use these funds for the acquisition of the unit, only that you buy a residence. It may be to your advantage to use the minimum for your down payment and use the rest to retire expensive credit card debt. The definition of a residence is a housing unit on Canadian soil. The housing unit could be a single family house, a semi-detached, a town home, a mobile home, a condominium unit, part of a duplex, triplex or fourplex, part of an apartment building. Both new and existing units qualify.
6) The RRSP funds for this purpose are limited to $20,000 per qualifying person. A couple may withdraw up to $40,000.
7) The funds must be in the RRSP for at least 90 days, although you do have an overlap period of 30 days beyond the purchase date. Be careful when you put in your offer to make sure to count the days to your proposed closing date.
8) To gain access to your RRSP funds, ask your RRSP trustee to help you fill out form # T-1036, Home Buyers Plan (HBP)-Request to Withdraw Funds from an RRSP. Once presented to your Trustee, the funds will be made available to you normally within 2 weeks.
The repayment to your RRSP must occur before December 31 each year, and any amount not repaid will increase your taxable income by the amount of the shortfall. In other words, if your repayment called for $1333.33 per year (thats 1/15th of $20,000), and you could only pay back $1000 in the year 2004, the difference ($333.33) would be added to your taxable income that year.
There are some schemes that will promote 100% financing using the RRSP funds. If you have the funds already, there is no problem in utilizing them. If you do not have the funds already, some promoters may want you to borrow enough money to buy whatever amount of RRSP you are entitled to (the amount will show on your last Revenue Canada Assessment Notice). This will create a rather large tax refund, in most cases. These promoters will then tell you to cancel your RRSP loan after 91 days. Your tax refund will allow you to attain your minimum 5% down payment, and you no longer have the payment on the loan. You still must repay your RRSP the amount that you had borrowed over the next 15 years. Here the catch to the plan, you must now have an asset equivalent to the tax refund or else you cannot use the refund for down payment purposes. Apart from the 5% down payment, you must also show that you have 1.5% of the purchase price in reserve for closing costs, such as legal fees, land transfer tax, etc. As an added tidbit, until you repay the 1/15th portion each year, you cannot purchase new RRSPs.
Borrowing from your RRSP under the HBP constitutes borrowing at zero percent. While it looks like a good idea on the surface, one must remember that the RRSP is no longer earning tax free income. If the HBP is the only way to acquire the home, or if the borrowed amount from your RRSP will avoid the high ratio surcharge (CMHC premium), I feel it is still a good idea to participate. If one can muster enough down payment without dipping into RRSP funds, and the RRSP funds themselves are in a vehicle that earns sufficient returns, I would elect not to participate in the HBP.