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Contribute to your RRSP and become a homeowner

Posted on Friday November 15, 2019


Contribute to your RRSP and become a homeowner

Do you dream of owning a home but haven’t saved up enough yet for a down payment? Do you work and pay income taxes each year? By making a down payment using funds raised under the Home Buyers’ Plan (HBP), you can become a homeowner even if you don’t have a sizable RRSP—or any RRSP at all. Here’s how it’s done.

HBP: 100% legal and (IMHO) pretty cool

Forget about sketchy loans and run-down houses! Buying your first home is a milestone in your life that’s too important to have to resort to shortcuts that could turn against you down the road. Financial institutions in New Brunswick require a minimum down payment of 5% under a CMHC-insured loan or 20% otherwise, in accordance with Canada Revenue Agency policy. The main thing is not to find ways to get around rules but rather to make the most of the financial tools made available to you through the HBP, under which prospective buyers can put money from an RRSP toward a down payment on purchasing a home.

Is the HBP right for me?

The HBP has pros and cons—but for many people, it can be an excellent way to raise funds toward buying a home. The HBP allows you to take funds out of your RRSP temporarily to use as a down payment on a residential property. More specifically, it’s a program under which you can withdraw up to $35,000 from your RRSP to buy or build a qualifying home for yourself or a relative with a disability. If you’re a couple, you could be eligible to withdraw up to $70,000 to put toward a down payment, which is enough money to reach the minimum down payment on a first home in almost any community in New Brunswick.

I don’t have an RRSP. Does that mean I’m out of luck?

Not at all—this is where paying income tax finally pays you back! Since your employer has already been taking income tax deductions out of your pay all year long, you can increase the size of your tax refund substantially if you take advantage of the opportunity to maximize your RRSP contribution. Keep in mind that you probably have significant contribution room available to you if you haven’t been contributing much, or at all, in recent years, as it continues to accumulate over time. But where does the money come from? From an RRSP loan.

Borrow, contribute, collect, pay down and buy: it couldn’t be simpler

At UNI, we offer personal loans to help members maximize their RRSP contributions. And the more you pay into your RRSP, the bigger your potential tax refund. You can then use your refund to pay off all or part of the loan to limit the interest you have to pay, and use your newly topped-up RRSP as a down payment on buying a home. Visit our HBP page for full details on how this strategy works. Would you rather watch an entertaining video explaining the entire process? We’ve got that too!

The numbers speak for themselves!

Let’s look at a fictitious couple that we’ll call Jessica and Michael. They’ve known each other for 10 years and have been together for the past 6 years. They’ve got a baby on the way and would like to buy a house this year in Dieppe near their families, friends and jobs.

Jessica and Michael have found a cute three-bedroom bungalow that they really like priced at $235,000 in Dieppe, where the average home price is $249,800 (2018–2019). Jessica has $5,200 in her RRSP, while Michael has $3,500 set aside in his. The total amount they have access to through the HBP is therefore only $8,700, which is a little less than the 5% minimum. Their lender has offered them a more attractive interest rate if they can raise a 10% down payment; and if they can come up with 20% or more, they can bypass the CMHC insurance requirement and, in so doing, lower their monthly payments. Both of them have built up significant RRSP contribution room during the last few years. The following figures were calculated using the Neuvoo.ca Tax Calculator

Here’s how they can reach their goal:

Jessica earned $42,500 this year, and her employer withheld 25% of her pay as source deductions. She borrows $20,000 and invests 100% of that amount in her RRSP.

Scenario without RRSP contribution:

Annual salary: $42,500

Effective tax rate: 22.70%

Income tax withheld in 2019: $10,625 (25%)

Actual tax payable: $9,647.50 (22.70%)

Anticipated tax refund without RRSP contribution: $977.50

Scenario with RRSP contribution:

Annual salary: $42,500

Taxable income after $20,000 contribution: $22,500

Effective tax rate after contribution: 16.15%

Income tax withheld in 2019: $10,625 (25%)

Actual tax payable: $3,634 (22.70%)

Anticipated tax refund with RRSP contribution: $6,991

Michael earned $38,700 this year, and his employer withheld 25% of his pay as source deductions. He borrows $20,000 and invests 100% of that amount in his RRSP.

Scenario without RRSP contribution:

Annual salary: $38,700

Effective tax rate: 21.81%

Income tax withheld in 2019: $9,675 (25%)

Actual tax payable: $8,439 (21.81%)

Anticipated tax refund without RRSP contribution: $1,236

Scenario with RRSP contribution:

Annual salary: $38,700

Taxable income after $20,000 contribution: $18,700

Effective tax rate: 13.41%

Income tax withheld in 2019: $9,675 (25%)

Actual tax payable: $2,507 (13.41%)

Anticipated tax refund with RRSP contribution: $7,168

Jessica and Michael will consequently receive a combined tax refund of $14,159, which they can immediately put toward paying off a good portion of their personal loans in order to reduce the amount of interest they have to pay. Jessica now has $25,200 in her RRSP, while Michael has $23,500 in his for a total of $48,700, which is more than enough for a 20% minimum down payment on their home under the HBP.

Do I have to put the money back into my RRSP?

Of course. Since contributing to an RRSP helps to reduce income tax, participants in the HBP have up to 15 years after purchasing their home to repay the borrowed funds into their RRSP. However, they don’t have to pay any additional interest. This means paying back one-fifteenth of the advance every year, which, in Jessica and Michael’s case, works out to $1,333 per year.

I participated in the HBP before and it worked out. Can I do it again?

The HBP is available to you as a Canadian citizen as long as you have repaid previous HBP amounts in full within the allotted time limit. In other words, take advantage of it again if you like. For full details, please visit the CRA website.

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