Ask The Readers: HBP Without An RRSP?

by Tax Guy - Burlington Accountant on January 22, 2010 Print This Post Print This Post

I came a cross a rather interesting strategy that suggests using an RRSP loan to fund the down payment on a house. This strategy seems perfectly reasonable from the perspective of the Income Tax Act.

The Way It Works

  • Take out an RRSP loan equal to your RRSP contribution limit,
  • Contribute the proceeds to your RRSP for 90 days,
  • Withdraw the funds from your RRSP under the Home Buyers Plan and use it to pay off the loan,
  • Use your income tax refund as your down payment, and
  • After 2 years, start repaying your RRSP 1/15th per year until its fully repaid.

Hypothetical Example

John is 28 years old and earns $40,000 a year. He has never had an RRSP and currently has $28,800 of unused RRSP contribution room. If he were to make the maximum RRSP contribution possible, he would get a tax refund of $6,300 (assuming John’s in Ontario).

If we assume John has not saved anything for a down payment, this strategy would net him $6,087 after the interest on the RRSP loan is repaid. This means the maximum house he could reasonably purchase would be $118,310.*

Note that the above example assumes the full $28,800 may be witdhdrawn under the HBP. In fact, there is a limit of $25,000.

*Assumes 5% down and CMHC Fees of 2.75%.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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