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.
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%.