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%.
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Hi there,
Mortgage Brokers have been using this strategy for several years. As a CFP I’m not always a fan of this. Ultimately it can help people without the cash flow to support the mortgage debt and the additional expenses associated with home ownership purchase a home they can’t afford.
In some cases it really does work very well. The example leaves out the fact that the maximum withdrawal under the HBP is $25,000 not the $28,800 figure used. Additionally, the tax payable on $40,000 of income in Ontario is approx. $6,129 and with the $28,800 RRSP contribution tax payable falls to $236, a refund (assuming proper taxation by the employer and no other deduction) of $5,893.
Besides home ownership, one upside to the HBP is the ‘forced’ RRSP savings beginning 2 years following the withdrawal. At that point 1/15 of the borrowed amount, $1,667 per year on $25,000, must be deposited to an RRSP or the amount ($1,667) is added to taxable income.
@ James – Great comments and thank you for the insight. I forgot about the $25,000 maximum. With respect to the calcuations, I used the E&Y tax calculator and RRSP contribution calculators for the estimates.
Interesting – thanks. Can you help me a bit – I have about $80k of contribution room and I make $100k/year and pay about $17k or so in tax each year that I could get back. In my case because of the high income I am probably more suited than most to get a bigger refund with this strategy. My question is really about my spouse… am I allowed to take out an RRSP carryforward loan to contribute to HER RRSP with all her contribution room available, while still being able to get the refund on my taxes? Effectively I would look to take a loan for $50k and then use the $12.5k refund for part of our downpayment? If that works, then who has to pay back the 1/15th of her HBP, her or me – or does it matter?
@ Ray – James corrected me in that there is a $25,000 maximum withdrawal under the HBP.
You can take out a loan and contribute to a spousal RRSP. You take the deductions but the contributions reduce your own RRSP contribution limit. Her RRSP contribution room is unaffected.
Only been working for 2 years therefore my contribution limit is only about 10k. My wife just moved into the country so her limit is nil. I made a mistake of taking a leverage RRSP loan for a HBP worth 20k for myself and 5k for wife.
Problem is I dont have enough contribution room for taxes. Since I invested the fund in 2010(first 60 days) and will purchase the house by Aug 2010. Does that sort out my contribution problem? Or am I going to be over the limit for 2011 taxes?
John:
It’s difficult for me to say based on the information provided. Your RRSP contribution limit for 2010 is set at the less of 18% of earned income from the prior year or $22,000. If your RRSP contribution limit was $10,000 for 2009, your limit for 2010 will be $10,000 less the amount of your contributions of $25,000, plus your new limit (18% of 2009 income or $22,000).
I used this strategy…it worked well for me.
In fact, there can be another advantage. Spousal RRSP contribution, “attribution” withdrawal rules don’t apply to the RRSP repayment because repayments must be made by the RRSP holder and not the original contributor. For example, I contributed $20K to my wife’s RRSP plan, she withdrew the funds for First Time Home Buyers plan….but when we make a repayment, it is no longer a spousal contribution (there is no such thing as a spousal repayment in Home Buyers plan -the rules don’t allow for this – repayment must be made by the person who’s name its in (in our case, my wife)… Here is the advantage, my wife is currently a student, and has no income, she can therefore make a large repayment (e.g. $8K in one tax year, even deposit the money one day, withdraw it the next, allow for the bank to withold the taxes for Revenue Canada, which we will get back when we file our taxes because of her income bracket is below taxable threshold. The advantage is that, once my wife is working and earning income in 3yrs or, even retired, she will likely be in a taxable income bracket…so while here annual income is low (near nil currently), our strategy is to get the repayment over quickly and use the money to recontribute to a new spousal RRSP (non-repayment to Home Buyers Plan), so I can take advantage of the tax deduction again. So in short, the advantage is that if we had to wait the full 3yrs to prevent an attibution tax to myself as the contributor, by then she will likely be working and have enough income to have to pay taxes. I hope I explained this clearly…
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