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RRSPs May Be The Icing

Written by Posted On Tuesday, 20 April 1999 00:00

You know the old saying about not being able to have your cake and eat it too? Well, thanks to Revenue Canada home buyers can achieve this impossibility, not with cake, but with their Registered Retirement Savings Plans (RRSPs).

Use the federal Home Buyers' Plan (HBP) and you won't have to cash-in your RRSP to afford a new home. If you follow Plan rules, you can withdraw up to $20,000 to buy or build a home and still have your RRSP in tact. This means the withdrawal is not taxable and can be replaced later. Usually any funds taken out of an RRSP become taxable income for that year and the "savings room" ceases to exist.

You will be giving yourself a no-interest mortgage which should be repaid within 17 years. The real cost of this money is the years of tax-deferred compound interest you will lose. Be careful to get all the facts so you don't get short changed. With the Home Buyers' Plan, details and exceptions matter, this is, after all, a Revenue Canada program.

"The Home Buyers' Plan is complex. First-time buyers may not understand how it works," says Edmonton Chartered Accountant Gordon Bentham of Meyers Norris and Penny. "My advice to someone looking at [the HBP] would be to talk to the person they are going to get the mortgage with. I think you can get advice on this topic for free. They won't charge you money and they should be trying to get the mortgage. Then if you are still uncomfortable, phone a chartered accountant and pay for a half-an-hour of their time."

The mortgage lender and the realtor involved have a vested interest in your success since without the RRSP funds for the down payment there may not be a purchase.

Revenue Canada reports that since the Home Buyers' Plan began in 1992, nearly 770,000 Canadians have used more than $7.3 billion in RRSP savings to buy or build a home in Canada. According to the Canadian Real Estate Association (CREA), 117,000 home buyers used the Plan in 1997 to contribute $1.9 billion for home purchases. In 1998, more than 110,000 home buyers withdrew over $1.1 billion from their RRSPs. A survey conducted by Toronto-based Clayton Research revealed that about one third of first-time buyers have used HBP. Thirty-eight per cent of those who didn't simply had no RRSP savings.

Here's how the Home Buyers' Plan works. First-time buyers, or those who have not owned a home within the past five years, may withdraw up to $20,000 from their RRSP (couples a combined total of $40,000) to buy or build a home. After a grace period of two years, at least one-fifteenth of the amount withdrawn must be repaid to the RRSP each year for the following 15 years until the total amount is repaid. If the RRSP is repaid on schedule, the transaction will be tax free.

If the amount designated for repayment is not paid, the unpaid portion will be taxable income for that year and can never be repaid to the RRSP. For instance, if you withdrew $15,000 from your RRSPs, then each annual repayment would be $1000. If you repaid only $800 one year, the balance or $200 would be added to your taxable income for that year.

What qualifies as a "home" under this Plan? As well as traditional single-family homes, semis and town homes, buyers may use their RRSP funds to purchase a mobile home, condominium unit or a share in an equity cooperative. Contact Revenue Canada, a Realtor or a financial advisor to get the facts on having your RRSP and a home too.

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PJ Wade

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