Ratcliffe Wealth & Risk Management

The question asks if you should contemplate using your RRSP for your down payment through the Home Buyers’ Plan. The answer? It depends!

Let me first provide a link to Canada Revenue Agency’s Home Buyers’ Plan (HBP) information on their website. This program allows you to withdraw money from your RRSP to buy or build a home. It was $20,000 per person, but that was raised to $25,000 for withdrawals made after January 27, 2009. For a couple, this means up to $50,000 toward the down payment, furnishings, or other expenses. The use of the money is not restricted if you qualify. In case you are not aware, one of the requirements of the program is that you repay the amount to your RRSP over a 15 year period, commencing the second year after making the withdrawal. The minimum payment will be the remaining balance to be repaid divided by the number of repayment years. If you don’t make a payment, the amount to be repaid for that year will be added to your income.

Now, I want to acknowledge that there are arguments for and against using funds in a RRSP. A concern is that you miss out on the tax deferred compounding that will occur within the RRSP. However, for many, they do not have the luxury of deciding whether to use the RRSP or other funds. The RRSP may be the only savings, so the choice may be clear. If you have a choice, that is a discussion to have with your financial advisor. The question I want to answer today is whether to actually place the money into the RRSP with the goal of the HBP in mind.

In asking and answering the question, I have one major consideration in mind, and I’m thinking of those with perhaps in their early career stage. It will be an individual decision as to the best approach, but ask if your tax bracket will be significantly higher in a not-so-distant subsequent year. Since the income tax refund you will receive by contributing to a RRSP is based on your tax bracket, you need to assess whether the reward may be higher waiting for a later year. Such a person may not have much contribution room in the RRSP anyway, thereby reducing any real tax opportunity.

Another option is to save the money in a Tax-free Savings Account (TFSA). You can withdraw the money for any purpose, and contribution room for the amount withdrawn will be restored in the following year. Just remember, while a wide range of investments may be held within your TFSA, you want to ensure the money is in conservative and guaranteed investments/savings and accessible when needed.

Let me leave you with a strategy in case you do want to use the RRSP and the HBP and have enough unused contribution room. Perhaps by this time you have saved for a few years in the TFSA, or you have other savings. You can generate a potential tax refund (or at least reduce taxes) by making a contribution to the RRSP, leaving the funds in for at least 90 days, and then withdrawing under the HBP.

There are certainly alternative approaches. Be sure to talk to a financial advisor earlier rather than later!

**This message is an expression of the author’s personal opinions. The companies represented by Antony (Tony) Ratcliffe of Ratcliffe Wealth & Risk Management, as an independent agent/broker in Alberta, Canada, will not be held liable in any way for the opinions expressed herein.