A friend of mine lives in Massachusetts and made an offer on a home that seemed unusually low in price. As it turns out, the home is next to an infamous property that was condemned by city officials in the recent past because it reeked of garbage and was infested with cockroaches.
My friend decided to buy the place, figuring that time will work in his favour. Buy low and sell high, as they say. The truth is, home ownership is one of the cornerstones of financial security, and if you're thinking of buying a place don't forget to consider your registered retirement savings plan (RRSP) as a source of some funds for a downpayment. The Home Buyer's Plan (HBP) in our tax law makes it easy to use RRSP assets to help with a home purchase. Here's a primer.
In order to use funds from your RRSP to help in a home purchase, you'll have to be a first-time home buyer. This means that you may not have owned a home in the past five calendar years. More specifically, you'll be out of luck if you owned a home during the window of time that starts Jan. 1 of the fourth calendar year before the year in which you make a withdrawal under the HPB, and ending 31 days before the date of the withdrawal. (If you have a disability or are buying a home for a related person with a disability, or are helping such a person to buy a home, the five-year condition may not apply)
If you're married, each spouse can make a withdrawal under the HPB provided that neither of you has owned a home in the five-year period I've described, and you're buying the home jointly. Even if your spouse has owned a home in the last five years, you can still make a withdrawal under the HBP as long as your spouse's home was not your principal residence while you've been married or living common-law.
By the way, simply being pre-approved for a mortgage isn't enough; you'll have to actually enter into a purchase agreement to be eligible for a withdrawal under the HBP, and it has to be your intention to move into the home as your principal residence no later than one year after buying or building it. So, you can't use the HPB to buy a rental property.
You, and your spouse if he's eligible, can each withdraw up to $25,000 from your RRSPs under the HBP. You have to be resident in Canada at the time you make the withdrawal, and you have to withdraw all the funds in the same calendar year. You can only make withdrawals from your own RRSP (that is, an RRSP under which you're the annuitant), and not a plan under which your spouse is the annuitant.
Also, you can't generally make withdrawals from a locked-in RRSP or a group RRSP under the HBP, and any RRSP contributions that you make must stay in your RRSP for at least 90 days before you can withdraw those funds under the HBP, otherwise you won't get a tax deduction for those contributions.
You'll have to close your home purchase by Oct. 1 of the year following the year of withdrawal (the taxman calls this the "completion date"). For example, if you make a withdrawal under the HBP in 2015, you'll have to take possession of your new home no later than Oct. 1, 2016. Be aware that you can extend the completion date by one year if certain conditions are met.
Finally, you or your spouse cannot own the home for more than 30 days before you make a withdrawal under the HBP. So it's best to make the withdrawal before the closing date if you can.
You'll have to repay the amounts borrowed from your RRSP under the HBP in equal instalments over 15 years, and your repayments will have to start in the second calendar year after the year of withdrawal (that is, in 2017 for withdrawals made in 2015). If you fail to repay the amounts, the shortfall is taxable to you in the year you missed the repayment. Also, be aware that you can't claim a deduction for amounts repaid to your RRSP under the HBP. If you want more information on the HBP, check out the taxman's booklet RC4135, Home Buyer's Plan, which you'll find at www.cra.gc.ca.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.