When Reilly approached me last month for some financial advice I wasn't sure I should help him. Reilly is my step-brother, and the last time I gave him financial advice he went against my thinking and invested in a fitness club exclusively for runners. Not just any runners – these are "four-legged" runners (folks who run on all-fours. I thought he would have learned the drawbacks of this sport when a close friend of his ran on a mountain out west, where he was shot at by a hunter who mistook him for a wild boar. He lived.). But I digress.
Reilly wanted advice around the purchase of a recreational property. Specifically, he wanted to use his registered retirement savings plan (RRSP) assets to help buy the place. There are some twists and complications here that we can learn from.
It may be possible to use your RRSP assets to help buy a house under the Home Buyer's Plan (HBP) – see my article dated Mar. 4, 2015, for all the details (tgam.ca/EIZd). Under the HBP, it's possible to withdraw up to $25,000 to contribute toward the purchase of a house. In Reilly's case, it wasn't a city house he was looking to buy, it was a cottage. Further, he planned to tear down the cottage and build a house on the property using the shell of the cottage as a starting point.
Someone had told Reilly that he would not qualify to use the HBP to help buy the cottage because it had no foundation, no septic system or a well to provide water. The interesting thing is that, provided certain conditions are met, this type of purchase and rebuild can, in fact, qualify for the HBP.
In order to use the HBP, you have to be a first-time home buyer. Reilly met this test because prior to the purchase, he simply rented a place in the city. The actual rules are a little complicated. If you or your spouse have owned a place in the past five years that you have occupied as your principal place of residence, you might not qualify to use the HBP (there are some exceptions) – see my previous article for specifics.
It's important to note that a recreational property can qualify for the HBP provided you use the place as your principal place of residence once you own it. As an aside, there's a difference between a "principal place of residence" (which the cottage must become to qualify here) and a "principal residence" for purposes of the principal residence exemption (PRE). All that's required for the cottage to qualify for the PRE is that you ordinarily inhabit the place, which might only be several days or weeks each year; your vacation time would likely be sufficient.
A "principal place of residence" for purposes of the HBP is different. The taxman will look at factors such as where you normally sleep, the location of your belongings, where you receive your mail, and where your immediate family, including your spouse or common-law partner and kids, live. Reilly plans to make the cottage his full-time home once the building is finished.
In Reilly's case, he can do most of his work from home. Convincing the taxman that the property is his "principal place of residence" would be tough if he worked in an area far away from the residence and chose to sleep closer to work much of the time.
What about using the shell of the cottage as the start of his new residence? Does that pose a problem for Reilly when using the HBP? No. You can use the HBP to either purchase or build a home. The fact that the building of the residence starts with the shell of a previous structure is not an issue. Even if the recreational property Reilly purchased could not qualify as his "principal place of residence" at the time of its purchase, the fact that he has plans to build on the property and make it that residence is okay with the taxman.
Reilly had also asked me whether a motor home parked on the property would qualify as an eligible residence and allow use of the HBP – as an alternative to building a new place. The answer is that CRA will count a mobile home that is permanently parked as a residence as being eligible. But this is different, in the taxman's view, than a motor home that is powered by an engine and can be used for long trips. A motor home is unlikely to qualify.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.