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youngmoneyadviser q&a

Question from Young Money Globe reader: My partner and I are planning to buy a house. I have $35,000 in my registered retirement savings plan. My spouse has no RRSP. I have roughly $60,000 in unused contribution room. We are planning on using the first-time Home Buyers’ Plan for my RRSP. My income is $80,000, my partners’ income is $35,000. We have over $50,000 in a joint savings account. Can I use $35,000 of that savings and put it into a spousal RRSP so that we can use the $35,000 from my own RRSP plus the $35,000 in the spousal RRSP? What’s the catch?

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Answer from Shannon Lee Simmons, a financial planner and founder of The New School of Finance in Toronto: This is a really good question. I bet a lot of people are wondering about this, given the steep rise in house prices. Let’s start with some basics.

Shannon Lee Simmons is the author of the book Worry-Free Money: The Guilt-Free Approach to Managing Your Money and Your Life.

The Home Buyers’ Plan (HBP)

Anyone who qualifies as a first-time home buyer and is eligible for the Home Buyers’ Plan can withdraw up to $35,000 from their RRSP toward the purchase of their first home. If two people do that, that’s $70,000 between them both.

Here’s why this is so useful for anyone trying to buy a home. Money you put in to an RRSP counts as a tax deduction. If you’re an employee, it will result in a tax refund. If you’re self-employed, it will result in less tax owing – or a refund if you pay instalments. For example, you earn $80,000 a year, so a one-time $35,000 RRSP contribution would result in a refund of approximately $10,400. You can use an online income-tax estimator like this to run your own numbers.

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You have to repay the money that you took out of the RRSP over the course of 15 years, but it is an interest-free loan to yourself. For example, if you take out $35,000, once you have to start repaying it, you’ll have to put $2,333 back into your RRSP each year – that’s $35,000 divided by 15. If you aren’t able to do that, the $2,333 would be added to your income that year and you’d pay tax on it.

It should also be noted that the money needs to be in your RRSP for 90 days before you withdraw it under the HBP.

The spousal RRSP

A spousal RRSP is a good idea when there is a large income disparity between spouses, like your situation. The spousal RRSP works in a similar way to a normal RRSP; however, it is in your partner’s name – the lower-earning spouse, called the annuitant – not yours. The contribution limit, which is the amount you can put in, is based on your RRSP contribution limit – not your spouse’s. That’s because you, the higher-income spouse, get to deduct it.

The idea is that the higher-earning spouse contributes to their spouse’s RRSP but gets to deduct the contribution from their higher income for a bigger refund. Then, later on, the lower-earning spouse will pull money out of the spousal RRSP and pay tax at a lower rate. This is income-splitting.

But, here’s the thing. There is usually a three-year waiting period until the annuitant – that’s the lower-earning spouse – can withdraw the money from a spousal RRSP. If the annuitant withdraws funds from the spousal RRSP within the first three years, the amount will be taxable to the contributor – the higher-earning spouse, in the year it was withdrawn. So it defeats the purpose, and there is no income-splitting. Money has to stay in the spousal RRSP for three years for the household to get the income-splitting benefit.

However – dramatic pause – there is one exception: The first-time Home Buyers’ Plan!

Putting them together

Here’s a life hack for aspiring homeowners who are buying with a spouse and an income disparity.

Step 1

Make sure you’re both eligible for the HBP. Provided that both the annuitant (the lower-income spouse) and the contributor (higher-income spouse) meet the eligibility criteria for the HBP, each spouse or common-law partner may make withdrawals from an RRSP for the HBP, even if it’s less than three years!

Step 2

Ensure you can make the money work. Make sure you, as the contributor, have enough RRSP contribution room and that you don’t need to withdraw the money for at least 90 days (you’re not buying a house for the next 90 days).

Step 3

Make the contribution. If Step 1 and Step 2 check out, you can use $35,000 of your joint savings, put it in a spousal RRSP where your partner is the annuitant, and withdraw $35,000 from both your RRSP and the $35,000 from your partner’s spousal RRSP.

Step 4

Celebrate the refund. You’ll get the $10,400 refund next tax season!

Step 5

Repay it properly over 15 years. The $35,000 borrowed from the spousal RRSP will need to be repaid by your spouse (the annuitant), not you. You’ll need to repay the $2,333 personally back to your own RRSP, and your spouse will need to repay their $2,333 to the spousal RRSP. If the required amount is not repaid, the attribution rules for regular withdrawals from a spousal RRSP do not apply, but the amount your spouse needs to repay – for example, $2,333 – will be added to their income in the year that they miss the payment since contributions to a spousal RRSP cannot be designated as HBP repayments.

This is an amazing way to maximize your money for a down payment when every dollar counts. The only way that the three-year attribution rules would apply is if the withdrawal is deemed ineligible for the HBP, meaning you didn’t qualify to use the program in the first place.

You asked me what the catch is. There really isn’t one.

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