The first 60 days of the year is commonly referred to as “RRSP season.” That’s because deposits made to your RRSP in this period may be claimed as a deduction against a person’s prior year’s income.
For those who have participated in the RRSP Home Buyers’ Plan (HBP), it might be a higher priority to regard it as “repayment season,” since failure to pay an instalment will result in the amount due being included in taxable income for that prior year.
For HBP loans commencing prior to 2009, a repayment will be due in the 2010 tax year, for which the last allowable repayment date is March 1, 2011.
HBP in brief
The HBP allows individuals to withdraw some of their RRSP funds to buy or build a qualifying home. As long as the individual and the property meet the qualification criteria, the amount withdrawn is not included in the individual’s income.
The individual must buy or build the qualifying home before October 1 of the year after the year of the withdrawal. RRSP repayments must commence the second year following the year of withdrawal, continuing for no more than 15 years. A minimum of 1/15 of the original withdrawal amount is due each year until the full amount is repaid.
What is it really costing you?
An RRSP can certainly be a useful vehicle to accumulate funds for a home purchase, with access to those funds facilitated by the availability of the HBP. Still, participants should consider carefully their ability to repay HBP before making an RRSP withdrawal.
As already mentioned, unpaid instalments are taxable in the year the instalment is due. As the original funds will have already been applied to the home purchase, cash will have to be found to pay the tax on the income inclusion, likely from current income sources.
To illustrate, assume that a homeowner with a 40% marginal tax rate fails to repay $1,000. In order to make the subsequent $400 tax payment, $667 of gross income will be required. Arguably, this could be viewed (at least in part), as a beneficial deferral of the tax payment. However, if the individual is in a higher bracket at that later time, it will cost relatively more in pre-tax income to make that payment.
Of course, it is even more costly to actually fulfill the $1,000 instalment, requiring $1,667 out of gross income. Mind you, if you don’t make the instalment then you don’t regain any RRSP room. This brings to mind the newly available Tax-Free Savings Account (TFSA), which may be a good alternative or complement when saving for a home.
By the way, if a person misses the first 60 days deadline, all is not lost. Any RRSP contributions made during 2010 may be designated as HBP repayments at tax filing time, but keep in mind that these amounts will then not be deductible against 2010 income.