The Home Buyers’ Plan (HBP) enables would-be homeowners to access their RRSP holdings to assist in the acquisition of a new home.
In simplified terms, a person may withdraw up to $25,000 in a year and not have it included in taxable income, so long as the funds are devoted (a purposely soft term I have chosen for now) to the purchase of a new home by October 1 of the following year. The person then has about 15 years to re-deposit the money to the RRSP without incurring penalties.
The set of HBP rules is not the most complicated drafting one may come across, but is nonetheless tax legislation, and earns its stripes fairly in that regard. The cross-referencing of terms makes it a bit of a challenge to navigate, particularly for first-time homebuyers who by definition are likely to consult the rules but once in a lifetime.
And in a case heard near the end of 2009, a judge was presented with a set of facts that highlighted a conflict in those rules.
Undisputed facts
In June 2005, taxpayer AL withdrew $20,000 from her RRSP (the maximum allowed by the rules at that time), and used it as part of a series of initial payments to a builder for construction and eventual occupation of a condominium unit, with the last payment made in April, 2006. The agreement required AL to take possession by May, 2008.
Following her 2005 tax filing, AL was assessed by the Canada Revenue Agency (CRA) for a $20,000 income inclusion on the basis that she had not taken possession of an eligible housing unit prior to October 1, 2006 in compliance with the HBP rules.
AL initiated an appeal from the assessment to the Tax Court of Canada under the informal procedure. She represented herself opposite Crown counsel on behalf of the CRA.
Daisy-chaining definitions
For a taxpayer not to be immediately taxed on withdrawn RRSP funds, all parts of the definition of “regular eligible amount” (REA) must be satisfied, including the requirement that the individual must acquire the property by the completion date.
One part of the REA definition addresses possession, whereby an individual must intend to use the property as a principal place of residence not later than one year after its acquisition. In the case of a condominium unit, acquisition is the day the individual is entitled to immediate vacant possession of it. In the present case, the written agreement entitles AL to vacant possession at May 1, 2008, so that is the deemed completion date.
Another part of the REA definition addresses the issue of payments, which must be equal to or exceed the RRSP withdrawal and have been made between the withdrawal date and the completion date. Pursuant to this rule, the deemed completion date is before October 1, 2006.
The world be deemed
According to Crown counsel, the date of acquisition cannot be considered to occur after the completion date for purposes of habitability and vacant possession, and before the completion date with respect to the commitment of building payments. It must be one or the other; else, a person could engage a builder with an agreement for a very distant possession date, which in Crown’s opinion would be against the purpose of the HBP program.
The Crown goes on to suggest that the extension of the completion date was only available in circumstances when unforeseen delays occur, not if it is known in advance that the date of acquisition will be after the completion date. Indeed, the written agreement has a possession date of May, 2008 which, according to the Crown, implies that AL knew at time of RRSP withdrawal she would not be acquiring the housing unit before the completion date.
The judge acknowledged that the two deeming provisions were inherently in conflict, but declined to accept the further Crown submissions as to precedence of those rules.
In the end, the judge held that as long as the amounts withdrawn from the RRSP were used for the construction of the qualifying home before the completion date, that is October 1, 2006, it does not matter after that when the housing unit was ready to be occupied. In fact, the property was still not ready by the time of hearing in 2009.
Overall, it is a practical determination that comports with the reality of building timelines in many cases. Otherwise the rules would discriminate against buyers acquiring a property as part of a large scale building project, and that certainly could not be what the HBP was ever intended to do.