Tag: HBP

Whether a motor home qualifies for the RRSP Home Buyers’ Plan

At issue

The RRSP Home Buyers’ Plan (HBP), allows individuals to withdraw some of their RRSP funds to buy or build a qualifying home.  Presently a person may access up to $25,000 for the HBP, with payback of the borrowed funds to the RRSP required within a 15 year time period following property occupancy.

While there are many rules as to when and how to make use of the HBP, the threshold issue is whether the property under consideration actually constitutes a “housing unit” for the purposes of the program. The Canada Revenue Agency (CRA) issued a clarification letter in March 2013 revoking comments it had made in an earlier letter that purported to extend the definition to include a motor home. 

Income Tax Folio S1-F3-C2: Principal Residence

A “mobile home” is among the list of property types in Folio section 2.7 that the CRA has accepted a housing unit that can then qualify as a principal residence.  A principal residence does have to be in Canada.

(For those unfamiliar with Folios, in 2012 CRA began revising and consolidating its commentaries onto its website in the form of its Income Tax Folios.  This Folio was published in early 2013, replacing Interpretation Bulletin 120-R6 Principal Residence.)

RC4135 Home Buyers’ Plan (HBP)

There are two components to the definition of a qualifying home in the CRA’s HBP Guide: what type of property is it, and where is it located? 

As with the principal residence definition, it is likewise accepted that a mobile home may be a housing unit.  But unlike a principal residence, a qualifying home for the HBP must be located in Canada.

2011-0423971E5 Home Buyers’ Plan – Qualifying home

This CRA letter is in response to a taxpayer inquiry as to whether a “motor home” would qualify for the HBP.  It appears from the brief factual outline that the taxpayer intended to purchase a small motor home chosen or designed to accommodate for a person with disability needs. The home would be driven south for the winter months, returning to Canada for the warmer months.

After referencing the foregoing definitions for a housing unit, the writer stated that “a motor home is a type of mobile home that is considered a housing unit.” [My emphasis added.]  But based on the intended travel plans, in the CRA’s opinion it would not be located in Canada and therefore not qualify for the HBP.

The letter includes the standard lead phrase: “Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.”

2013-0482291I7 Home Buyers’ Plan – Motor Home

This is an externally published memo between CRA departments regarding the above stated conclusion that a “mobile home” includes a “motor home.”   

As there is no definition of either term in the Income Tax Act, resort is taken to the Concise Canadian Oxford Dictionary, which defines:

  • a mobile home as “a large transportable structure equipped with living accommodations, permanently parked, and used as a residence”, and 
  • a motor home as “a large motor vehicle equipped as a self-contained home for camping or long trips.”

As a motor home is not affixed to land, it is viewed as a vehicle, and thus not eligible for the HBP.  The interpretation on that point in the previous technical letter is thereby revoked – with apologies expressed for any confusion or misunderstanding caused. 

Practice points

  1. Be reminded that technical letters issued by the CRA are not legally binding on courts, not legally binding upon the CRA itself, and are subject to revocation.
  2. A non-vehicular mobile home remains qualified for the HBP.
  3. A property that does not qualify for the HBP because it is outside Canada, may nonetheless qualify for the principal residence exemption.

Repay your HBP … or pay dearly for that delay

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.

Homebuyer triumphs in the face of conflicting HBP acquisition rules

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.