Q: In 2007, we bought our home using $12,000 from my RRSP through the Home Buyers’ Plan program. Since then, I’ve made annual contributions and paid back approximately $5,000 on the loaned RRSP money. This year I won’t be able to make a contribution to my RRSP, or claim a portion as a HBP payment. I make about $83,000 a year and my wife doesn’t work. Since I can’t make a payment on the HBP loan this year, how will I be taxed? Will it be on the full $7,000 that’s still owed, or will it be a 1/15th of the original $12,000 that I borrowed?
— John, Toronto
Ayana Forward is a Certified Financial Planner with Ryan Lamontagne Inc. in Ottawa:
Good news, John. You will only be taxed on the required loan repayment portion that’s due in that particular tax year—calculated as 1/15th of the original loan amount. The amount will be treated as RRSP income on your income tax return.
Ayana Forward is a real estate investor who also holds the Certified Financial Planner (CFP®) designation. Ayana is fee-based Financial Planner with Ryan Lamontagne Inc in Ottawa, ON.
Romana King, senior editor and real estate specialist at MoneySense:
As a general rule, the Home Buyers’ Plan (HBP) is a great way to dip into your RRSP savings for a tax-free loan that can be used as a down payment on a home. However, you need to make sure you qualify—you and your spouse must be first-time buyers—and that you follow the rules.
For instance, you cannot withdraw more than $25,000 per person from your RRSP using the Home Buyers’ Plan—for a maximum withdrawal of $50,000. Single-income families can still take advantage of the maximum, as long as the employed spouse contributes to both her own RRSP as well as a spousal RRSP, and she makes the contributions to the spousal RRSP at least two years before withdrawing that money.
However, to keep the HBP loan tax-free you must contribute at least a minimum repayment portion to your current RRSP account in each calendar year and then declare this amount on your income tax form. The calculation of that minimum repayment is based on the initial loan amount you withdrew divided by 15—as you have 15 years to repay the loan. For a $12,000 loan that works out to $800 per year.
As Ayana mentioned, if you don’t make the annual repayment, that annual amount is treated as RRSP income and you will pay tax based on your marginal tax rate.
Romana King is the senior editor and real estate specialist at MoneySense. She is also a licensed real estate sales agent. Follow her on Twitter (@RKHomeowner) or on Facebook. If you have real estate concerns or questions, please email Romana directly at firstname.lastname@example.org.