Q: I am totally disappointed with my investment advisor’s advice in terms of tax issues. Four years ago, I contributed to my wife’s spousal RRSP for $25,000 in order to borrow under the Home Buyers’ Plan (HBP). Now we need to repay the HBP for $1,666. By accident, I was guided to contribute to the spousal RRSP account and told I could designate $1,666 as HBP repayment. However, a tax software doesn’t allow me to designate my spousal contribution as my wife’s HBP repayment.
I found not paying back the HBP repayment would generate a larger refund by using the software to compare two options of dealing with the $1,666. The first option was to pretend my wife put $1,666 in her RRSP and paid back the HBP repayment directly; the other one was to use the $1,666 RRSP to deduct from my income. Because I had full-time salary and my wife almost had no income in 2015, the second option from the tax software calculated a bigger refund for us, which I think makes sense in our situation.
A: I think one of the first mistakes you made, Scott, was taking tax advice from your investment advisor. My experience has been that some investment advisors give pretty crummy investment advice and that’s what their purported specialty is in the first place. So you should take an investment advisor’s tax advice with a grain of salt.
I’m sure some gardeners know a lot about auto mechanics. But I’d rather have my mechanic look at my brakes.
When it comes to taxes, if you don’t have an accountant, you should at least consider the Canada Revenue Agency as a potential source of information. In particular, the CRA’s website is chock-full of information about tax issues like this. A quick Google search would have given you (or your investment advisor) that right answer.
When you take a withdrawal from your RRSP under the Home Buyers’ Plan (HBP), you can use up to $25,000 if you are an eligible first-time home buyer to buy or build a qualifying home. In your case, Scott, part of the confusion relates to the spousal RRSP issue.
A spousal RRSP is an RRSP that is owned by one spouse and contributed to by the other spouse. Your wife’s spousal RRSP is considered her RRSP and withdrawals, whether for the HBP or any other reason, are considered withdrawals in her name. Contributions, on the other hand, are considered yours for tax purposes and deductible on your tax return.
So the withdrawal from her spousal RRSP was her Home Buyers’ Plan withdrawal and the required repayments or re-contributions – at least 1/15 of the withdrawal beginning no later than the second year after withdrawing the funds—are hers to make.
Your spousal contribution this year, Scott, was a contribution in your name and not counted towards her required repayment. So she will have to include the minimum required repayment in her income for 2015.
A bigger issue may relate to the initial $25,000 contribution and withdrawal four years ago. If you contributed the amount and withdrew shortly thereafter, it may be that the HBP withdrawal was not even a qualifying withdrawal in the first place. If you make contributions to a spousal RRSP and your spouse takes withdrawals in that year or the next two years, some or all of the withdrawal may actually get attributed back to you and be taxable on your tax return.
So if you contributed $25,000 to her spousal RRSP and withdrew the money under the Home Buyers’ Plan right away, which it sounds like you may have done, the withdrawal should have been taxable fully to you in the year of withdrawal and all this HBP repayment stuff may be all for naught, Scott.
That significant nuance aside, you mentioned that there is a difference in refunds based on how you claim the contribution in your tax software, but you don’t have the option to “pretend”, as you put it, by claiming it as a contribution by her. A spousal contribution by you can only be claimed by you.
The reason the refund is higher if you claim the deduction instead of her is because your tax bracket is higher. Specifically, if you claim a deduction of $1,666 for your contribution and she includes $1,666 in her income for not making the repayment, your tax rate on the refund is higher than her tax rate on the income, making you guys better off as a couple.
I like the Home Buyers’ Plan as a tool. I think it can be a great way to save for a home for a young person or a great tool to leverage if you haven’t owned a home in the past 4 years and are considering becoming a homeowner. The key, as with many financial concepts, is to make sure you understand the ins and outs and to get advice from a qualified professional.
In particular, keep in mind that many financial advisers are just product salespeople, so be careful about taking their financial advice. Far too many of them have no idea about how to help you plan your finances. Maybe someday regulators and governments will clue in to that fact and start to regulate people’s titles and the financial advice industry to protect consumers like you, Scott.
A previous version of this article incorrectly stated that HBP repayment begins four years after withdrawal of funds. MoneySense regrets the error.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.