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The Money Management Newsletter: Home Ownership
Thinking ahead - First time home buyers can use RRSP contributions to buy down mortgage debt


Like many Canadians, you may be wondering what you can do to reduce your annual tax burden. While it may be a little too late to alter the outcome of your 2004 tax year, you can definitely start arranging your finances in such a way that you will have more after-tax income in 2005.

Are you taking full advantage of the opportunities for tax savings, which already exist inside a Registered Retirement Savings Plan (RRSP)? Some investors may believe that they cannot, or should not, contribute to an RRSP because they are planning to purchase a new home. This isn't necessarily true.

There is a special program available called the Home Buyers' Plan (HBP) that allows eligible first time home buyers to withdraw (borrow) funds from their RRSPs without any withholding tax deductions or having to include the amount withdrawn in their income for the year of withdrawal. Properly timed and planned, it is possible to have your tax cake and eat it, too. For example, if you have sufficient RRSP contribution room, you could make a $10,000 contribution to your RRSP in December, receive a generous tax refund after you file your return, then withdraw that same $10,000 to use as a down payment on your home. Any RRSP funds used for this purpose must have been in your RRSP for at least 90 days. Also, the most that you can withdraw from your RRSP under the HBP is $20,000.

Using the RRSP funds to reduce your mortgage amount may yield significant results by reducing the total mortgage interest that you would otherwise have to pay. To repay the $10,000 amount noted above on a mortgage with an amortization of 20 years and a fixed rate of 5% would cost a whopping $15,399 in interest. It is best to weigh the mortgage interest savings against the potential tax sheltered growth of your RRSP if the HBP is not used, as your personal circumstances will influence the long-term results. Your investment advisor would be happy to run different scenarios to help you determine which option may be better under your circumstances.

Any funds borrowed from your RRSP will have to be repaid over a 15 year period. The amount of any missed repayment for a given year will be considered as taxable income by Canada Revenue Agency for that year and will increase your corresponding tax liability. So if you plan to borrow from your RRSP also plan to pay it back.

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