Tax Letters: You may be closer than you think to landing your dream home

Date: April, 2013

Consider the financial incentives that may be available to you to help with the initial crunch on your finances – your down payment.

Purchasing a home can take a huge bite out of your finances. How big a piece? It largely depends on what your home “must-haves” are. Usually, the longer your wish list, the more money you will need to land your dream home. However, most home buyers often need to compromise their wish list with the reality of their budget. So, it is especially important for first time home buyers to arm themselves with the right information regarding the cost of home ownership.

With the arrival of spring, the real estate market is in full swing. If you are looking to buy your first home in the near term, consider the financial incentives that may be available to you to help with the initial crunch on your finances, otherwise known as your down payment.

Home Buyers’ Plan (HBP)

If you are working and have been able to contribute toward a Registered Retirement Savings Plan (RRSP), the money that you have contributed to your RRSP may help to fund your down payment. The HBP allows a first time home buyer to withdraw up to $25,000 from his or her RRSP, which may be used to buy or build a qualifying home. If you are buying or building a home together with your spouse or common-law partner, your spouse or common-law partner may also withdraw up to $25,000 from his or her own RRSP (assuming that he or she is also a first time home buyer and has built up value of at least $25,000 in his or her own RRSP). The HBP program may give a couple access of up to $50,000 of pre-tax funds (to be withdrawn from their RRSPs) toward a down payment on a home.

Consider the following example. Assume Roger and Joan are purchasing their first home. With their combined income of $125,000 per year, they wish to make a 20% down payment on a $400,000 home (resulting in a total down payment of $80,000). Together, the two have saved $60,000 toward their down payment over the past five years. Their combined savings leave them $20,000 short of their $80,000 desired down payment. However, what would happen if Roger and Joan had diverted a portion of their savings into RRSPs over the past five years? If we assume that Roger and Joan each have a marginal tax rate of 30%, and had both contributed $5,000 a year to their own RRSPs, they would have each received an annual $1,500 income tax refund. After five years, their combined income tax refunds would have totaled $15,000 in additional savings.

As a result, Roger and Joan would now have $75,000 toward their down payment. Roger and Joan would us the withdrawal of $50,000 available to them through the HBP, the $15,000 received from their income tax refunds generated over the past five years, and their extra $10,000 of savings (which was saved outside of their RRSPs in our example) towards their down payment. Contributing a portion of their savings to a RRSP over the past five years has brought Roger and Joan $15,000 closer to reaching their desired down payment of $80,000.

Various fine print details should be considered when using the HBP. These details include that you must make sure to wait at least 90 days after making an RRSP contribution to make a withdrawal under the HBP; otherwise, the recent contributions to the RRSP may not be deductible to you. As well, you must repay the amounts withdrawn under the HBP back to your RRSP in annual repayments over a period of 15 years. If the required annual HBP repayment for a year is not made, the unpaid amount will be included in your income.

Home Buyers’ Amount (HBA)

The HBA is a federal government incentive, offered as a non-refundable tax credit (i.e. an income tax savings), and is available to first time home buyers. The maximum benefit under the HBA for a first time home buyer is $750. A claim for the HBA is made on your personal income tax return for the year that includes the acquisition of a qualifying home. Couples must share one HBA between them.

If you are a first time home buyer, be sure to consider the impact of the above information on your budget. With the assistance of these incentives, you may be closer than you think to reaching your goal of home ownership.

This article was originally prepared by Suraj Patel.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article.

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