If you are aware of the Home Buyer’s Plan or the Lifelong Learning Plan, you know that there are ways you can get money out of your RRSP (temporarily) through tax-free withdrawals. The programs require that you pay money back to your RRSP over time and the CRA will inform you of how much of the loan is required to be paid back in any given year.
There is no rule that says you have to make the repayment – only that if you don’t, then the year’s required re-payment amount will be included as taxable income for that tax year. So if you are in a low income year and you have a repayment required – it might not be a bad idea to skip the payment and add the payment amount to your taxable income – it won’t make a significant impact on your taxes.
So for example, if you contributed to a spousal RRSP for your spouse or common-law partner and used money for the HBP or LLP – if your spouse is a stay-at-home parent with no income – they won’t pay tax on skipping the re-payments. Note that their income deemed to have been received may reduce the spousal credit if you qualify for it.
Additionally, you can make contributions to your RRSP and simply elect to not use the contributions towards the required HBP or LLP repayments IN ADDITION to not claiming the RRSP deduction. You would do this if you wanted to shelter money for long term growth NOW but wait until a higher income year in the near future to use the deduction to reduce taxes.
As always, make sure to consult with your own qualified financial advisor before engaging in any financial strategies.
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We’re doing this very strategy with my wife’s hbp since she is not working. There is a decrease in the spousal amount that I can claim (I can’t remember how much) but it works out much better if she just claims the hbp amount owing as income.
Mike, I added a sentence to warn people of the reduction in spousal credit if they are eligible for it. Thanks again!
Preet
Hey, does this mean that if I don’t make the repayment and add the payment amount to my income for the year that my total hbp balance owing will go down by the amount that I should have paid? Do I add the payment amount to my income on my tax return or does Revenue Canada recalculate my income after I file?
@Allie – correct, the HBP balance goes down. If you use a software program it will make the adjustment before you file. I assume you can make the adjustment on a paper filing as well but I’ve never filed a paper return… :)
Maybe I’m confused, I had another question but Allie’s stumped me. If you added the HBP payment amount to your income instead of paying back the amount you owe for that tax year, wouldn’t that increase the payment amount for the remaining years? I borrowed 20k from my rrsp in 2007 and have to make the $1333 payments each year for 15yrs (beginning in 2009), otherwise I understood skipping the first payment makes the remaining ones each $1428, (or higher if you skip any future years?) and so on until the 20k is paid back.
My original question was going to ask what your thoughts are on the advantage of repaying the HBP as fast as possible. I know it’s an interest free loan, but doesn’t your rrsp benefit most when it’s at it’s full amount?
Think of it as taking the money permanently out of your RRSP, it would be subject to deregistration and you would owe tax on it. Your annual payment would still be $1333 for the next year. If you didn’t pay that, then the $1333 gets included as taxable income. You could do that every year until the loan balance is zero but the initial benefit of getting a tax refund to put money in the RRSP would get completely nullified (or more if your tax bracket keeps increasing).
There is a tradeoff to consider for the second part of your question. Money in the RRSP earlier can certainly benefit from more time in the market, assuming that it only goes up. So it is possible that by delaying the payments over time you actually end up with a lower cost base (and therefore a greater return) if markets are correcting for an extended period of time.