Why First Time Home Buyers should Leverage their RRSP and the Home Buyer Plan

I often hear from people that they want to save for a down payment before they think about buying their first home, but in the meantime prices are going up on values faster than they can save.

I always recommend getting an RRSP and using the Home Buyer Plan (HBP) to them, but not just strictly as a saving tool. There are a lot of ways that this can be beneficial.

While people often say they don't have the money to save for their RRSP or down payment, consider making automatic deductions. Each payday pay your RRSP $25 or $50 or try doing direct transfers from your bank account by "rounding off" your bank balance a few dollars each week. You will be surprised how fast it adds up and how little you miss it. You can also ask your employer to offset this by lowering your tax deductions at source to account for the higher refund you will receive, so often this works out to the same or similar "take home" amount.

Firstly, the contributions to the RRSP are tax deductible. So while you are saving up for your own home, you will get a tax break in the form of a higher refund or lower tax bill. This can be from 20% up to 40% of what you are putting into the RRSP coming back as a tax refund. Often the strategy ends here, once enough is saved the RRSP holder takes the money (up to $25,000 per spouse) out under the Home Buyer Plan and uses it as their down payment. Under the HBP you can take out money out of the RRSP without it being considered income or losing your tax breaks so long as you put it back in an RRSP over 15 years.

However, there are other ways to leverage that RRSP to help you buy your first home. The money can be used for anything, not just a down payment. The only requirements for taking it out are that you:
- are purchasing a home you intend to live in within a year of purchase
- you haven't owned another home in the past 5 years or have a balance owing to the HBP already
- The money has to be in for at least 90 days before the withdrawal
- you must make the withdrawal within 30 days of the purchase and if multiple withdrawals, they have to be in the same year
- you agree to repay the withdrawal over 15 years (with a 2 year reprieve before you starts) into your own RRSP, but if you can't make that payment you pay tax on the payment you should have made to offset the original tax break you received. (Note: in a year you have little or no income, you can basically skip it with no tax consequences).

Sometimes, using the HBP money in other ways can help make the purchase a reality, for instance letting your mortgage broker know you will use the withdrawal to pay down existing debts, instead of entirely as a down payment, may help you qualify for a mortgage or higher amount that you may not have qualified for due to "Debt Service Ratios" as these are used to determine how much of your income goes to debt. Even if you have only a few payments left to go paying down a debt, this can be held against you in qualifying for a mortgage. One client did this as we suggested and qualified for a mortgage of $80,000 higher. Making it possible to find a home available in the approved range that wouldn't have been previously possible. Often people take all the cash they have to pay down debt to try and improve debt service ratios, but recycling it through the RRSP first gets them the tax refund and the money to pay down debt in order to make that money go much further.

Another idea is that if you have a lump sum you are planning to use for your down payment or can "borrow" for 90 days somehow, put in the RRSP before using it to buy the property. This will allow you to get both a tax break and a nice size tax refund as well. Therefore getting more "bang for your buck" with the same money. Putting your down payment fund in the RRSP first may give you enough money to qualify for a larger mortgage, or provide you with money for closing costs, moving expenses, and incidentals like renovations or furniture.

Sometimes using this strategy makes the difference between making it work to buy your home or not. People are frequently disappointed that they can't qualify for quite enough money, when doing this can make it work. Mortgage brokers try to be helpful but aren't always knowledgeable about RRSP's options that might help or that sometimes less down payment and paying down the debts can be the key, even if they are small ones.

Keep in mind that as a first time home buyer you will also qualify for the First Time Home Buyer Credit which gives taxpayers a $5000 non-refundable tax credit in the year they buy their first home. This translates into a $750 extra refund.

Feel free to contact us at service@painfreetaxes.ca for free tax planning around buying your new home or leveraging your down payment in the best possible way. You might be surprised how using these strategies can make your dream of owning your own home a reality faster, or leave you with a little less cash crunch in the process.

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CRA Reviews and getting supporting documentation. We do this for no extra charge, and sometimes its a lot of work.

I frequently end up helping clients to support a review of their tax deductions with Canada Revenue Agency.

This is a normal part of the self-assessment process we have in Canada in particular since returns are usually electronically filed without documentation. It is not what you would call an audit and it isn't usually triggered by anything considered suspicious or fraudulent on your tax return.

It is important however to provide the correct information in the requested amount of time for your review to avoid having your expenses reversed. Otherwise you may owe CRA back some money.

This is something that I help my clients with as part of my service in order to save them headaches.

If for some reason CRA rejects your expenses during a review, that doesn't mean they can't be reinstated. Often they just need more documentation.

In one case I had a client with $18,000 worth of medical that was rejected partly because insufficient information was provided and partly because CRA had misinterpreted some of the information. The client thought CRA was refusing to allow the claims unfairly, and he was right. In this case, because it was complicated, I opted to file a Notice of Objection on his behalf and formally request a formal review of this decision. I also submitted the correct information that hadn't been submitted originally by his prior service provider. In this case, almost all the claims were reinstated except for a couple of things we had advised him were not going to be accepted already.

This case took a lot of work and follow up and quite a bit of effort to make a clear picture for CRA to understand, in part because there were complex Medical Travel circumstances and some documentation was difficult to obtain.

However, in the end we were very successful, because we cared enough to help. And it didn't cost the client anything extra.

If you have had deductions rejected by Canada Revenue Agency (CRA) you should talk to us for free. Maybe they can be reinstated, if we can help you through the process.

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service@painfreetaxes.ca

Extended Health Benefits Frequently Not Included as a Deduction. Leaving hundreds of your refund unclaimed.

I spend a lot of time educating my clients about what is a Medical Expense that they can use that they haven't thought of. The most frequently overlooked is the Extended Health & Dental plans. SOMETIMES these show up on your T4, but more often than not the employer/payroll deducted plans only show on your paystubs.

There is a common misperception that if your Health Plan comes off your payroll it is not deductible, but the employee paid portion is. Companies sometimes will issue a letter stating the amount paid but that is rare, normally all you will receive is your paystubs and we can use either each paystub or the final one from the year to determine the total paid for the year. Often retirees get this type of expense deducted off a pension cheque and get a letter once a year that contains the amounts for their plans.

In many cases their former tax professional has not mentioned this to them, even though the health plan was obvious from their medical receipts or statements.

For many families this is the most common medical expense and can make the difference between having enough to claim and not (because 3% of your income is subtracted from your expenses like a deductible).

I have done adjustments for at least 6 clients recently for clients to claim this type of expense that has been overlooked for years. The average refund for these adjustments is at least $900-$1200 per family. Sometimes more if many years have gone by.

Adjustments can be made for up to 10 years. Contact us for a free review of your return. service@painfreetaxes.ca

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