You have 15 years to repay amounts withdrawn from your RRSP
You pay no tax on the amount you exit from your RRSP provided you repay it to any of your existing RRSPs, a new RRSP or a Pooled Registered Pension Plan (PRPP) within 15 years that follow. The 15-year repayment period begins two years after the calendar year you made the withdrawal.
For example, if you made a withdrawal in 2019, you will need to start repaying the amount before the end of 2021 or in the first two months of 2022. If you do not make the minimum required repayment in a year, you must include the amount you did not repay as RRSP income on your tax return.
What if you don’t need that money to make your down payment?
Even if you have enough money to make your down payment, it may be wise to take advantage of the HBP. If you have contribution room, you can deposit the amount you saved for your down payment into your RRSP, get the tax deduction, and use the tax refund you receive to repay the RRSP or cover other costs related to purchasing your home.
Remember, however, that you can only deposit funds into your RRSP, get the tax deduction, and withdraw funds in the same year if the funds had been in the RRSP for at least 90 days before the withdrawal.
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If your repayments are overdue, you will have to pay tax.
According to the latest available data (2011) compiled by the Canada Revenue Agency, almost 1.8 million people had made withdrawals from an RRSP that they had not repaid under the Home Buyers’ Plan. More than 840,000 of them (47%) had not made the full repayment required for the 2011 tax year. Therefore, an income tax was calculated on this amount at the marginal rate taxation of each of these persons.
While withdrawing funds from your RRSP to help finance a home purchase may seem like an attractive option, it’s essential to understand the downsides of this strategy:
You must waive tax-sheltered compound interest on the amount withdrawn until you repay it.
Suppose you withdraw the maximum amount allowed for a couple. In that case, your RRSP repayment of $4,666.66 per year for 15 years could significantly increase your financial burden, as it would be added to your mortgage repayment and pay taxes and services.
You may not be able to contribute regularly to your RRSP until your HBP loan has been paid off.
Consider using your TFSA
If you have deposited funds into a Tax-Free Savings Account (TFSA), it may be more beneficial to use this money to make your down payment for your new home than to withdraw funds from your RRSP. You won’t get the tax deduction for your RRSP contributions, but withdrawals are tax-free. You could also decide to re-deposit the amount in your TFSA, or not, at your own pace, without tax implications.
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