How to truly maximize the Home Buyers Plan with your spouse
The Home Buyers’ Plan (HBP) is nothing new in Canada, the basic gist being that RRSP contributions, which generate a tax deduction in the year paid, can be withdrawn later (max $25,000) to purchase a qualifying home in Canada. There are number of requirements that must be met, including: when the home must be purchased by, how long the funds must be in your RRSPs, and what meets the definition of a qualifying home. Such requirements are outside the scope of this blog post, however most accountants and financial advisers are aware of the requirements so you should not have difficulty making sure you abide by them. The focus of this post is how to maximize the HBP with your spouse.
Spouses who are in different tax brackets, especially when a spouse is subject to the highest tax bracket and the other has little to no income, should consider spousal RRSP contributions. The higher income earner (contributor) will receive a tax deduction for spousal RRSP contributions in the name of his/her spouse (the “annuitant”). Further, the funds will be taxed in the annuitant’s hands provided they remain invested for at least 3 years. Funds drawn by the annuitant within the first 3 years revert back to the contributor for tax purposes thereby potentially negating any benefit as they would be taxed in the hands of the higher-income spouse. The exception to this rule is if the funds are withdrawn under the HBP. The annuitant can withdraw up to $25,000 of RRSP contributions made by the contributor. The HBP rules require the funds to be paid back or taken into income by the person who withdrew the funds over a period of 15 years. The following example helps illustrate the benefit:
Brad has a high paying job of $150,000 year and Katie is a stay at home mom, working part time for $10,000 a year. They are renting a condo in Burlington and are looking to purchase a house in the not too distant future. Over the past 5 years Brad has been able to save in his RRSPs $35,000 whereas Katie has never contributed to her RRSPs. The family also has a savings account put aside for their home purchase with a balance of a little over $30,000 saved from Brad’s wages. Brad could set up a spousal RRSP plan and make $25,000 of spousal contributions in 2017. Brad will receive a $25,000 tax deduction on his 2017 tax return thereby saving tax at his high marginal rate. As long as all the requirements have been met, Brad and Katie can each withdraw $25,000 to use towards the purchase of a qualifying home. $25,000 from Brad’s RRSPs and $25,000 from Katie’s RRSP. Two years after purchase, the HBP must start to be paid back, over 15 years, and this can be done in one of two ways. First, by contributing funds to the RRSP plan or alternatively by being taken into income and paying taxes on the annual amount. If Brad and Katie’s employment situations remain the same, it makes more sense as a family to have Brad continue making RRSP contributions to his and the spousal RRPS plans, while having Katie forgo contributing to her RRSPs. The resulting effect is that Brad will continue to receive tax deductions (less the required HBP payment) at his high marginal tax rate whereas Katie will have to pay tax on the $1,666 annual amount ($25,000 / 15 years) at her low marginal tax rate, potentially avoiding tax altogether depending on her taxable income. It’s worth noting that Brad’s contributions to the spousal RRSP plan after the HBP withdrawal cannot be designated as repayments by Katie.
The Home Buyers Plan is a great tool for entering the real estate market and as illustrated above, can even allow you to technically split income with your spouse.