Home-buyers plan revisited: the answer to the question is not always clearcut

Money Digest, Feb, 1996 by Graydon Watters

Sometimes we try to communicate too much in too little space. That was the case in the December issue of Money Digest where we stated that "a downside risk of this [assisted home buyers plan] plan is that a taxpayer is not permitted to deduct contributions to an RRSP in the year that the funds are withdrawn."

This rule was established to prevent a person from "double dipping" by obtaining an RRSP tax deduction and the benefit of an interest-free loan in the same or subsequent tax years. This rule applies to "normal" RRSP contributions; rollover or direct contributions are not affected.

Generally, the only restriction on the use of RRSP funds is that an individual will not be able to deduct an RRSP contribution made less than 90 days before a withdrawal, and the amount not permitted as a tax deduction is the lesser of the contribution made during the same 90-day period. The nuances regarding this rule are extensive and any person considering the Home Buyers' Plan should read the Revenue Canada Interpretation Bulletin on this subject.

The December article perhaps overstated the financial aspects of the lost growth opportunity for the RRSP the difference can be marginal as the accompanying chart shows.

                     Case Profile of Benjamin Chessler

1. Retain RRSP and Take $20,000 Mortgage / 8%
Monthly mortgage payments                              $189.63
Total mortgage payments over 15 years               $34,133.40
RRSP beginning balance                              $20,000.00

Balance at end of 15 years / 10% compounded         $89,078.41
monthly
Taxes / 40%                                        ($35,631.36)

After tax dollars retained                          $53.447.05
Total after tax mortgage payments                  ($34,158.75)
Net After Tax Dollars Retained                                   $19,288.30

2. Take $20,000 Out of RRSP Under Home Buyers
Program
Monthly RRSP repayments                                $111.11
Total RRSP repayments                               $19,999.80

Balance at end of 15 years / 10% compounded         $46,051.72
monthly
Taxes / 40%                                        ($18,420.69)

After tax dollars retained                          $27,631.03
Total after tax RRSP repayments                    ($19,999.80)
Net After Tax Dollars Retained A                     $7,631.23

RRSP monthly contributions                              $78.52
Total RRSP contributions                            $14,133.60

Balance at end of 15 years / 10% compounded         $32,544.17
monthly
Taxes / 40%                                        ($13,017.67)

After tax dollars retained                          $19,526.50
Total RRSP contributions                           ($14,133.60)
Tax Savings / 40%                                    $5,653.44
Net After Tax Dollars Retained B                    $11,046.34

Total Net After Tax Dollars Retained (A + B)                     $18,677.57

Net advantage                                                       $610.73

Other Considerations

The major unknowns! What will the house be worth in 15 years? What will
happen to rents during this same timeframe? What's lifestyle objectives?

Charts provided by R. Wilson, CA of Hutchinson, Wilson.