Cash taken out must be repaid on schedule
Ray Turchansky
Province
CREDIT: The Associated Press File Photo Real estate, such as a cabin, cannot be held directly in a registered retirement savings plan.
With the housing market booming during recent years, I’ve received a number of inquiries about registered retirement accounts and real estate.
Here are a few:
Q: Is there a method of taking money out of or transferring an RRSP and using the funds for a mortgage or down payment, without tax consequences? Previously the government had a RHOSP program for this very instance.
— M.D.
A: The RHOSP was eliminated some years ago, and we now have the RRSP Home Buyers Plan. It allows a first-time homebuyer to take up to $20,000 out of his or her RRSP tax-free and use it toward purchasing a home, but the amount must be repaid over a 15-year period.
If spouses are co-tenants of the house, they may each withdraw up to $20,000 from their own RRSP.
If the yearly amount is not repaid, it is treated as fully taxable income. And you lose that RRSP contribution room.
You can also have your RRSP make you a loan secured by a mortgage on your home, but it must be insured by Canada Mortgage and Housing Corp. or public mortgage insurer GE Capital.
When you hold your own mortgage within your own self-directed RRSP, you must pay yourself principal and interest at the going rate. Also, this limits the rate of return of your loaned RRSP amount to the mortgage rate you pay yourself, which at current rates means your RRSP could earn only five or six per cent annually for five or 10 or 25 years.
Furthermore, there is up to $1,500 in legal and financial costs in setting up such a plan, as well as yearly administration fees.
Q: A client withdrew RSP money several years ago to buy his first home. Last year he lost his job, and his income dropped significantly.
We understand that if he does not make a repayment in a year, the required repayment amount is added to taxable income.
Our question: Is there any mechanism to take the entire outstanding amount into income all at once and complete the homebuyer’s obligation?
— J.S.
A: You can only include as income the amount you were supposed to repay each year (1/15th of the original withdrawal) minus any RRSP contribution made that year.
Here’s the wording from the Canada Revenue Agency’s Home Buyers’ Plan Guide. Note the last sentence:
“If you repay and designate less than the amount you have to repay for the year, you will have to include the difference as RRSP income, on line 129 of your return.
“The amount you include on line 129 is the amount you have to repay for the year, minus the amount you repay and designate as an HBP repayment. You cannot include in income an amount that is more than the result of this calculation.”
Q: I would like to know how I could go about purchasing an income-producing real-estate property (outright) using my RRSPs. I am not interested in purchasing the shares of a company nor real-estate-based mutual funds.
— E. F.
A: Generally, real estate cannot be held within an RRSP.
I quote from Gordon Pape’s Buyer’s Guide to RRSPs: “You may not hold any type of real estate directly in an RRSP under most circumstances. This includes both residential and commercial property as well as vacant land.
“You can, however, own real estate indirectly, either by purchasing shares in real estate companies or through units in a real estate mutual fund or real estate investment trust (REIT). You may also hold mortgages in your RRSP.
“The one exception to the no-real-estate rule is a case in which your RRSP has foreclosed on a mortgage and taken possession of the property.
“In such circumstances, your RRSP may temporarily hold the property, provided it is promptly offered for sale at a reasonable price and sold within a year.”
© The Vancouver Province 2005