Concept #2 – Save 32.5% on the Down Payment for a Home
When the nesting instinct kicks in and the “home of dreams” is found, many home buyers have difficulty coming up with the required down payment. Some may have sufficient savings while others turn to relatives for a loan. Many find that the only alternate source of capital is their Registered Retirement Savings Plan (RRSP) and withdraw funds on a tax-free basis under the Home Buyer’s Plan (HBP).
The HBP allows first-time home buyers or those who have not owned a home in the preceding five years to withdraw up to $20,000 on a tax-free basis from their RRSP, provided the funds are used to purchase a qualifying home. Any amounts withdrawn under this plan must be repaid over the following 15 years and any repayment missed becomes taxable in the applicable year. Of course, these repayments are not considered to be RRSP contributions and are therefore not tax deductible.
Repayments are generally made in cash and because they are not tax deductible, the repayments are made with “100 cent dollars.”
Now for the really exciting news!
Repayments can be made in cash or “in kind” in the form of RRSP-eligible assets.
This can include Guaranteed Investment Certificates, eligible bonds, eligible shares, etc. Shares in SaskWorks Venture Fund also qualify as RRSP-eligible investments.
Rather than repaying the HBP loan with cash, consider repaying it with shares of SaskWorks Venture Fund which qualify for both the 15% federal and 17.5% provincial tax credits. First, purchase the eligible SaskWorks Venture Fund shares on a non-registered basis (outside of the RRSP) in an amount equal to the required HBP repayment (up to the $5,000 annual maximum). This entitles the purchaser to the 32.5% combined tax credit. The second step is to make the required HBP repayment to the RRSP with SaskWorks Venture Fund shares, using fair market value as the repayment amount.
(Note: if the existing RRSP is not permitted to hold SaskWorks Venture Fund shares it will be necessary to change the RRSP to a self-directed plan which is eligible to hold SaskWorks Venture Fund shares).
|Example:||Withdraw $20,000 to make Home Down Payment
Over next 4 years, purchase $5,000 in SaskWorks Venture Fund annually outside of RRSP
Contribute the units to RRSP as purchased – $5,000 repaid per year
Pocket the 32.5% tax credit! Net repayment on $20,000 loan: (1 – 32.5%) or 67.5% of $20,000 = $13,500The client has an additional $7,000 for investment by repaying RRSP loan with 65% dollars!
Investment in an LSIF is subject to certain restrictions on resale and redemption. An investment in an LSIF is speculative and may not be suitable for all investors. Income tax savings are only one aspect of an investment in an LSIF. The merits of the investment as a whole should be considered. LSIF shares are offered by prospectus only. Consult the applicable LSIF prospectus for full details of the offering.
Rewritten with permission, based on a series of original articles written by Allan Jacks, Vice-President, Sales, Crocus Investment Fund. Previously published in CAIFA Winnipeg IMPACT Magazine.