Home Buyers Plan – Finally figured this out
Ok, perhaps I was way out in left field when I started the home buyers plan.. but for some reason I always thought when they said ‘repayment’ .. it was actually me putting money back into the RRSP via my income tax return every year. So when I went a few years without seeing any money in any account anywhere.. I wondered what was going on.. was Royal Bank (where the RSP account was held) screwing me over? Where was my money that I was repaying?
Insert the simple answer.. there is no money I’m repaying… unless, of course.. I put money back into RRSP’s the last few years.
How it works, and I just realized this (how stupid do I feel), is that when I purchased my home.. I used $7200 of my RRSP’s to do it. The benefit of the Home Buyers Plan is that as a first time home buyers, I could do that tax free, as long as I “repayed it within 15 years”. Ok, that’s really not what happens, I don’t have to repay it in the 15 years, but if I don’t.. it would be just like I withdrew the money and got taxed on it… Be it over a 15 year period.
Confused? Well, so was I… so I’ll use this example now that I have it figured out.
For example.. I have 10,000 in RRSP’s in fund XYZ which I withdraw and use to purchase my first home. Now usually if I withdrew my $10,000 I would get taxed at my bracket which would be completely stupid as it defeats the purpose OF an RRSP (registered retirement savings plan). Anyhow, so since this is my first home, the government will let me withdraw it tax free. Thank you very much Mr. Gov’t for letting me spend my money on my down payment. 
Now, after two years I get a statement from the gov’t (I think it comes in the tax bundle) saying that my repayment amount is $666.67 a year for the next 15 years.
What I originally thought, was that I have to pay 666.67 back.. however I also thought that if I had a refund of say.. $2000, that the $666.67 would be taken off of that, and put back into my original RRSP account. This is the not the case!
So if you make contributions to your RRSP.. the first $666.67 is going to be entered without the tax benefit you would usually get for an RRSP. This is how you ‘repay’ your original withdrawal, without any tax implications!
So for a few examples:
- if I contributed $1000 into my RRSP account this year. I would only get the benefit of $333.33 or whatever is left over after the $666.67 is taken out for repayment.
- if I didn’t contribute at all into my RRSP, well I basically paid the tax on 1/15 of the $10,000 I withdrew for the down payment. Again, this would be just like if someone withdrew $10,000 to pay off a credit card, except the difference is that I would be paying 1/15 of the taxes each year I don’t repay.
See what I mean? So getting back to my real life example, I have $1200 approximately which I’ve repayed on my RRSP .. however since I actually haven’t contributed to the RRSP account (I’ve traded without a registered account), but still marked it on my income tax as my repayment each year. I’ve essentially paid taxes taxes just like if I would have just withdrew 1200 in RRSP money. Stupid mistake on my part.
So really, I could contribute $1200 to my RRSP account, and just file the check under ‘mistake’ as I won’t get the tax benefit from it as it goes to repay what I’ve already reported repaid. The good news is that I will likely do this to start my RRSP savings again.
I hope I’ve cleared up anyone whom has had or made the same mistake I did. It’s not a big deal, but always nice to understand how it all works.
More information can be found here on the Home Buyers Plan (government of Canada website) also I would highly recommend the article by Million Dollar Journey here.
