Money Smarts recently ran a piece about the RRSP Home Buyer’s Plan and this reminded me of some trouble I got myself into years ago with this plan. Today the 90-day rule says that RRSP contributions made less than 90 days before making a Home Buyer’s Plan withdrawal cannot be deducted from your income in any year. The old rules used to have a longer restriction as I found out.
Below is the explanation of my troubles that I wrote on a public forum. Something similar could still happen to you today if you run afoul of the 90-day rule. For those who like happy endings, I did eventually manage to save my $2500 (a large sum to me at the time).
I used my RRSP money to buy a house and due to some unfair rules, I may lose about $2500. If you are thinking of entering the RRSP home-buyer’s plan, you may want listen to my troubles. My life story follows.
In Jan. 1993, I had $12,000 in my RRSP. In Feb. 1993, I put in $5000 and claimed it as a deduction on my 1992 tax return. In Aug. 1993, I bought a house using the full $17,000 in my RRSP as part of the down payment. Under the rules from the first year of the RRSP home-buyer’s plan, the $5000 contribution was permissible because it applied to the 1992 taxation year. When I asked for information about the home-buyer’s plan in May of 1993 from Revenue Canada, they sent me the previous year’s leaflet, and told me to add a year to all the dates. However, one crucial date was changed for the second year of the plan. Contributions between 1992 Dec. 2 and 1994 March 2 are not permitted.
I received a cheerful letter from Revenue Canada about 2 weeks ago explaining that I would have to include the $5000 as income for 1993. After several phone calls, I discovered that I would not get this RRSP room back for the future, and that the $17,000 that I have to pay back to my RRSP would not be reduced to $12,000. This means that after paying back the $17,000, my RRSP would contain $12,000 untaxed and $5000 taxed. When I take this money out in the future, the $5000 would be taxed again. Based on a 50% marginal tax rate, this means that I lose $2500.
I finally got to speak to a pleasant and intelligent person at Revenue Canada named Mary Allen. She agreed that my $5000 was going to be double-taxed and that the situation was unfair. She also understood that even though I would probably win if I fought this, the loss of money and time in the fight would be significant to me. She said that there was one possible out. If I put $5000 back into my RRSP with a T1037 form as a home-buyer’s plan repayment, and then take it back out again with a T3012-A for the purpose of having my 1992 tax return reassessed to remove the RRSP deduction, then I could get back the right to put $5000 in my RRSP in the future, and I would only have to pay back another $12,000 into the home-buyer’s plan.
As it happens, I can scrape up $5000 to be tied up for a week or so in all of this nonsense. I have also talked to Royal Trust, and they seem quite willing to do all of this for me, even though it is just a bunch of paper work for nothing. There is still a catch though. The RRSP plan number on my T3012-A form (for withdrawing money) has to match the RRSP plan number on the RRSP deduction form that I used on my 1992 tax return. However, when I withdrew all of my RRSP to buy the house, Royal Trust closed my RRSP. Their normal mode of operation would be to open a new plan for new contributions.
Right now, my $2500 stays or goes based on whether my contact at Royal Trust can get around the normal process and use the old plan number. This whole business is making my head hurt. I'm very conservative with money. If something seems too good to be true, I avoid it. I investigated the home buyer’s plan for some time before entering into it.