Thursday, February 17, 2011

RRSP Home Buyer’s Plan – A Cautionary Tale

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.


  1. I had no idea about that restriction - seems pretty strange!

    I didn't use my HBP until 1999, so luckily I didn't have any problems.

    Thanks for the mention.


  2. @Mike: The only difference now seems to be the size of the "forbidden window" of RRSP contributions. Other than that, if someone today made a contribution less than 90 days before making a HBP withdrawal, they'd be in a situation similar to the one I was in.

  3. Ouch, yet another reason why we should simplify the Canadian tax system. How much money and time is wasted just understanding, executing, and administering these programs- RRSPs, RESPs, TFSAs, and the myriad of other tax breaks for children's activities, transit passes, and so on? And we continue to pile more on.

  4. @Greg: You make a good case, but I think forces work against you in some cases. Consider the TFSA. Instead of introducing the TFSA, the government could have just declared that the first $1000 of investment income each year is tax-free. This isn't exactly the same, but is vaguely similar. (This $1000 exemption used to exist for interest income many years ago.) However, a new government could easily eliminate this $1000 exemption with little fuss. But there would be a huge backlash if a new government were to try to eliminate the TFSA. So, those who want to make a permanent mark are pushed toward complex policies rather than simple ones.

  5. I can see the rationale behind this rule, but it should be completely transparent. You could have people putting their whole downpayent in an RSP just to get the tax deduction before withdrawing the whole amount for a house.

    Of course, your situation back in 1993 was punitive and you were misled. I didn't understand all the steps to reverse the charges, but clearly it was huge headache.

  6. @Gene: I agree with you that the rule makes sense. As a matter of fact, it is quite permissive. I could easily see the time period being a year rather than only 90 days. It would be nice if there were some procedural method of preventing someone from breaking this rule rather than punishing them after the fact.

  7. I'm not sure I see the rationale for any waiting period at all. What is the problem with someone putting money into an RRSP 5 minutes before invoking the HBP to make a downpayment on a house?

    Whether the HBP makes any sense at all is a separate question...

  8. @YourMoney: Fortunately for me the $2500 ended up back in my pocket because I was able to get several transactions reversed.

    @Patrick: I think the idea is that when you make an RRSP contribution, you're supposed to be pure of heart and plan to leave the money there until you retire. Presumably, we're too dumb to plan more than 90 days in advance.

    1. The first reply above is to YourMoney's comment:

      RRSP is often a very messy topic to fully organize in terms of qualifying rules and information. But hopefully your $2500 ends up in your disposable income rather than a tax deduction.