Using RRSPs for real estate, higher learning

Saving for education, paying off student loans or buying a home often have higher priorities for young people than contributing to an RRSP.

But the Home Buyers Plan and the Lifelong Learning Plan can provide options for anyone saving for retirement but in need of investing in more immediate priorities – especially with the increasing price of real estate and tuition.

The Lifelong Learning Plan allows you to withdraw up to $10,000 in a calendar year from your RRSP to finance training or education.  You cannot withdraw more than $20,000 in total.  To qualify, three conditions must apply:

  • The student must be a full-time student or a part-time student if he or she meets the disability conditions.
  • The RRSP owner has to be a resident of Canada.
  • The student has to enroll in a qualifying educational program at a designated educational institution.

People may participate in the plan as many times as they wish after repaying an LLP withdrawal.  Older students should keep in mind that the education has to be completed before the end of the year the person reaches the age of 71.

You and your spouse may be participants in the LLP at the same time.  You may also use the LLP for either or both of you.  You may be eligible to participate in the LLP even if you have withdrawn amounts from your RRSP under the Home Buyers’ Plan  that have not been fully repaid.

Students must receive a written offer to enroll before March of the year after a withdrawal from their RRSP.  Participants who withdraw funds from their RRSP under the LLP must repay the amounts over a period of up to ten years.  For example, Suzy withdrew $8,000 from her RRSP to attend a program at the University of Victoria on March 1, 2006 that finished in 2006.  For 2008, Suzy should repay at least 1/10th (or $800).

This program may be suitable for younger or mature students with an RRSP, individuals who have been laid off, or simply someone interested in a method to fund higher learning costs.

With the Home Buyers Plan, younger people who begin contributing to an RRSP may not even own a house yet.  Does it make sense to contribute to an RRSP if you think you will need to keep funds liquid to buy a home?

In some cases the answer is yes, especially if a person is earning good income.  The HBP allows participants to withdraw up to $20,000 in a calendar year from an RRSP to buy or build a qualifying home.  Couples may each utilize the HBP (combined maximum of $40,000).  The plan may be suitable for any first-time home buyers who are buying a home and may need additional funds to pay for a down payment or reduce financing costs.  A larger down payment may eliminate the costs to insure the mortgage.

The Home Buyers Plan is open only to first-time buyers and applicants should check for specific details on who can apply.  Participants in these plans should understand that withdrawals need to be repaid or have the amount included as taxable income.

The first repayment is due the second year following the year in which a withdrawal is made.  Each year, Canada Revenue Agency will send you a Notice of Assessment  with a statement including: amount repaid (including any additional payments), HBP balance, and the amount of the next repayment to make.

Participants have up to 15 years to repay the amount that is withdrawn under the HBP. Generally, each year the repayment amount is approximately 1/15 of the total amount withdrawn until the full amount is repaid to your RRSPs.   For example, if Bill withdrew $15,000 from his RRSP in September 2007, he must pay at least 1/15th (or $1,000) of the withdrawal in 2009 (or the first 60 days of 2010).

Withdrawals from an RRSP account are generally considered taxable income.  Financial institutions are required to withhold the following tax on RRSP withdrawals:  10 per cent on the first $5,000, 20 per cent between $5,001 and $15,000, and 30 per cent on amounts greater than $15,000.   Two exceptions to this rule are if you give the financial institution a signed form T1036 (HBP) or RC96 (LLP).  These forms allow a financial institution to release the full amount of funds to you without withholding tax.

Both plans require the participants to file a completed Schedule 7 with their income tax return to designate the contributions as either a LLP or HBP repayment.  Failure to complete this schedule may result in CRA including the required repayment as income and assessing your tax return accordingly.  The repayment may be done to an existing RRSP account or to a new one.  The RRSP issuer should give the participant an official receipt for the contribution.

Liquidity is a very important component to consider if you are looking at participating in one these plans.  Cash has to be available within the RRSP account.   Some investments that may be purchased within an RRSP are illiquid or require fees for selling early.

Before you pay your tuition or buy a home you may want to consider all of your funding options.  A simple strategy that applies to both plans is making a contribution to an RRSP to receive the deduction (and possible tax refund).   Care should be taken to understand all important dates and all exceptions that are specific to both plans.

Prior to considering these plans you should read the CRA guides RC4135 (HBP) and RC4112 (LLP) available in both printed versions and online.