This week’s Toonie newsletter issue discusses a topic I’ve wanted to talk about for years. The crux of the matter:
You have to take 1/15th of that RRSP withdrawal (if you withdrew $20,000, 1/15th would be $1,333) and add it to your income. Despite making $52,500 in the year, you are now taxed on $53,833 ($52,500 + $1,333), a chunk of which is at the 20.5% level of income tax.
Said another way, you contributed that RRSP and saved 15% income tax only to turn around and pay 20.5% income tax in your repayment.
Another way to avoid the tax hit of the RRSP Home Buyers’ Plan (as noted by a colleague) is to simply not deduct the RRSP contributions in the contribution years and deduct the entire Home Buyers’ Plan withdrawal amount in the very first year of repayment. So in short, you match the RRSP deduction with the entire repayment, having a nil impact on your net and taxable income.
(One of the RRSP’s lesser known qualities is the fact you can contribute to the RRSP but choose not to deduct the contribution from your net income until you see fit. I’ll talk about this another day, but you could theoretically max out your RRSP on your 71st birthday and deduct the contributions in your final (estate) return. This could save your estate a boatload of tax if handled correctly.)
I am doing my best to keep longer financial discussions on Toonie, so if you’d like more of this kind of chatter, feel free to subscribe. I try to publish every Friday morning.