Borrowing your down payment from your RRSP
As is reported in the news at least once a month, there doesn’t seem to be an end or a limit to the inexorable rise in Canadian house prices. While the cost of housing in Vancouver and Toronto outstrips prices everywhere else, even smaller metropolitan areas are posting record increases.
As with just about any economic development, there are winners and losers in this scenario. Baby boomers (and the parents of baby boomers) who purchased a home decades ago and are now looking to sell will undoubtedly realize a significant tax-free gain on that sale. The biggest losers are those who are still on the outside looking in—generally younger Canadians who are trying to break into the housing market by acquiring that first property, whether it’s a condo, townhouse, or detached home.
For most individuals or families in the market, buying real estate is a significant long-term financial commitment and right now, that financial commitment can be assumed at record low interest rates. As of the end of September, a five-year fixed-rate mortgage (the kind of mortgage taken out by two thirds of home buyers aged 18 to 34) could be obtained from major Canadian financial institutions at an interest rate of less than 3%. For most of those looking to get into the market then, the biggest hurdle isn’t likely the ongoing cost of financing, but the need to put together the required down payment. A down payment is calculated as a percentage of the purchase price of the house and so, as house prices in most Canadian markets have increased, the amount of the required down payment has risen in tandem. And, if that weren’t enough, changes made to the rules governing the financing of home ownership over the past few years have set the bar even higher.
Until the summer of 2008, it was possible to buy a home in Canada with a zero down payment (in other words, the entire cost of the home was borrowed) and to amortize repayment of that cost over up to 40 years—a time frame which would put most purchasers past the traditional retirement age of 65 by the time the mortgage was paid off. Successive changes implemented by the federal government have whittled away at those practices. Borrowers are now required to have at least a 5% down payment on a residential home purchase, and the maximum amortization period on a residential mortgage is 25 years. More stringent borrowing requirements are also imposed on would-be home purchasers, in terms of the percentage of income which monthly costs related to housing (mortgage payments, property taxes, and home heating) are permitted to consume.
All of this leaves the would-be first time home purchaser falling further and further behind when it comes to putting together a sufficient down payment. There is, however, another option available to that first-time purchaser, and it’s one not just sanctioned but created by the federal government itself. That option is borrowing all or part of the down payment from one’s registered retirement savings plan (RRSP), on a tax and interest free basis, under a program known as the Home Buyers’ Plan (HBP).
The average house price in Canada right now, when Toronto and Vancouver are excluded from the calculation, is about $340,000. The rules governing the HBP permit each taxpayer to withdraw up to $25,000 from his or her RRSP, which would be enough to make a 7% down payment on the average home. And, if there is a silver lining to the fact that many Canadians are forced to defer their entry into the housing market, it may be that, having been in the work force for a longer period of time, they are more likely to have at least $25,000 in their RRSPs. And, as outlined below, married couples can aggregate funds from each of their RRSPs to come up with that down payment.
While the rules governing HBPs can be detailed in their application, especially when it comes to any special circumstances or any contravention of those rules, the concept of the program is straightforward. A first-time home buyer who has entered into an agreement to purchase or build a home can withdraw up to $25,000 from his or her RRSP to purchase that home. The amount withdrawn is not taxed on withdrawal, as it usually would be, but must be repaid to the RRSP, without interest, over the subsequent 15 years, with the amount of each annual repayment prescribed by law. Where the first-time home buyer is married, and his or her spouse is also a first-time home buyer, the spouse can also withdraw up to $25,000 from his or her RRSP and both withdrawals can be pooled to come up with a down payment.
There are some additional rules, as follows. The home purchased using funds borrowed under the HBP must be bought or built before October 1 of the year following the year of withdrawal. As well, the borrower (and his or her spouse, where applicable) must intend to occupy the home as the principal place of residence within one year after its purchase—the HBP is not intended to provide funds to purchase or build rental residential accommodation.
The concept of a “first-time home buyer”, while seemingly self-explanatory, is in fact more flexible than it first appears. For purposes of the HBP, a first-time home buyer can actually be someone who has previously owned and lived in a home, as long as that home ownership ended more than four full calendar years prior to the time a withdrawal under the HBP is made. For instance, an individual who wishes to participate in the HBP by making a withdrawal of funds on March 31, 2016 will be considered a first-time home buyer if he or she had not owned and occupied a home after the end of 2011, the four full calendar years being the period between January 1, 2012 to February 29, 2016. Where the prospective home owner is married (including a common-law partnership), the same requirement applies to that person’s spouse.
Whatever the amount withdrawn from the RRSP under the HBP, that amount must be repaid within a maximum of 15 years. The first repayment is required in the second year following the year of withdrawal so, in the case of the example above, where the withdrawal is made in 2016, the first repayment must be made in 2018. Each repayment is generally 1/15th of the amount withdrawn so, a maximum withdrawal of $25,000 would mean an annual repayment amount of $1666.66. The taxpayer doesn’t have to keep track of where he or she stands with respect to the repayment schedule—each year, a Statement of Account sent to the taxpayer with his or her Notice of Assessment, after the annual return is filed. That Statement will summarize amounts repaid to date, the current HBP balance, and the amount of the next repayment which must be made. Such repayments are made by making a contribution to the taxpayer’s RRSP during or within 60 days after the end of the year for which the repayment is due, and designating part or all of that contribution as an HBP repayment on Schedule 7, which is then filed with the tax return for that year. If the taxpayer does not make the repayment when and in the amount required, any outstanding amount is added to income for the year and taxed at the taxpayer’s top marginal rate.
Like all investment and tax planning strategies, borrowing money from your RRSP to put together a down payment on a first home has both upsides and potential downsides. The biggest downside is the permanent loss of investment gains on the money temporarily withdrawn from the RRSP during that period of withdrawal. However, it’s also possible that the real estate purchased with the withdrawn funds will enjoy a greater increase in value over that period than would have earned by the funds had they remained in the RRSP. Like all investment and tax planning decisions, it comes down to a personal decision based on one’s own circumstances.
The rules outlined above summarize the basic structure and operation of the Home Buyers’ Plan. However, anyone contemplating making use of the HBP will need to familiarize themselves with those rules in much greater detail, perhaps with the assistance of professional advisers. A good place to start is the Canada Revenue Agency website, where information on the HBP can be found at www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html.
How to respond to an information request from the Canada Revenue Agency
By the time the summer is over and everyone’s back to school and work, most taxpayers have completed and forgotten about their tax obligations for the year. Returns have been filed and Notices of Assessment have been received. Income tax refunds have been spent or saved, and any amount still owing for taxes has generally been paid. For the Canada Revenue Agency (CRA), however, taxes are a year-round business, and fall marks the move from one phase of its activities to another—specifically, to the start of its annual post-assessment tax return review process.
What that means for the individual taxpayer is the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this fall by millions of Canadian taxpayers.
This year, Canadians filed nearly 28 million individual income tax returns with the CRA. The vast majority of those returns—about 23 million—were filed electronically, with either EFILE or NETFILE, while only 5 million paper returns were filed. For several years, the CRA has encouraged taxpayers to take advantage of its electronic filing options, and its efforts have clearly been a success. As the CRA has always noted, filing electronically means faster turnaround (and quicker refunds!) but, when returns are filed by electronic means there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. There have, however, always been means by which the CRA can verify claims made by taxpayers. Where returns are paper-filed, taxpayers must usually include receipts or other documentation to prove their claims, whether those claims are for dependent tax credits, charitable donations, medical expenses, or other similar deductions and credits. For the 82% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale. The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring.
That post-assessment review process starts in the month of August. There are two components to the review process—the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included on the taxpayer’s return with information provided to the CRA by third-party sources, like T4s filed by employers or T5s filed by banks or other financial institutions. The time periods during which the two programs are carried out overlap, as the peak time for the Processing Review Program is between August and December, while the Matching Program is carried out from October to March.
While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income for the year.
Of course, most taxpayers are not concerned so much with the kind of program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is a precursor to an audit, but that’s not usually the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow that up to find out the reason for the discrepancy. Canada’s tax laws are complex and, over the years, there are areas in which the CRA has determined that taxpayers are more likely to make errors on their return, so a return which includes claims in those areas may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns that too may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on a random basis.
Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time—usually a few weeks from the date of the letter—in which to respond to the CRA’s request. That response should be in writing, attaching (if needed) the receipts or other documentation which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency. If, after the response is received, more information is needed, the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone.
One word of caution: there have been instances in which taxpayers have been contacted by telephone or e-mail by someone who claims to be a CRA representative, but is not. That person generally indicates that a review of the taxpayer’s return shows that additional taxes are owed, and suggests payment by an e-transfer of funds or other payment method. Taxpayers should be aware that the CRA never requests tax payment in this way. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. As well, the CRA does not correspond with taxpayers by e-mail – any e-mail claiming to be from the CRA is not authentic and should be deleted without opening.
Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain: a prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the CRA and the taxpayer.
Upcoming deadline for change to direct deposit
For several years the Canada Revenue Agency (CRA) has encouraged taxpayers to begin receiving payments from the Agency by means of direct deposit to their bank accounts, rather than by receiving cheques sent through the mail. By the spring of 2016, that second option will no longer be available.
In just over six months, on April 20, 2016, the CRA will be making all payments made to Canadian individuals and businesses by way of direct deposit. Many taxpayers, of course, have already arranged to have such payments deposited to their bank accounts. As well, at the beginning of 2015, the CRA began automatically direct-depositing amounts owed to individuals who had current bank account information already on file with the CRA. Anyone who does not fall into either of those two groups will have to act now to ensure that the CRA has the information needed to make direct deposit payments to their bank account after the end of this year.
Direct deposit can be arranged for any individual who receives at least one of the following kinds of payments from the CRA:
- income tax refund;
- goods and services tax/harmonized sales tax credit and any similar provincial and territorial payments;
- Canada child tax benefit and any similar provincial and territorial payments;
- working income tax benefit;
- universal child care benefit; or
- deemed overpayment of tax.
There are a number of ways in which a direct deposit arrangement can be set up. Canadians who have already registered for the CRA’s online service My Account can sign up for direct deposit using that feature, available at www.cra-arc.gc.ca/myaccount/. Those who are not registered for My Account can complete and send a paper copy of the Canada Direct Deposit enrolment form, which can be found on the federal government website at www.tpsgc-pwgsc.gc.ca/recgen/dd/form/can-eng.html. All such forms, when completed, are sent to the Receiver General for Canada, at the address provided on the form.
Finally, perhaps the easiest way to sign up for direct deposit is through a phone call to the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281. Taxpayers who want to pursue that option will need to provide the following information:
- social insurance number
- full name and current address, including postal code
- date of birth
- most recent income tax and benefit return and information about the most recent payments received from the CRA; and
- banking information: three-digit financial institution number, five-digit transit number, and the account number.
The last item on that list—banking information—can be confusing. While the needed information can be found in a line of figures which appears at the bottom of cheques issued to individuals by their bank or other financial institution, that line can be difficult to decipher. The best approach is likely to visit one’s financial institution, where they can provide the information needed (financial institution number, transit number, and account number) in a more comprehensible format.
The information above summarizes the steps which individuals can take to sign up for direct deposit. However, businesses are also affected by the CRA’s upcoming changeover, and the procedures which they must follow to sign up for direct deposit are slightly different.
First of all, a business which receives any of the following types of payments from the CRA can sign up for direct deposit:
- corporation income tax refund;
- goods and services/harmonized sales tax credit;
- refund of excise or other duties; or
- refund of payroll deductions.
Businesses which are already registered for the CRA’s online service My Business Account can sign up for direct deposit there. As well, where a business has provided sufficient authorization to a representative, that representative person or firm can sign up on their behalf.
If the business wishes to register for direct deposit using a paper form, that form can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/rc366/README.html. In this case, however, the completed form is sent, not to the Receiver General, but to the business’s customary Tax Centre. A listing of such centres, with mailing addresses, can be found on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html.
Finally, any business can obtain more information about direct deposit by calling the CRA Business Enquiries Line at 1-800-959-5525.
Federal government matching program for refugee relief donations
Time and again, Canadians have shown that where there is a humanitarian crisis anywhere in the world, whether caused by a natural disaster or arising for reasons of politics or economics, they are prepared to extend a helping hand. In many such past instances, the federal government has indicated that it will augment the generosity of Canadians by matching donations which are made.
The refugee crisis now taking place in Europe is no exception. The federal government recently announced the creation of the Syria Emergency Relief Fund, and its plans to match funds donated by Canadians for refugee relief. For every eligible dollar donated by individual Canadians to registered Canadian charities for the purpose of refugee relief, Canada will set aside one dollar for that Fund. The Government’s contribution to the Fund will provide assistance through international and Canadian humanitarian organizations to meet humanitarian needs such as shelter, food, health, and water, as well as protection and emergency education. The maximum amount which the federal government will contribute to the Fund is $100 million.
The federal government has set certain parameters or criteria which donations must fulfill in order to qualify for the matching program. In order to qualify, donations from individual Canadians may not exceed $100,000 per individual and must be:
- monetary in nature ( i.e., not donations of goods or services);
- made to a registered Canadian charity that is receiving donations in response to the Syria crisis;
- specifically earmarked for response to the Syria crisis;
- made between September 12 and December 31, 2015; and
- used by the registered charity receiving the donation in support of the humanitarian response to the impact of the Syria crisis.
Once a donation is made, the registered charity which receives it has until January 15, 2016 to make a declaration of that donation to the Department of Foreign Affairs, Trade and Development Canada.
Donations from a fundraising event undertaken to raise money from individuals in response to the Syria crisis can also be eligible for matching. This fundraising may be undertaken by schools, faith-based organizations, clubs, social groups, businesses, incorporated entities, or charitable organizations. There are, however, specific criteria which must be met, in order to qualify for matching. As stated on the federal government website, any donations made by corporations, governments, businesses, partnerships, schools, incorporated or non-incorporated entities, and unions from their existing resources that were not raised from individuals specifically in response to the Syria crisis are not eligible to be matched. In addition, donations to augment the amount originally raised from individuals through a fundraising activity or event are not eligible to be matched. The federal government has provided detailed information on how to make a qualifying donation, and that information can be found at www.international.gc.ca/development-developpement/humanitarian_response-situations_crises/how_to_syria-syrie_comment.aspx?lang=eng.
In the rush to help, the need to ensure that donations are made in a way that will most benefit those who need that help can sometimes be overlooked. As well, it’s an unfortunate fact that disasters sometimes bring out the worst as well as the best in people. In any such situation, a number of “instant” charities tend to spring up and begin soliciting donations for aid. Some of them are honest and well-intentioned, and others are not. However, no matter how good their intentions, if they are not already registered charities, then any donations made to them will not qualify, either for the usual charitable donations tax credit, or for any matching funds which the government of Canada has promised to provide. As well, it’s not likely that such an “instant” charity will have the resources or the infrastructure required to provide help on the scale needed by victims of the current refugee crisis.
With that in mind, there are a number of resources available to Canadians who want to ensure that they are making their charitable donations in the most effective way possible. The CRA maintains a current listing of registered charities (remembering that only donations to registered charities will qualify for the matching funds) on its website at www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html. Would-be donors can also obtain information about a charity’s current registration status by calling the CRA toll-free at 1-800-267-2384.
Canadians who donate to a registered charity for refugee relief will also be able to claim a non-refundable charitable donations tax credit. The federal credit claimable is a two-level one. A 15% credit is available for the first $200 in donations, and donations over the $200 threshold are eligible for a 29% credit. Similar credits, in varying amounts, are provided by the provinces and territories.