rrsp investments for home downpayment

When you buy a home, you can withdraw tax-free money from your RRSP. But telling the bank about the purpose of withdrawing is necessary otherwise you will have to face undesirable taxes.

A first-time home buyer is obligated $5000 to the Canada Revenue Agency after she withdrew RRSP for a down payment for Condo.

This real life story presents the mistakes that must not be done while having advantage of State-Sponsored tax shelter program.

Angela found that while finalizing the real state deal under strict deadlines, she failed to take preventive measures.

“I purchased a One-Bedroom Condo in the year 2011 and spent all my money including my RRSP to have it.”

As the Toronto Condo was very near to Subway Stop, so this idealized location attracted many buyers and ended up with the bidding.

Angela paid $40700, the amount higher than the registered price and more than what she anticipated to pay. In order to avoid Premium payment for mortgage default insurance, she hurriedly paid 20% as down payment.

Two months before the deal closing, Angela withdrew the amount of $13,000 from her RRSPs at two different banks.

She was thinking that everything is on track until the day when she received a tax bill of $5000.

It was her penalty for not declaring herself as the First-time Home buyer to the bank while taking out her RRSP.

“I foolishly did not mention to the bank about the purpose of money withdrawal, and they could not correctly designate the RRSP withdrawals,” She says, blaming her inexperience for this mistake.

This was the first mistake she made. She must have checked Canada Revenue Agency’s website and have called to the agency to know about HOME BUYERS PLAN HBP.

HBP has permitted withdrawal of up to $25000 from RRSP every year in order to purchase a home.

Form T1036 is mandatory to be filled for each RRSP drawing.

You have to fill one region of the form, and then hand it over to RRSP issuer for the filling of other region.

After this process, you are issued with the form T4RSP by your RRSP issuer. This form presents the amount of money that has withdrawn under HBP in Box 27. This T4RSP slip must be attached with your Income Tax Return.

Another big mistake of Angela was her wrong assumption about the paper work. She thought that the paperwork if not properly done can easily be corrected later. Thinking this she misdated it more than 2 years back.

Angela said: “I discussed the matter with two CRA representatives and they made it confirmed that I can retroactively entitle the RRSP drawings under HBP Home Buyer’s Plan. The main thing that would be needed is to ask the bank for reissuance of my T4 slip/form”.

But when Angela went to the bank to ask for the reissuance of T4 form, one of her bank clearly said NO while the other bank showed little concern.

Normally Banks can make their own decisions and verdicts on such issue, that’s why both banks said different things to Angela.

CRA spokesperson Philippe Brideau said: “If you have not filled the form as directed before the withdrawal of money, then the Minister of National Revenue is not judicially authorized to retroactively reassign your withdrawing from the Registered Retirement Saving plans as withdrawing under the HBP”

The bank CIBC was the one that rejected Angela’s request of reclassifying her RRSP withdrawal with another one. This bank also refused to comment particularly about Angela’s issue.

CIBC spokesperson Kevin Dove said in general: “Forms are to be filled out completely, and if they are not filled out as directed, you can ask to change things on retrograde basis. But this thing is more probable to do it when you withdraw your mortgage with us. In this case Banks must have an audit trail”

He further explained that if the customer or client takes out his RRSP funds for his first home but he does not inform the bank, and then it becomes difficult for the bank having no records to tell the CRA that the customer is a First-Time Home Buyer.

To arrange financing, Angela had taken help of a mortgage broker. She had borrowed money from a minor financial institute. She could not retreat as CIBC mortgage customer.

In her email, Angela said: “This money is mine, is it justice that the state should be taking the money that doesn’t belong to it?”

No need to mention but this was the third mistake that Angela committed. She does not realize the fact that in anybody’s RRSP, government always has its hands and share.

When your contributions are not subtracted or taken from your income and they are not taxed, it means they will surely be taxed at a later time when you make any withdrawal.

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