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Tax Strategy: A large down payment helps first-time homebuyers

 

Tax Strategy: A large down payment helps first-time homebuyers.

Canadian dollars are pictured in Vancouver, Sept. 22, 2011.

Canadian dollars are pictured in Vancouver, Sept. 22, 2011.

Jonathan Hayward / THE CANADIAN PRESS
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How to allocate funds for the purchase of a first home and how to collapse a Registered Education Saving Plan (RESP) in a tax-efficient way were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.

Q: My wife and I are looking at building a house in the $275,000 range within eight months and wondering what would be an appropriate down payment. I have $80,000 and my wife has an additional $20,000 in cash, both earning very little in the bank. Borrowing more rather than less would seem to be the way to go, with interest rates so low. What do you suggest?

A: Any time you can put down 20 per cent or more of the purchase price, you’re giving yourself a significant head start on the home ownership front, and you’d be in that range with a $55,000 deposit. At that level, the rate you’ll be charged for Canada Mortgage and Housing Corp. (CMHC) mortgage loan insurance is about half what someone putting down 10 per cent will pay. Houses usually cost more than most rookie homebuyers foresee, so it’s not a bad idea to leave yourself a bit of a financial cushion, especially at first, so you can get a feel for what your annual housing costs truly are. If you’re managing easily, then you could use some of the reserve cash for a paydown payment on the anniversary date of the mortgage. If you’ve got RRSPs and haven’t owned a home before, you and your wife could each borrow up to $25,000 apiece from the plans for the down payment under the RRSP Homebuyers’ Plan. You’d have up to 15 years to repay that money. In that scenario, you could boost your outlay to $100,000 by drawing $50,000 from your accumulated savings, leaving you with a low-interest mortgage in the $175,000 range and sizable cash reserves that you might consider parking in tax-free savings accounts (TFSAs).

Q: My wife opened a Registered Education Saving Plan (RESP) for our children in 1990 and we are thinking of closing it now. More than $80,000 was withdrawn from it for educational expenses over the years, but the children are done their studies and there is still more than $50,000 left over. Part of it is contributions and part of it is growth. As I understand it, the contributions can be reclaimed without any tax consequence. What is the most tax-efficient way to withdraw the rest? Does the fact my wife opened the plan mean that none of the funds can be transferred to my RRSP?

A: The key detail in this RESP-windup scenario may be who is officially considered the plan subscriber. If it’s your wife alone, your options are rather limited. Contributions can indeed be withdrawn tax-free from an RESP at any time, but not so for any accumulated income. The tax rules state that accumulated income generally can be paid only to the plan subscriber. And once the subscriber has made a withdrawal of this nature, they must collapse the RESP by March of the following year, giving them only two years to spread the tax blow, which could be considerable: withdrawals of RESP income by a subscriber not only are taxable, they’re subject to a special surtax (12 per cent for Quebec residents). You can get around the surtax by transferring up to $50,000 to an RRSP or spousal RRSP, if you have the contribution room. But if your wife is the only recognized subscriber, it will all hinge on whether she has the contribution room. If she doesn’t, you might want to hold off on withdrawing those funds until there is contribution room, or until a year when her other income is low. You’ve still got time, since the plan doesn’t have to be collapsed until its 35th year.

The Montreal Gazette invites reader questions on tax, investment and personal-finance matters. If you have a query you’d like addressed, please send it to Paul Delean, Montreal Gazette Business Section, Suite 200, 1010 Ste. Catherine St. W., Montreal, QC, H3B 5L1, or by email to This email address is being protected from spambots. You need JavaScript enabled to view it.

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