What is the best way to repay my Home Buyer's Plan?

Gena Katz, a chartered accountant and principal with Ernst and Young, has the answer.

Gena Katz 21 April, 2003 | 1:00PM
Dear Expert:

I have an RRSP contribution limit of $14,000 and a Home Buyer's Plan balance of $18,000 with minimum repayment of $1,300. I made an RRSP contribution of $20,000 for 2002. What is the optimal way of applying this $20,000 to the HBP, and how do I report this on my tax return?

Expert Answer:

It is difficult to determine the optimal allocation of the RRSP contribution because we would have to consider a number of factors that are not addressed in your question. For example, it would be important to know if the contribution was made in the first 60 days of 2003, in which case any unused contribution could be deducted in 2003 without attracting a penalty. We would also have to consider your current marginal tax rate (to determine the current tax benefit of a deductible contribution) and your ability to fund contributions in future years.

However, here are some broad guidelines for you. You can designate any amount between $1,300 and $18,000 of your 2002 RRSP contribution as a Home Buyer's Plan repayment. Since your contribution limit for the year is $14,000, you likely don't want to have more than $14,000 of your contribution as a new annual contribution and certainly not more than $16,000 (which would wipe out the $2,000 overcontribution cushion, assuming the contribution was made in 2002).

If you can get the benefit of a high-rate tax deduction for the entire $14,000 RRSP contribution, then claim the $14,000 deductible contribution and designate $6,000 as a Home Buyer's Plan repayment. If not, you can either designate more to the Home Buyer's Plan or simply leave a portion of the contribution as an undeducted contribution that can be claimed perhaps next year with a higher tax benefit associated with the deduction. Note that if you repay and designate more than you have to, the Home Buyer's Plan balance is reduced and so are annual minimum repayments for later years.

To report Home Buyer's Plan repayments, you must complete Schedule 7 of the T1 tax return, RRSP Unused Contributions, Transfers, and HBP or LLP Activities.

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Gena Katz

Gena Katz