Last year we had a call from a young professional who wanted to buy a home and get into the market. Everything sounded very straight forward until we learned they did not have much of a down payment available and didn’t have any family to support them on that front. They called us looking for any sort of creative options as they were sick of renting. As we went through the discovery phase of the process we found out they had never contributed to their RRSP’s so had a lot of room. We had found the solution… An RSP Catch-Up Loan or Line of Credit
This type of loan is an excellent means to generate a significant income tax refund which can be used as a down payment for a home all while increasing your retirement savings. Here’s a step by step guide of how it works.
Step 1: Look at your 2014 Notice of Assessment to find out your available RRSP deduction limit
Step 2: Determine Your Potential Tax Refund
In order to do this all you need is your T4 from 2015. Based on your income we can calculate your marginal tax rate and determine the potential tax refund.
Step 3: Obtain an RSP Catch-Up Line of Credit or Loan
An RSP Loan or Line of Credit can be obtained at very attractive terms. For this scenario we are going to use a $50,000 RSP Line of Credit at Prime +2% amortized over 10 years. Given these terms, the monthly repayment will be approximately $530 per month. Remember, while you do have to make this payment on a monthly basis, your $50,000 of tax shelter money will be growing as well.
Step 4: File your taxes with your $50,000 RRSP Contribution
Filing your taxes with the $50,000 contribution to your RRSP will generate an income tax refund. The amount of this refund will depend on your tax bracket. Let’s assume you’re in the 30% tax bracket. The $50,000 contribution comes off your taxable income and will generate a $15,000 tax refund ($50,000 X 30%). Please note: The deadline for contributing to your 2015 RRSP is February 29, 2016.
Step 5: *For First Time Buyers Only* You can access up to $25,000 of your RRSP for the down payment of your home in addition to the $15,000 tax refund for a total of $40,000.
Click here to see details on the Homebuyers Plan for First Time Buyers.