Can I use money from my RRSP to pay for a cottage?—Violet Pearl, via email
You can use money from your RRSP to pay for anything: a lambo. A year’s worth of Baby Duck. An expensive Shetland pony.
But you’ll be taxed on it. “You can withdraw money from your RRSP to purchase a cottage, but the amount of the withdrawal will be treated as a ‘payment of pension income’,” says Karen Slezak, a tax partner with Crowe Soberman in Toronto. “That means that there will be tax withheld at the time of the withdrawal: 10 per cent on the first $5,000, 20 per cent between $5,001 and $15,000, and 30 per cent on any amount above $15,000.” And, depending on your actual tax bracket, you may have to pay additional tax when you file your return.
Another, possibly better option, is to take advantage of the Canada Revenue Agency’s Home Buyer’s Plan (HBP). “The plan allows for withdrawals of $35,000 or less from an RRSP as long as very specific criteria are met,” says Slezak. (It’s tax-free, and works a little like a loan: you have to pay the money back over a maximum of 15 years.)
And you have to qualify. “The main requirement is that the person has to be a first-time home buyer,” says Slezak. You can meet that requirement if, in the four years leading up to buying the cottage, you didn’t live in a home that you, your spouse, or your common-law partner owned. So, “if you’ve been renting your accommodation, the cottage may be considered a first-time home.”
If you’re interested in using the HBP, talk to a tax expert to help determine if you’ll qualify.
This article was originally published in the August/September 2021 issue of Cottage Life magazine.
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