# Bit of a pickle... RRSPs, home buying and investments.. need some help!



## Siwash (Sep 1, 2013)

I know I am going to be chastised for doing this, but here it goes:

We bought a house recently. We've been renting for a couple of years. Landlord is selling and the potential buyers aren't interested in renting it out so we've decided to jump into the market instead of renting again. 

Here's the "problem" - I have to tap out my RRSP that is invested in index funds and wife has to eat up her GICs, which are in her RSP also. Therefore, we are going to have to payout the withholding tax (correct name?) - I have owned a property in the last 3 years and she doesn't qualify for the HBP because she lived with me after we had gotten married so she can't even use that program. 

I am not happy about having to do this but if we don't use these funds, we will fall short of a solid downpayment. And we want to avoid the CMHC fee which will cost about the same as the total withholding fees. 

Is there a way of avoiding the withholding tax? I know I'm grasping at straws here, but I thought maybe someone out there knew of a loophole. We are still holding out hope for a reduction of the land transfer tax b/c someone we know had mentioned that their wife avoided it in the past in a similar situation. 

Also, should we wait until the new year to cash in those investments? Is there an advantage to doing so (for example, would we not avoid paying the tax until the following year or is it added to the upcoming tax season?). I am worried that the market will continue to go down so I am thinking that I should take the funds out now and move them into a HISA or similar until closing in early March?

Some advice and direction would be most appreciated! Thanks!


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## Eclectic12 (Oct 20, 2010)

Siwash said:


> Here's the "problem" - I have to tap out my RRSP that is invested in index funds and wife has to eat up her GICs, which are in her RSP also.
> 
> Is there a way of avoiding the withholding tax?


Is the withholding tax your biggest problem?

With the RRSP withdrawal, whatever your usual income is going to go up by the withdrawal amount. The withholding tax is simply a pre-payment intended to smooth out any amounts owing, the same as the withholding tax on one's employment income. Despite paying the top withholding tax ... you may end up owing more when the tax return is filed for the tax year of the withdrawal.

The only posts I've seen is that before there was so much computer based checking, one could make a series of smaller withdrawals at the lowest withholding tax rate where a single larger withdrawal would have used the larger %. Posters have indicated that their bank has tracked the withdrawals through the year and increased the withholding tax % despite doing this.




Siwash said:


> Also, should we wait until the new year to cash in those investments?
> Is there an advantage to doing so (for example, would we not avoid paying the tax until the following year or is it added to the upcoming tax season?).


Later does mean the income will be added to the following year so that only the withholding tax will be reducing it. I'd also want to figure out if by taking some this year and some next year (i.e. spreading the income over two years instead of one large income increase) helps.




Siwash said:


> I am worried that the market will continue to go down so I am thinking that I should take the funds out now and move them into a HISA or similar until closing in early March?


Switching investments within the RRSP has no impact on taxes so if you believe the capital is at risk, I'd sell some/all and switch it into a HISA. You can make a decision about when to withdraw at your leisure.

With now being the tax loss selling season - for any withdrawals made this year, I'd be worried about further drops. For withdrawals next year, there is a chance of a bounce back, with people adding new money/looking for investment in the new year.


Cheers


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## none (Jan 15, 2013)

From what I understand the 5K 'hack' doesn't work unless you do 5K withdraws monthly. Like you say, you pay tax eventually so I don't see the big deal. If that's a problem with buying a house you should defina


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## Woz (Sep 5, 2013)

When you got married, did your wife live with you in the home you owned or the home you rented. If it’s the home you rented then she’d still be eligible for the HBP.

You’ll need to pay income tax at your marginal rate for all of your withdrawals. The withholding tax is a prepayment of that income tax. If you’re going to owe additional income tax then it’d be best to make the withdrawal in January so that you don’t have to pay the income tax until March of the following year.

There’s no way to avoid the withholding tax, but if you’re able to minimize your taxable income in the year you make the withdrawal you can minimize the impact of withdrawing from your RRSP. The strategies to reduce income usually involve borrowing money to write off the interest, which probably isn’t suitable given your situation. You could also get an RRSP loan to lower your income, but that again doesn't seem like the best idea given your situation.


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## Eclectic12 (Oct 20, 2010)

^^^^

I'm not seeing advantage to the RRSP loan ... it will provide a deduction but I don't believe the refund will pay off the loan. 
I suppose one could roll it into the mortgage, making the mortgage bigger.


Cheers


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## Woz (Sep 5, 2013)

You’d repay the loan by redirecting your future planned RRSP contributions to the loan or if you didn’t care about the contribution room withdrawing from your RRSP in future years.

It allows you to smooth out your income. If you’re withdrawing $50k from your RRSP then instead of having an extra $50k of income in 1 year you could smooth it out over multiple years to minimize the tax hit.

To be clear, I’m not recommending this strategy. It’s only beneficial if your RRSP withdraw pushes you into a higher tax bracket, and it increases your debt at a time when you’ve just taken on a lot of debt.


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## Eclectic12 (Oct 20, 2010)

none said:


> From what I understand the 5K 'hack' doesn't work unless you do 5K withdraws monthly...


Odd ... I'm not sure why the financial institution would care for random withdrawals totaling more that $5K but wouldn't care for withdrawals that could be as high as $60K.

I'm not planning any withdrawals until I have stopped working where the pension hasn't started yet so there's time to learn.




Woz said:


> ... if you’re able to minimize your taxable income in the year you make the withdrawal you can minimize the impact of withdrawing from your RRSP ...


YMMV ... where one has DB pension, earns a ton of RRSP contribution room and then has the PA get rid of most of it, there may not be a lot of benefit.

Then too, if the RRSP has to be raided for the better down payment - is there going to be enough cash flow to make use of whatever RRSP room the increased income generates?

Buying the house is likely to mean for a while at least cash flow is down as there are a lot of new, if not increased expenses (mortgage, property taxes, maintenance etc.).




Woz said:


> You’d repay the loan by redirecting your future planned RRSP contributions to the loan or if you didn’t care about the contribution room withdrawing from your RRSP in future years.


So it's have two debts (mortgage plus RRSP loan) instead of one in exchange for a somewhat reduced income tax hit.




Woz said:


> It allows you to smooth out your income. If you’re withdrawing $50k from your RRSP then instead of having an extra $50k of income in 1 year you could smooth it out over multiple years to minimize the tax hit.


I must be missing something ... where one takes out $50K from one's RRSP, that's a $50K increase in income in the year the withdrawal occurs, as I understand it. The same applies to the reduction in income/taxes owing from the RRSP deduction as I can see no point in delaying claiming the deduction into a following year when income has returned to the usual level. 

So the top has dropped a bit, where going forward there's two debts (mortgage plus RRSP loan). The RRSP loan is likely around the full amount as the income deduction is reducing taxes owed instead of generating a refund.

Finally, the mortgage rate is usually the lower interest cost for loans so the higher interest cost could be a more expensive route.




Woz said:


> ... To be clear, I’m not recommending this strategy.


A good point to make ... I'm trying to make sure I understand the ins/outs.




Woz said:


> ... It’s only beneficial if your RRSP withdraw pushes you into a higher tax bracket, and it increases your debt at a time when you’ve just taken on a lot of debt.


I'd want to run some numbers as it seems to me that there are a lot of ways this strategy could end up costing more than simply skipping the RRSP withdrawal and going with a bigger mortgage.

... and that's without worrying about all the first time costs or ongoing costs of home ownership.


Maybe for a small amount to lower tax bracket, where the cash flow is not a concern ... though I'd also want to compare what splitting the withdrawals up into half this year and half next year as another method of smoothing out the income hit would do.

Cheers


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## Siwash (Sep 1, 2013)

We definitely don't qualify for HBP. We called CRA. We lived in the condo that I bought. We we sold, her name was on the docs


It sucks b/c we were actually planning to continue to rent another year... or two.. If we'd waited til 2016, 4 years would have passed and HBP would kick in.

But we are tired of renting - 2nd rental in 2 years and she wants to feel settled. We have a newborn baby so I think it's time we do this. suitable rentals are not easy to find where we live. 

Thanks guys. I am going to talk to an accountant as well... I think holding off on pulling the cash out of the index funds and placing it in an HISA til the new year is the best option. At least I won't get hit with the extra tax bill in April. 

By the way, she's on mat leave. With the new Harper tax laws coming into effect this spring, would income splitting help us? I don't know enough about how it'll work.

Thanks!!


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## Woz (Sep 5, 2013)

Congrats on the new addition! I’m going to change my answer a bit. Ecletic’s right that splitting the withdrawals across two years would probably be best, so you might want to consider making a withdrawal before the end of the year and another in 2015.

Your goal should be to keep your total taxable income (including the RRSP withdrawal) as flat as possible for you and your wife for 2014 and 2015.

Your wife being on mat leave will help things as she probably has lower income this year. In which case you’d definitely want to take advantage of that and make a withdrawal this year.


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## domelight (Oct 12, 2012)

Here's my two cents.

Google "Non Arms Length loan via a self directed rsp" I believe this will be a likely consideration.
Contact a good accountant and pay a few hundred dollars to get the following comparisons done.

1. Non Arms Length Loan
-continued growth of deferred savings
-access to 100% of the funds in your registered accounts.
-minimal startup costs and maitenance fee's.
-repayment term could be 25 years. (but would need to be a second to the bank)
-two mortgage payments. (they may more or less than one mortgage payment with a smaller down payment. You need to determine ??
-I am really not sure if the second mortgage would be considered a downpayment for CMHC & bank mortgage purposes, you would need to find out in advance

What is the long term impact to your costs incurred to interest paid on your mortgage by having a larger downpayment ??

2. HBP
-restricted amount of withdrawl. but no withholding tax.
-essentially two mortgages payments, the annual repayment should be prorated into the monthly amount.
-you could not repay it and incur the tax. What does this cost ?
-you should also calculate a growth interest element to the RRSP principal to offset the interest expense of the mortgage.
What is the long term impact to your costs incurred to interest paid on your mortgage. Factor this in.

3. Cash the Extra RRSP's and Eat the tax.
-you have only one mortgage payment
-how much does this save you in mortgage interest less Deferred savings growth, accounting for your tax rate now, and potentially projected retirement tax rate.

Performing these projections will provide you the best options and let you make an informed choice.

It is important to note 
a) A fair comparision will be best if calculated based on cash flow. So meaning in each of the three scenarios you should use the same mortgage payment amount.
b) each scenario will result in a different mortgage term ie 25 years 22.4 years etc..
c) so if scenario "B" has a mortgage paid off in 6 months less than scenario "A" than 6 months of mortgage payments should be added to "B"'s benefit.


The difference could be minimal or significant. Probably worth paying for some professional help.


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## Eclectic12 (Oct 20, 2010)

Siwash said:


> ... By the way, she's on mat leave....


Hmmm ... does this give a period of lower income?
I'm not familiar with all the details but from the comments I've heard, income is down which would mean a larger RRSP withdrawal during this period should be no worse than regular income. I'm not sure if it would do anything to any credits etc.

As for the new income splitting ... I'm not sure and there may not be details for a while.






domelight said:


> Siwash said:
> 
> 
> > We definitely don't qualify for HBP. We called CRA.
> ...


Good points for #1 and #3.

#2 may factor in for readers considering using the HBP but it's not in the mix for the OP.
... looking on the bright side - the OP has less projections/comparison's to make .... :biggrin: 


Cheers


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## Woz (Sep 5, 2013)

domelight said:


> Here's my two cents.
> 
> Google "Non Arms Length loan via a self directed rsp" I believe this will be a likely consideration.
> Contact a good accountant and pay a few hundred dollars to get the following comparisons done.


I believe non arms length RRSP loans need to be insured in order to be eligible.


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## Siwash (Sep 1, 2013)

Yes, her take home pay has declined by more than 50%. 

I think I need to speak with an accountant to clarify all of this. 

I am beginning to worry about this market. I seems to be collapsing in our midst due to the price of oil. I am thinking about selling all of the index funds. I only invested $15K and it's only made $700 in about 9 months. Don't I only pay tax on the capital gain ($700) plus the withholding tax?

Thanks...


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## Eclectic12 (Oct 20, 2010)

^^^^

If it's in a registered account, buying/selling within the account has no tax implications (i.e. no capital gain taxes, no income taxes, no dividend taxes etc.).

For the RRSP, the indirect tax implication is that when the cash withdrawn, it is included as income on that year's tax return, regardless of whether it was the original $ or any type of gain or the total of both. 

The withholding tax will provide a partial payment that is usually won't be enough to cover the total amount owing.
(There are exceptions where the withholding tax might be too much so that a refund is received but it does not sound like this will apply.)


Cheers


*PS*

That's why I said in post #2 that if you are worried about the capital (or any gains) - sell.
You control when it becomes income by when the RRSP withdrawal is made.


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## Siwash (Sep 1, 2013)

Eclectic12 said:


> ^^^^
> 
> If it's in a registered account, buying/selling within the account has no tax implications (i.e. no capital gain taxes, no income taxes, no dividend taxes etc.).
> 
> ...


I guess if I wait til Jan 1 it won't count as income in 2014. That is key b/c we need as much cash as possible in March for the closing.. I don't need a fat tax bill in the spring. 

The income splitting will be interesting. I wonder how it will play out for our situation. Her income in 2015 will be less as well since the mat leave won't end til August 2015. 

Thanks


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