If you've bought your first home in the past decade, chances are you either
took advantage of the federal government's Home Buyers' Plan or at least were
familiar with the program.
Under the HBP, if you qualify as a "first-time home buyer," you (along with
your spouse, common-law or same-sex partner) can withdraw up to $20,000 from
your registered retirement savings plan to purchase your first home.
Under the plan, you must repay your RRSP over a 15-year period, beginning the
second calendar year after the year of withdrawal. These repayments are not
considered RRSP contributions and are therefore not tax-deductible.
Interest is not charged on the RRSP withdrawal nor will it be taxed provided
the minimum payments are repaid to the RRSP over the 15-year period. Depending
on your financial situation, you may choose to pay more or less than these
scheduled annual amounts. If you pay less, the amount you do not repay must be
included as income on your tax return for that year. If you pay more, you will
reduce your outstanding balance, resulting in lower annual repayments in
A recent tax case decided last month involved a taxpayer who withdrew money
under the HBP, but did not make the annual repayments as he lost his home in the
course of a bitter divorce settlement.
In 1997, the taxpayer withdrew just over $8,000 from his RRSP under the HBP.
Consequently, he was required to repay 1/15 of this amount annually to his RRSP.
In 2002, he failed to repay the required amount, so the Canada Revenue Agency
included 1/15 of the original withdrawal in his income for that year.
While the taxpayer acknowledged that he knew at the time of the original RRSP
withdrawal that to avoid tax on the amount withdrawn, he had to repay the $8,000
in annual instalments over 15 years, he argued that due to his matrimonial
dispute and the subsequent division of matrimonial property, he never did get
the benefit of the RRSP withdrawal -- his wife did.
At first glance, it appeared that there may be a precedent for this position
in a 2001 tax case involving a spouse who made a fraudulent withdrawal from her
estranged spouse's RRSP. The Court found that the husband did not have to pay
tax on the fraudulent RRSP withdrawal by his wife since no "benefit" was ever
received by the husband.
The judge, however, distinguished this 2001 fraudulent RRSP withdrawal case
from the current one because "the question of benefit does not come into play.
Even if it did, the benefit would be the benefit at the time the funds were
withdrawn from the RRSP. There is no question that at that time, [the taxpayer]
did receive a benefit by using such funds for the purchase of a qualifying home.
Events three or four years later do not impact on that benefit."
The judge dismissed the case and ruled that the non-repaid HBP amount had to
be included in the taxpayer's income.
There's a lesson to be learned here for all couples. If you are going through
a divorce, you need to obtain not only legal advice, but may also need to seek
expert tax advice to ensure that any tax consequences as a result of the
division of property are taken into account in any ultimate matrimonial
GRAPHIC: Black & White
Photo: Andrew Barr, National Post; (Fight for the house).; Black & White