12 May 2014

As a result, Kate had to pay $407,000, which was higher than the initial price and, of course, much higher than she had expected. She made a 20% down payment in attempt to avoid paying for the expensive mortgage default insurance, and it was all her money.

Two months before the deal was closed, Kate took out $13,000 from her RRSPs in two banks.

And she didn’t suspect anything until she received a tax bill for $5,000 just a few months ago. It turned out she had to pay for taking out her “own” money.

So what actually happened here? Kate got penalized for not informing the bank about being a first-time home buyer when she took the money.

“I didn’t tell the banks why I needed the money. So they didn’t have the necessary information for designating these RRSP withdrawals,” – she says.

It’s a mistake #1. What she needed to do is call the Canada Revenue Agency and checkits official website in order to find out properly how the Home Buyers’ Plan (HBP) worked.

We’d like to remind you that the HBP allows you to withdraw up to $25,000 in a yearfrom your RRSP to purchase a qualifying home.

You have to complete form T1036 for each RRSP withdrawal, give it to RRSP issuer and get another form – T4RSP. It shows the sum you withdrew under the HBP in box 27. This slip must be attached to your income tax return.

The mistake #2 was assuming that it would be easy to fix all the paperwork andbackdate it even despite two years of silence.

“The deal is that two CRA representatives confirmed that I could retroactively designate the RRSP withdrawals under the Home Buyers’ Plan. I needed the banks to reissue my T4 slips for that,” – she said.

It seemed easy until one bank didn’t agree to reissue T4 slips.

Yes, in such cases banks are allowed to make their own decisions, and no one can influence them.

“If the form was not filled properly before the withdrawal, the Minister of National Revenue has no possibility to retroactively reclassify a RRSP withdrawal as a withdrawal under the HBP,” – explained CRA spokesman.

In her email letter Kate said: “This is my money. How can it be fair if the government pockets my money?”

And that was the mistake #3 – not understanding, that government is watching very closelyour RRSP money. And as your RRSP contributions are not taxed today, you will have to pay taxes later when you withdraw.


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