CRA gives separated couples another chance at using RRSPs to buy a home

by Davies Otwell
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Jamie Golombek: Recently amended rules relax definition of a first-time homebuyer for some separated couples

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With residential real estate sales slowing in recent weeks and market values dropping in some of Canada’s hotter urban markets, some first-time homebuyers are taking a closer look at their finances to determine if now is the right time to jump into homeownership. For many, the determinative factor may very well be the amount they’ve saved for a down payment.

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While we continue to await details of the planned launch of the Tax-Free First Home Savings Account in 2023, many first-time homebuyers are currently turning to their Tax-Free Savings Accounts (TFSA) and, in some cases, to their Registered Retirement Savings Plans (RRSP) via the Home Buyers’ Plan (HBP), to come up with a lump sum for a down payment.

A recent technical interpretation letter from the Canada Revenue Agency sheds some positive light on how the recently amended HBP rules can help some separated or divorced couples use their RRSPs to buy a home. But before jumping into the new rules, let’s review the basics of the HBP.

As a reminder, the HBP allows a “first-time homebuyer” to withdraw up to $35,000 from an RRSP to purchase or build a first home without having to pay tax on the withdrawal. Amounts withdrawn under the HBP must be repaid to an RRSP over a period not exceeding 15 years, starting the second year following the year of the withdrawal. Amounts not repaid in a particular year, as required, must be included in income.

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So, what exactly is a first-time homebuyer? You’re considered a first-time homebuyer if, in the four-year period prior to purchasing a home, you did not occupy a home that you owned, or one that your current spouse or common-law partner owned. That four year period begins on Jan. 1 of the fourth calendar year before the year you withdraw funds from your RRSP under the HBP, and ends 31 days before the date you withdraw the funds. For example, if you are withdrawing the funds under the HBP on July 31, 2022, the period is from Jan. 1, 2018 to June 30, 2022.

The good news for taxpayers who are separated, divorced or experienced a common-law partnership breakdown, is that the definition of first-time homebuyer was relaxed as of 2020. Under the new rules, the Income Tax Act now permits an individual who would not otherwise be considered a first-time homebuyer under the HBP at the time of the withdrawal to be considered a first-time homebuyer if, at the time of withdrawal, they are living separate and apart from their spouse or common-law partner because of a breakdown of their marriage or common-law partnership for a period of at least 90 days, and they began living separate and apart in the year of HBP withdrawal or in the four preceding calendar years.

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In a recent technical interpretation released last month, the CRA was asked about the application of this rule in a specific scenario, as follows. Mr. X and Ms. Y were common-law partners for the past six years. The family home they live in is owned solely by Mr. X. Mr. X and Ms. Y decided to separate, but continue to both live in the family home, although they now consider themselves “separated” as of June 1. In particular, they sleep in separate rooms, they do not have shared social activities, and they do not identify themselves as a couple. Thus, although they live under the same roof, they considered themselves to be roommates. They live together “solely to minimize the financial impact of their separation and to allow Ms. Y the time to find a new residence that she will purchase and occupy as sole owner.”

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Ms. Y wishes to participate in the HBP by withdrawing $35,000 from her RRSP in September (more than 90 days after the date of separation) to purchase a new property in respect of which she has made an accepted offer to purchase. The CRA was asked if it would confirm that she is eligible to participate in the HBP.

The CRA responded that it’s the Agency’s long-standing position that two individuals can live apart while remaining under the same roof. That being the case, each scenario will come down to a question of fact that can only be determined by looking at all circumstances. Assuming they have been living separate and apart for 90 days, the CRA confirmed that Ms. Y would, indeed, be eligible to participate in the HBP.

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The CRA was then asked whether its answer would be different if the couple was legally married (versus living as common law partners), but not legally divorced, yet no longer considered themselves to be a couple, while still living under the same roof for the reasons above. The CRA confirmed that the answer would be the same, and that Ms. Y could participate in the HBP.

Finally, the CRA was asked to consider the situation where Mr. X and Ms. Y were co-owners of the family residence, and Ms. Y wished to participate in the HBP to either acquire a new residence of her own or buy out Mr. X’s share of the current residence. Once again, in each of these scenarios, the CRA confirmed that Ms. Y could access the HBP to either buy a new home or buy out her partner’s share of the family home.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.

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