A recent tax court of Canada ruling on transferring RRSP funds into the federal Homebuyers’ Plan provides your clients with a clear warning, according to tax expert Jamie Golombek.

“The [HBP] rules are complex. Individuals should not attempt to do this on their own without involving a financial advisor,” says Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce’s private wealth-management division.

The rules posed a particular problem for Toronto resident Karen Ka Yan Ho because she, like many new homebuyers today, was purchasing a condominium unit for which she had to make several payments over a period of time while the building was being constructed. As a result, Ho tripped over Income Tax Act provisions governing tax-exempt transfers from an RRSP to a HBP over multiple years.

However, Golombek says, with good professional advice, Ho could have avoided the $13,874 reassessment of her taxable income and her unsuccessful appeal before the Tax Court of Canada, which recently ruled that the Canada Revenue Agency was correct when it decided that a 2008 RRSP withdrawal that Ho had paid into the HBP was not exempt from taxes.

FAILURE TO DESIGNATE

When Ho entered into the purchase and sale agreement for her Toronto condo unit in July 2005, she knew that it would be at least three years before the unit would be ready for occupancy, Tax Court Justice Valerie Miller noted in her ruling last month.

The agreement required Ho to make a series of payments to the condo developer. The first of these payments, due in July 2006, was for $10,712, but Ho had only $6,146 in her RRSP, so she withdrew that under the HBP to fund a portion of the payment. Ho subsequently made further contributions to her RRSP so that by the closing date for the condo purchase, she had $13,854 in her RRSP. Ho withdrew that amount in December 2008, claiming a tax exemption under the HBP.

The total amount that Ho withdrew under the HBP was $20,000, which was the maximum then allowed under the plan. (That maximum amount was expanded in the 2009 federal budget to $25,000.) Under the HBP rules, however, an RRSP withdrawal is not exempt from taxes unless the taxpayer’s HBP balance is zero at the beginning of the calendar year in which the withdrawal is made. But Ho’s HBP balance was still $6,146 when she made her last RRSP withdrawal, because she had failed to designate any amounts that she had subsequently contributed to her RRSP as repayments under the HBP.@page_break@The CRA’s guide to the HBP provides the following, somewhat complicated explanation: “Your HBP balance is zero when the total of your designated HBP repayments and the amounts included in your income (because they were not repaid to your RRSP in previous years) equals the total eligible withdrawals you received.”

The guide also explains that making repayments to a HBP account involves contributing to your RRSP and filling out a form for each repayment; that form is passed on to your RRSP issuer, which will then send you a T4RSP slip that you must attach to your income tax return.

If Ho had gotten advice on the rules — set out in the ITA, the CRA’s Homebuyers’ Plan guide and on the CRA’s website — she could have ensured that her withdrawals qualified for the HBP, according to Golombek. “The rules are very clear,” he says. “Unfortunately, she didn’t follow the rules … and the consequences were that her second withdrawal was not part of the homebuyers’ plan because it was too late, and therefore, there was nothing that the Tax Court could do.”

Added Golombek: “She could have fixed the problem, if she had known she had a problem, by repaying the initial withdrawal to her RRSP and then cancelling her participation [in the HBP], and participating again closer to the date of the closing of the home.”

CHANGING THE RULES

Justice Miller was not swayed by Ho’s position that the legislation should be amended on the grounds that new construction today requires a series of deposits over a period of time and it is therefore illogical that all withdrawals must be made in the same year.

Ho’s position was that the HBP legislation is contrary to the underlying spirit of the program, which is to financially assist first-time homebuyers with home ownership.

But Justice Miller concluded: “The appellant has been assessed correctly and in accordance with the act. The court does not have the jurisdiction to amend the legislation; that remedy lies with Parliament.”

Golombek says he has a lot of sympathy for taxpayers in this situation, and he agrees that there could be some argument for a change in legislation: “There’s a valid point being made here — that often, pre-construction on condos does take a few years, so there may be some argument that the legislation could be changed to make it easier for first-time homebuyers to make deposits during the construction period as required.”

But, Golombek adds, Ho was making the basic argument about the need for change in the wrong place: “You can’t go to Tax Court asking for the law to be changed. If this person had come to me asking for advice, I’d have said, ‘You don’t have a case because it’s black and white, and you can’t argue legislative unfairness in Tax Court’.” IE