Loophole for Home Buyers in Canada Leads to Big Tax Refunds

Tax season is approaching, and most people want to get the maximum amount from their refund that they can.

Well, there are a lot of deductions that you can make, but did you know that if you're buying a house you can make your refund even larger?

In Canada, you can actually get a considerable amount of money in refunds from a home purchase, but it depends on a variety of factors. A lot of people find this useful, especially since registered retirement savings plans don't go quite as far as they used to in the past.

RRSP Withdrawal Options in Canada

As you're probably already familiar with, Canada has a home buyers' plan that says home buyers in the country can withdrawal $25,000 from their RRSP (registered retirement savings plan) and use it towards purchasing a home. This does have to be paid back over the next 15 years for anyone who wants to avoid a costly penalty after that. Couples can even combine their money together, meaning they can use $50,000 towards purchasing a new home.

Sounds like a good deal right? Well, that amount of money really isn't that big of a dent when you're looking at something like purchasing a home throughout Calgary or Vancouver.

The $25,000 amount has actually been the same since way back in 1999, and home prices have increased considerably since then. In fact, these days a down payment of $50,000 would be just barely above the minimum for a home in Calgary. But, that same $50,000 won't go much farther in the future, with home prices climbing to an average of $462,000 in Calgary.

If you want to avoid mortgage default insurance, then you'll have to dig into your own pockets to make sure you adequately cover the down payment of at least 20 percent of the total purchase price.

The Loophole to Large Returns

So, how are people getting big returns on their taxes with their RRSPs? Well, they are actually calculating their moves exactly so that they get more in tax refunds with the money that they are using for down payments.

Let's say you are planning on purchasing your home within the next 90 days. In order to do this, you put a contribution of $25,000 (or double that if you're a couple) into your RRSP. Guess what happens after that? As long as you leave this in the plan for 90 days, it will trigger a refund that can garner you around $20,000 in refunds!

Of course, the amount you get will depend on your marginal tax rate and many other factors, but it still means seeing a larger number on your refund.

This is a very popular time of the year to do this; since people want to see their down payments get them more money on their returns. That extra money can go towards a lot of things for your new home and mean moving in with a nice cushion in your savings account.

This loophole may push more people to use their RRSPs, but that depends on each individual situation since RRSPs aren't thought of as the overall best way to save for a home.