16 May 2000 Ministerial Letter 2000-0016898 - Home Buyers' Program

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Can a participant in the Home Buyers' Program reduce the balance of the amount originally borrowed by increasing the amounts taken into income for taxation years after the year in which the RRSP must mature and re-payments to the RRSP are no longer possible?

2. Can a spouse of a deceased participant assume the balance of the loan outstanding after the participant dies rather than have the whole balance included in the participant's income on the final T1 tax return?

Position: 1. No. 2. Yes.

Reasons:

1. Re-payments can no longer be made to an RRSP after the year in which it must mature and the formula in subsection 146.01(4) then forces a yearly income inclusion of a fixed amount based on the number of remaining years over which the loan would otherwise have had to be re-paid. The loan can be reduced more quickly only during the years in which a participant can make re-payments to his or her RRSP because re-payments can be increased up to the entire outstanding balance at the participant's option (146.01(3)).

2. In the participant's year of death, the total balance of the loan outstanding at that time must be taken into income on the participant's final T1 return (146.01(6)), unless the spouse and the deceased individual jointly elect to have subsection 146.01(7) apply. If this election is made, the surviving spouse can make re-payments of the deceased participant's outstanding balance at the time of death to his or her own RRSP. If the surviving spouse has reached the age in the year in which his or her own RRSP must mature before the taxation year in which the original participant died, the election under subsection 146.01(7) can still be made, but the surviving spouse must take the remaining balance into income over the same number of taxation years as would the deceased participant if he or she had not died.

Signed on May 16, 2000

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Martin Cauchon, Minister of National Revenue, has asked me to reply to your letter of March 7,2000, concerning the Home Buyers' Plan.

First, I would like to apologize for the manner in which you were treated. Clearly, Canadians are entitled to an adequate explanation of tax provisions. I regret that you were not referred to someone who could respond to your questions.

I confirmed with officials of the Individual Returns and Payments Processing Directorate of the Canada Customs and Revenue Agency that in XXXXXXXXXX you borrowed $XXXXXXXXXX from your registered retirement savings plan (RRSP) to purchase a house under the Home Buyers' Plan. From XXXXXXXXXX, your TI returns have been reassessed to include in your income $XXXXXXXXXX every year. In February 2000, a letter was sent to you explaining that all Home Buyers' Plan repayments to an RRSP are prohibited after the year in which the RRSP annuitant turns age 69.

You requested confirmation of the foregoing and asked us the following questions:

1. Can you report the entire remaining balance as income for tax purposes now?

2. Could you increase the amounts reported as income for tax purposes each year in order to reduce the outstanding balance more quickly?

3. Could your spouse assume the balance of the loan at the time of your death and report the required amounts each year as income on her tax return?

You cannot report the entire remaining balance as income for tax purposes now, nor can you increase the amounts reported as income for tax purposes each year to reduce the outstanding balance more quickly. The Income Tax Act provides for an income inclusion for the amount by which the required repayment to the RRSP is in excess of the amount actually repaid to the RRSP for a taxation year. This amount is determined by a formula in which the only variable is the amount that the participant repays to his or her RRSP for a given taxation year. The participant has the option of increasing the amounts repaid to the RRSP and therefore reducing the amount outstanding more quickly. In fact, the individual could repay the entire outstanding balance to his or her RRSP at any time.

However, one of the registration rules for an RRSP requires that in the year an annuitant turns 69, the RRSP funds must be used to purchase an annuity or the RRSP funds must be transferred into a registered retirement income fund. Since the individual cannot make contributions to any RRSP after the year in which he or she reaches the age of 69, repayments under the Home Buyers' Plan are also prevented.

The registration rule described: above was amended in 1997 to lower the maximum age for the year an individual could contribute to an RRSP from 71 to 69. This amendment was not applicable for RRSPs registered before 1997 or for individuals that were 70 before 1997 or turned 69 in 1996.

Under the old provisions of the law, which apply to you, your RRSP was required to mature in XXXXXXXXXX. Since you could not have an RRSP to which you could make contributions after the year in which you turned 71, you could not repay amounts withdrawn under the Home Buyers' Plan after XXXXXXXXXX. Consequently, in XXXXXXXXXX and each of the next XXXXXXXXXX years you were and are required to include in your income for tax purposes 1/15th of the balance of the original Home Buyers' Plan withdrawal which you had not repaid before XXXXXXXXXX.

With respect to your third question, the general rule is that where a Home Buyers' Plan participant dies, the entire amount of the balance outstanding (that is, any portion of the original withdrawal which has not been repaid to the RRSP or taken into income for tax purposes in a prior year) must be included in computing the individual's income for tax purposes on the final return for the year of death.

However, if at the time of your death, your spouse is a resident of Canada, she and your legal representative can make a joint election not to have the full outstanding balance included on your final income tax return for the year of your death. This election must be filed with your final tax return. The practical effect of the election is to put your spouse in the same position with respect to the balance outstanding as you were at the time of your death. My understanding is that your spouse was also XXXXXXXXXX years of age in XXXXXXXXXX. If the election is made, she will be required to include in her income each year the fixed amount that would otherwise have been required to be included in your taxable income.

I appreciate the opportunity to address your concerns.

Yours sincerely,

Bill McCloskey
Assistant Commissioner
Policy and Legislation Branch

G. Kauppinen
957-8971
2000-001689
April 20, 2000