Can I use money from my RRSP to pay for a cottage?—Violet Pearl, via email
You can use money from your RRSP to pay for anything: a lambo. A year’s worth of Baby Duck. An expensive Shetland pony.
But you’ll be taxed on it. “You can withdraw money from your RRSP to purchase a cottage, but the amount of the withdrawal will be treated as a ‘payment of pension income’,” says Karen Slezak, a tax partner with Crowe Soberman in Toronto. “That means that there will be tax withheld at the time of the withdrawal: 10 per cent on the first $5,000, 20 per cent between $5,001 and $15,000, and 30 per cent on any amount above $15,000.” And, depending on your actual tax bracket, you may have to pay additional tax when you file your return.
If I rent out my cottage, do I need to include it as income when I file my taxes?
Another, possibly better option, is to take advantage of the Canada Revenue Agency’s Home Buyer’s Plan (HBP). “The plan allows for withdrawals of $35,000 or less from an RRSP as long as very specific criteria are met,” says Slezak. (It’s tax-free, and works a little like a loan: you have to pay the money back over a maximum of 15 years.)
And you have to qualify. “The main requirement is that the person has to be a first-time home buyer,” says Slezak. You can meet that requirement if, in the four years leading up to buying the cottage, you didn’t live in a home that you, your spouse, or your common-law partner owned. So, “if you’ve been renting your accommodation, the cottage may be considered a first-time home.”
If you’re interested in using the HBP, talk to a tax expert to help determine if you’ll qualify.
Seven deal-breakers to think about when buying a cottage
This article was originally published in the August/September 2021 issue of Cottage Life magazine.
Got a question for Cottage Q&A? Send it to answers@cottagelife.com.
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