Closing costs on the purchase of our house quickly ate into the down payment. We spent about 3% of the purchase price of the home on closing costs (lawyers fee, transfer taxes, and other adjustments) which totaled almost $20,000.

Recognizing that these costs would eat into any emergency funds we have, prior to home searching, we contributed a combined total of $28,000 into our Registered Retirement Savings Plan (RRSP).

Our intention was not to save for retirement which is what a RRSP is typically used for, but instead to use it to help generate tax refunds that can be applied towards our emergency fund after we purchased our house- something we desperately wanted to have.

Here’s how it worked:

1. Amanda contributed $18,000 to her RRSP and I contributed $10,000 to my RRSP.

2. We ensured that the total amount contributed into the RRSP was invested in a daily savings account. We needed the $28,000 to be used on the purchase of the home so we couldn’t invest in anything risky.

3. We kept the contributions in the RRSP for 89 days and on the 90th day, went to the bank to make the withdrawal for the full $28,000 under the Home Buyers’ Plan. The RRSP contribution must be held in an RRSP for at least 89 days prior to withdrawal to be eligible as a Home Buyers’ Plan withdrawal.

4. We were free to use the $28,000 however we wanted but the biggest benefit was that we would be able to deduct $28,000 from our taxable income when we filed our tax return as the contributions made would be treated as a regular RRSP contribution.

In other words, Amanda and I shouldn’t be taxed on $28,000 of income for the year and when we filed our tax return, we got over $9,000 in tax refunds for taxes that shouldn’t have been paid in the year.

What was the catch?

Starting the year following our home purchase, we have to start repaying the $28,000 withdrawal back into our RRSP over the next 15 years ($1,866.67 per year). If we don’t contribute the full $1,866.67 back in the year, we’ll have to include the portion that was unpaid as income in our tax return.

We aren’t able to deduct the annual repayments/contributions of $1,866.67 again from our future tax returns so essentially we were really loaning our own money to ourselves.

Final thoughts 

At the time when we bought our house, we could have contributed up to the maximum amount of $25,000 for each of us to generate more tax refunds (we had enough RRSP contribution room) but we elected not to. Since in Canada, our incomes are taxed on a progressive basis (the more you earn, the higher the tax bracket you’ll be in), we did the math to contribute just enough to make sure the tax refund was maximized and what we got was based on making deductions above the lowest tax bracket.

We recognized there would be longer term benefits from saving some of our RRSP contribution room for the future to use when we’re in a higher tax bracket.

The $9,000 in tax refunds was extremely beneficial when we had to dig into our emergency fund on more than one occasion to make emergency repairs so we’re really glad we took advantage of the Home Buyers’ Plan.