The federal government's Home Buyers' Plan (HBP) is a program for first-time home buyers in Canada. Through it, you can withdraw existing funds from your Registered Retirement Savings Plans (RRSPs) to buy or build a home, either for yourself or for a family member with a disability.
What you need to know
The Home Buyers' Plan allows first time home buyers to use a portion of the money they’ve contributed toward their RRSP for a down payment on a home – the withdrawn money will need to be paid back over 15 years into an RRSP account. If you do not make your annual HBP minimum payment, the minimum amount is added to your taxable income for that year.
In 2019, the withdrawal limit was increased to $35,000 per individual. This means that, where both spouses have an RRSP, a couple can withdraw up to $70,000 with this plan.
Normally, funds withdrawn from a Registered Retirement Savings Plan (RRSP) are included in your overall income and are subject to tax. However, withdrawals from an RRSP that meet all applicable HBP conditions are not considered income and are not taxed at the time of HBP withdrawal. This is because at least 1/15 of the total amount is due every year and any shortfall in this repayment is added towards RRSP income and becomes taxable.
Are you eligible?
To be eligible to participate in the Home Buyers' Plan, certain conditions must be met.
Be a resident of Canada at the time of application and up to the time the home is bought or built
Be a first-time home buyer under the Income Tax Act (Canada)
Have a written agreement to buy or build a home – either for yourself or for a person with a disability who is related to you
Use the home as your principal residence within 1 year of buying it
Reside in Canada when the funds are withdrawn
Have closed on a home purchase within the last 30 days
Something to note, even if you or your spouse have previously owned a home, you may still be considered a first-time home buyer. This is because you are considered a first-time home buyer if, in a four-year period, you did not occupy a home that you, your current spouse, or common-law partner owned.
There are other factors to consider when it comes to eligibility for the Home Buyers’ Plan, including buying or building a home for a related person with a disability or what happens in the case of separation from your partner.
Find out more about eligibility by visiting the CRA website.
Participating in the Home Buyers' Plan
If you meet the eligibility criteria and have entered into an agreement to purchase your first home, the next step is to fill out the Home Buyers’ Plan request form (Form T1036) ahead of your closing date. Additionally, you’ll want to review your RRSP investments to make sure that they are eligible for withdrawal.
It is important that you understand your bank’s requirements ahead of requesting the withdrawal (e.g., time needed to sell investments) to avoid delays. It is also important to know that Home Buyers' Plan withdrawals must be completed in the same calendar year.
Once the money is withdrawn from your RRSP and deposited in your account, you can use it toward your down payment. Make sure to factor in time to get all of your down payment funds together ahead of your closing date.
A withdrawal from the plan can be done up to 30 days after your closing date. After 30 days, you are no longer eligible to make the withdrawal under the Home Buyers’ Plan.
Repaying the withdrawn funds
The funds you withdraw must be paid back into your RRSP over a period of 15 years. At least 1/15 of the borrowed amount must be re-contributed every year.
To repay, make contributions to your RRSP, and at tax time, designate the relevant portion of your contributions as your Home Buyers’ Plan repayment.
You can repay more than the required minimum in any given year. Your Notice of Assessment can help you keep track of how much you owe. If you repay less than the minimum amount in a year, the difference is considered to be RRSP income and is taxed at your marginal tax rate.
Some pros and cons
You can use money you’ve already saved within an RRSP toward the purchase of your first home (personal and spousal plans qualify)
You can delay the start of the repayment of your loan to the second year after the year of withdrawal.
You have the flexibility to pay back an amount above the minimum, or even the entire loan amount at one time. There are no maximum payback limits.
You can think of it as an interest-free loan from your RRSP.
You can only participate in this plan when you qualify as a first-time home buyer.
You need to recontribute at least the minimum annual amount each year. If you repay less, the difference is added to your taxable income for the year.
Withdrawals are only allowed on funds that have been in your account for 90 days or more.
Withdrawing from your RRSP means that you will not accumulate income on those funds until you recontribute.
All things considered
The Home Buyers' Plan is a great interest-free option for first-time home buyers looking to use the funds toward a down payment. To ensure that this is the right plan for you, understand the eligibility rules and weigh the various pros and cons as they apply to your particular situation. It is a good idea to work with a tax consultant so you can make informed decisions and avoid tax penalties.
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