Having trouble funding the down payment on a mortgage for your first home? If you have an RRSP (or are planning on opening one soon), one of the first-time home buyers’ programs that might be worth looking into is the Home Buyers’ Plan (HBP). There’s no doubt that there are monetary benefits to be reaped from this plan, but whether or not it’s the right plan for you may depend on a few things.
What is the Home Buyers’ Plan?
An RRSP is a tax-sheltered account, which is designed for saving for retirement. And if you make a withdrawal, you’ll be taxed. However, the HBP allows you to make a tax-free withdrawal from your RRSP.
If you choose to take advantage of the HBP, you enter a commitment to receive a tax- and an interest-free loan from yourself. You’ll then have to repay the amount you originally took out from your RRSP.
Am I eligible to participate?
Yes, if you’re a first-time homebuyer. In other words, during the last four years, you can’t have owned a home or lived in one owned by your partner. This gives you some leeway. If you sold a home in 2011, meet all other RRSP HBP qualifications and you’re buying a house five years later, you should be eligible for the HBP in 2016.
Aside from that, as always, there are a few more qualifications you’ll need to meet:
- You’re either a Canadian citizen or permanent resident
- You’re tied to a written agreement that says you’ve purchased a qualifying home that’s new or under construction
- You’ll live in that home as your primary residence within one year of the purchase date
- You don’t have outstanding balances due if you’ve used the HBP before
How much can I withdraw from my RRSP for the HBP?
Those who are eligible can feel free to borrow anywhere up to $35,000.
What if I’m buying with someone (spouse, common-law partner) who is also eligible?
The more the merrier. You can both withdraw up to $35,000 each for a combined total of up to $70,000.
What if one of you isn’t eligible?
Only one of you needs to be qualified for the HBP for that person to withdraw up to $35,000.
What are the benefits of using the HBP?
You can use the money saved in an RRSP for the down payment on a home. Also, you don’t have to use the money to fund mortgage down payments. If needed, it can be used to pay off other home-buying expenses too. Even if you can already afford your down payment, the tax benefits of using the HBP give you another reason to use it anyways.
How does the HBP process work?
First, any amount of money that you plan to withdraw from your RRSP has to sit in the RRSP for at least 90 days. Next, the withdrawal itself has to happen no more than 30 days after you’ve taken title of the home. If you procrastinate, your withdrawal won’t be eligible for the HBP! With the help of your financial institution, fill out the T1036 form. Your financial institution will then send you a T4RSP form, which will show you how much you withdrew from your RRSP for the HBP.
When do I have to start repaying?
The HBP gives you a two-year break before you need to start repaying the loan back to your RRSP. After that, you must make a minimum payment equal to one-fifteenth of the original loan amount over a 15-year period. If you don’t make the minimum repayment, the amount you don’t pay will be considered as taxable income.
If you start losing track of your payments, the Canada Revenue Agency (CRA) won’t miss a beat. It’ll send you a Notice of Assessment every year, which indicates the accumulated amount you’ve already paid and how much you still need to pay.
Can you give me an example of how the HBP repayment works?
For this example, we’ll assume you’ve taken out $15,000 from your RRSP. Since this withdrawal is a tax-free exemption, you put $15,000 directly into Home Buyer’s Plan. Each year, the minimum repayment you’ll need to make is $1,000 ($15,000 ÷ 15).
You can pay off more than $1,000 if you want. If you pay $2,600 instead of $1,000, then the minimum payment you’ll need to make each remaining year is $900 ($12,600 ÷ 14).
On the other hand, missing a payment will cost you! If you pay $800 instead of $1,000 during that first year, the remaining $200 you didn’t pay becomes taxable income. The more you don’t pay, the more that’s taxable.
How do I know if it’s right for me?
Consider whether or not it’s realistic for you to be able to make each annual minimum repayment. You may also want to take a few moments to compare the difference between making a larger down payment versus having years of tax-free growth in your mortgage payment with the HBP against any losses or opportunity costs from decreasing your RRSP, which has tax-free growth. Note that those repayments also won’t be considered tax-deductible.
Can I cancel my participation at any time?
You can’t back out unless you meet one of two conditions: You didn’t purchase/build a qualifying home or you ceased to be a resident before a qualifying home was bought or built. In such cases, you wouldn’t be taxed if you ended up repaying your HBP withdrawals by Dec. 31 of the year after the year you received the funds. If you don’t repay the amount you withdrew by that date, the unpaid amounts will be included as income in the year you received the money.