It’s challenging for first-time home buyers to save for a down payment that’s large enough to avoid mortgage insurance requirements and keep debt at a manageable level. That’s why the Canadian government came up with a plan to allow people to dip into their RRSPs to buy a home.
If you have owned a home in the past, you may think you are not eligible for this plan. However, there are several situations that could allow you to be designated as a “first-time home buyer.” Read on to learn if you qualify and how to take advantage of this program.
What is the Home Buyers Plan (HBP)?
The RRSP HBP allows each person to withdraw up to $35,000 from an RRSP without facing any withholding tax or being required to include these funds as income on their tax return. This is known as the first-time home buyer limit. If you are purchasing a home with a spouse or common-law partner, you can withdraw $70,000 towards a down payment. You cannot use the funds to purchase a second home, such as a vacation property.
What’s the catch? You must repay the funds into your RRSP within 15 years or face penalties. Therefore, you need a financial plan that will allow you to make mortgage payments and RRSP repayments at the same time.
Who is eligible for the HBP?
The plan is for first-time buyers who plan to occupy their home within one year of purchase. So, you can’t use the funds to buy a property and then rent it out indefinitely.
If you previously owned a home, you may still be considered a “first-time” home buyer under the plan. Here are two examples of situations that qualify:
Dave owned a home in Smiths Falls, Ontario, but moved to Edmonton five years ago to take a new job. He sold his home in Ontario and decided to rent in Alberta. He plans to stay in Edmonton and has found a house that he wants to purchase. Dave did not use the HBP in Ontario but wants to dip into his RRSP for a down payment on the Edmonton property. Does he qualify as a first-time buyer even though he previously owned a home in Ontario? Yes! The rules specify that he cannot have owned a home in the past four years – he’s eligible because he sold his home five years ago.
Zach and Emily separated six months ago. They owned a home together and Emily has bought out Zach’s share of the home as part of the separation agreement. Zach has a new partner, Zoe, who has never owned a home before. Can Zach and Zoe use part of their RRSPs for a down payment? Indeed, they can. The Canadian government has deemed that marriage breakdown can be a special situation that allows people who have owned a home previously to qualify for the RRSP HBP. Be sure to check the government rules to see if you meet the requirements!
The HBP rules
The RRSP HBP rules allow you to withdraw up to $35,000 from your RRSP without facing any withholding tax. You can’t withdraw from locked-in or group RRSPs.
It’s vital to make sure that you qualify for the RRSP HBP prior to taking out funds from your account. Review the rules on the Canada HBP website and check with your lawyer or financial adviser.
If you are ruled ineligible after withdrawing funds, you will be required to pay income tax on the withdrawal. Depending on your tax bracket, this could be substantial on a withdrawal of $35,000.
The RRSP first-time home buyer disadvantages
The primary disadvantage is that you must pay the funds back into your RRSP within 15 years. So, you are essentially borrowing from yourself. You will need to make a budget to both make regular mortgage payments and repayment to your RRSP.
How to withdraw funds under the HBP
In order to take out funds from your RRSP, you need to fill out the T1036 Form – Home Buyers Plan Request to Withdraw Funds from an RRSP. Again, it’s important to emphasize that you verify that you are eligible before you take out any money. You want to avoid penalties!
How do I pay back the RRSP home buyers plan?
You must make an annual payment. This repayment starts the second year after you withdraw the funds. So, if you took an RRSP HBP in 2020, you would need to make your first repayment in 2022.
The minimum annual payment is one-fifteenth of the total. If you borrowed $15,000 from your RRSP, you would need to pay $1,000 each year.
You can repay the entire amount any time. For example, Jane owes $20,000 from her RRSP HBP. She receives an inheritance the year after using the funds to purchase her first home. She can use the inheritance to repay the entire $20,000 without any penalties or tax consequences.
How do I cancel the HBP?
Once you have taken the funds from your RRSP, you cannot cancel the HBP. However, there are two exceptions to this rule:
- You don’t end up purchasing a home. In this case, you can simply return the funds to the RRSP.
- You move out of Canada and become a non-resident.
You can also terminate the RRSP HBP by repaying all of the funds withdrawn from the RRSP. However, you won’t be eligible to be a first-time home buyer in the future.
What happens with a missed payment?
If you fail to make the minimum annual repayment, you must include the amount as RRSP income on your tax return. You will face a tax bill for the income unless you have other deductions to offset it.
Spousal RRSP and home buyers plan
Both you and your spouse can contribute up to $35,000 to the RSSP HBP. These funds can come from a regular RRSP or a spousal RRSP.
Is the RRSP Home Buyers Plan for you?
As indicated, there are a lot of rules around eligibility, withdrawals and repayments with the RRSP HBP. Be sure to check the Government of Canada website or consult a lawyer to make sure that you are following them. If you don’t, you could face tax penalties.
