As a first-time homebuyer, its important to maximize the value of every single dollar being put towards your first home. Saving, budgeting, and planning are all paramount to success in a purchase. However, maximizing the use of government incentives to stretch these funds even further can assist in making home ownership a reality. The RRSP Home Buyers’ plan is a great way to use savings typically reserved for retirement, towards the down payment of your new home.
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What is the RRSP Home Buyers’ Plan?
The Home Buyers’ Plan (or RRSP Home Buyers’ Plan) is a government incentive that allows a first-time home purchaser to withdraw up to $60,000 from their Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home.
While funds in an RRSP are typically reserved for retirement, they can be a useful source of down payment. Most first-time home buyers are in the younger years of their life, and likely contributing to their RRSP. Instead of having to choose between saving for retirement or a home, they can do both, worry-free!
How Does the Home Buyers’ Plan Work?
In order to understand how the Home Buyers’ Plan works, we first need to understand an RRSP.
Funds in an RRSP are Tax-Deferred. This means that the funds contributed to the account are deducted from the income that individual earned during the year. While inside the RRSP, the funds are not taxed (on, for example, dividends or capital gains). The funds are then taxed at withdrawal and treated as income, which is usually during retirement. The result is that the funds in an RRSP can lower the effective tax rate of a taxpayer during employment and allow for a steady post-employment income to cover living expenses during retirement.
The Home Buyers’ Plan allows the individual to withdraw funds from this tax-deferred account without incurring any taxes or penalties if they are used to purchase a home. No tax is payable if these funds are then re-contributed back into the RRSP within 15 years.
Eligibility and Requirements
Who Can Use the RRSP Home Buyers’ Plan?
An individual must meet certain conditions in order for their withdrawal to be eligible under the HBP. These conditions are:
- You must be a resident of Canada at the time of your withdrawal
- You need to have a written agreement to purchase a home at the time of withdrawal (for example, an Agreement of Purchase and Sale)
- The Home must be considered a ‘qualifying home’, namely:
- Existing or to be constructed home in Canada
- Acquired or Built before October 1st in the year of withdrawal
- Co-ownerships, where you purchase a share of ownership in the land, qualify as eligible homes. However co-ops, where a share in the corporation is purchased with a right to occupy, are not considered eligible homes.
- You must intend to occupy the home as your principal place of residence within 1 year of purchasing
- You need to be a “first-time home buyer” as defined in the rules of the program
- Generally, you can not have owned a home anywhere in the world
- An exception applies if you and your spouse owned a home that was sold through divorce more than 4 years ago
- Disabled people have additional exemptions and exceptions to qualifying, and
- Withdrawals may be made in multiple stages, but have to all occur within the same calendar year.
- Couples who are both first time home buyers may individually contribute. In other words, their maximum withdrawal is effectively doubled if they each withdraw from their RRSP.
This eligibility list is by no means all-inclusive. To determine eligibility, it is recommended you seek expert advice. Full terms of eligibility can be found on the Government of Canada Website.
Spousal RRSP and Special Conditions
The Spousal RRSP is a special type of registered savings plan that allows couples to contribute to each other’s RRSP. This is useful in situations where there is a large income disparity between couples. However, there are specific rules in Spousal RRSP’s, like when couples can withdraw funds and how much they can withdraw.
Assuming both spouses are eligible for the Home Buyers’ Plan, the couple can use funds from the spousal RRSP as well as their individual RRSP, and take advantage of the doubled amount eligible under the plan. (Restrictions apply)
How the Plan Works
Withdrawing Funds
In order to withdraw funds from your RRSP for your first home purchase, you must fill out Form T1036, “Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP.” You can find this form on the Canada Revenue Agency (CRA) website. Submit this form to your financial institution holding your RRSP, and the funds will be withdrawn and given to you, penalty and tax free.
It is up to you, the withdrawing party, to ensure that you meet eligibility requirements. The financial institution bears no responsibility if you withdraw the funds and are ineligible. The CRA may determine you are ineligible at the time of next filing and request return of these funds back into your RRSP.
Once you are in possession of the funds, there is no further restriction other than they must be used towards your down payment. Whether this is used in your real estate deposit, or your down payment at closing, there is no restriction. Keep in mind that most deposits are due within 24 hours and you need a written agreement to purchase to be eligible. For this reason, most use the funds at closing rather than at the time of deposit.
Repayment Process
There are several steps to repay the funds back into your RRSP.
Each year, you must repay at least 1/15th of the total amount withdrawn from your RRSP used for the Home Buyers’ Plan. For example, if you withdrew $15,000, you must repay $1,000 each year for 15 years. You can repay more than this amount and it will reduce the total amount outstanding, but it will not reduce the requirement of the following years payment.
To repay, simply contribute the required amount to your RRSP by the end of the year. Ensure the contribution is designated as an HBP repayment. You can make the repayment at any financial institution that offers RRSPs, provided you designate with the financial institution that this is a “HBP repayment”.
On your annual income tax return, complete Schedule 7, “RRSP, PRPP and SPP Unused Contributions, Transfers, and HBP or LLP Activities,” to designate the contribution as an HBP repayment.
Indicate the amount you are repaying towards the HBP in the appropriate section of Schedule 7.
Penalties & Other Considerations
If you fail to repay the required amount in any given year, the unpaid amount will be added to your taxable income for that year. It is important to meet the annual repayment requirement to avoid additional taxes.
It is also important to note that HBP repayments are not tax-deductible. They are treated as a separate obligation from your regular RRSP contributions. If you use RRSP contributions as a tax planning and mitigation strategy, this amount should be considered over and above your regularly scheduled contribution amount.
Financial Considerations
Advantages and Disadvantages
Using the RRSP Home Buyers’ Plan is a great way to save and afford your first home. Together with other first time home buyer incentives, it comprises a valuable part of the money-saving toolkit. The primary advantage is using funds normally reserved for retirement towards down payment of a new home, years before these funds would be accessible.
However, there are several disadvantages to using the RRSP Home Buyers’ Plan. For example, using this plan obligates the withdrawing party to repayment in 1/15ths. A $60,000 withdrawal limit means that the buyer could be left with an obligation to repay $4,000 per year (of post-tax income) or face penalties. When considering all the other financial strains of home ownership (maintenance, mortgage, property taxes, condo fees, etc), this can put a significant financial stress on the individual.
Impact on Retirement Savings
Most RRSPs are invested into some sort of growth strategy. This can be via securities (stocks), GICs, bonds, or other financial instruments. When the funds are withdrawn, they no longer are able to earn interest, dividends, or other appreciation tax-free.
There is an alternate argument to consider here, however. In Canada, principal residences are exempt from capital gains tax. The funds used towards down payment may also grow tax-free, just in the form of your largest asset: your home.
Tips and Best Practices
Contribute to your RRSP Before Withdrawing
One of the best ways to maximize your HBP benefits is to contribute as much as possible to your RRSP before making a withdrawal. This not only allows you to take full advantage of the $60,000 withdrawal limit but also provides you with a tax deduction. This deduction can reduce your taxable income for the year, potentially leading to a significant tax refund. Just remember that contributions must be made at least 90 days before the planned withdrawal to meet the HBP eligibility requirement.
Strategic Withdrawal
When planning your HBP withdrawal, timing and strategy are key. If both you and your spouse or common-law partner have RRSPs, each of you can withdraw up to $60,000, providing a combined total of $120,000. This can significantly increase your home-buying power. Make sure to time your withdrawal in the year you plan to purchase your home to avoid any unnecessary delays and ensure the funds are available when you need them.
Optimize Repayment
Repaying the amount withdrawn from your RRSP under the HBP is an important part of the process. If financially feasible, consider repaying more than the minimum required amount each year. This approach reduces your outstanding balance faster and restores your RRSP contribution room sooner. Additionally, manage your cash flow to ensure that your annual repayment amount is manageable within your budget, avoiding financial strain.
Use a TFSA for Additional Savings
If you’ve maximized your RRSP contributions and still need additional funds for your home purchase, consider using a Tax-Free Savings Account (TFSA). Contributions to a TFSA grow tax-free, and withdrawals are also tax-free, making it a great complementary savings tool alongside the HBP. This strategy can provide you with extra financial flexibility when purchasing your home.
Stay Informed and Seek Advice
Staying informed about any changes to the HBP rules and RRSP contribution limits is crucial for maximizing your benefits. The Canada Revenue Agency (CRA) website is a reliable source for up-to-date information. Additionally, consulting with a financial advisor can help you create a tailored strategy that aligns with your long-term financial goals and maximizes the benefits of the HBP.
Consider Long-Term Impact
While the HBP is a fantastic way to fund your first home, it’s important to remember that RRSPs are primarily intended for retirement savings. Withdrawing funds from your RRSP means you’ll have less money growing tax-deferred for your retirement. Therefore, ensure that using the HBP fits within your overall retirement plan and long-term financial goals.
