With an extremely competitive housing market, many Canadians feel that putting a down-payment on their dream home is unattainable. This sentiment is particularly common among the younger generations and prospective first-time home buyers. As such, it is important to take advantage of all the tools at your disposal. Recently, the daughter of a client reached out to inquire about the Home Buyers’ Plan, a program offered by the Canadian government to help support a home purchase. Here’s what you need to know about the HBP.
The Home Buyers’ Plan allows first-time home-buyers to take out $35,000 of their RRSP savings ($70,000 for a couple) without immediate tax consequences to help fund a down-payment.
Who is qualified?
To qualify for the program, there are some conditions that must be met, including the following:
- You must be a resident of Canada
- You must be considered a first time-time home buyer
- You must have held the RRSP funds that you plan on withdrawing for the HBP in your RRSP for at least 90 days (90 days rule)
- You have entered into a written agreement to buy or build a qualifying home
How To Withdraw
To withdraw funds tax-free as part of the Home Buyers' Plan, you must complete Form T3106, the “Home Buyers’ Plan (HBP) Request to Withdraw Funds from a RRSP”. This must be done and submitted to your financial institution prior to withdrawing funds. These funds must be repaid to your RRSP within 15 years, acting as essentially an interest-free loan.
When to Withdraw
When timing your withdrawal from your RRSP, it is important to consider some key requirements:
- You must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it
- You cannot own the home for more than 30 days before you make the RRSP withdrawal (30 days rule)
- You must buy or build the qualifying home before October 1 of the year after the year you made the withdrawal from your RRSP
As an example, if you withdraw from your RRSP on July 1, 2020, you must buy your home by October 1, 2021.
How To Repay
You will have up to 15 years to pay back the full withdrawn amount to your RRSP, and a minimum of 1/15th of the amount must be repaid each year. Your repayment period begins in the second calendar year following the year you made your HBP withdrawal. To make the repayment, you simply contribute to your RRSP.
How to Report HBP Repayment
Your reporting of repayment under HBP is done through you annual tax reporting. With the RRSP contribution receipt, you designate how much of the RRSP contribution represents as a repayment under the HBP. The designated HBP repayment amount cannot be deducted on your income tax return and it will not affect your RRSP deduction limit.
Strategies to Consider
There are clear advantages to using the HBP as it creates an interest-free loan and allows you the option of drawing upon existing resources within your RRSP without realizing tax consequences. Even if you have already accumulated enough for your down payment, it may be beneficial to utilize the HBP. For example, if there are more than 90 days until your home’s closing date and assuming you had enough "contribution room" in your RRSP, you could move your savings into an RRSP and then withdraw the money through the Home Buyers’ Plan. The advantage is that the $35,000 RRSP contribution will count as a tax deduction this year, creating a tax refund that could be used towards other expenses.
However, there are still some things to take into account to determine whether the plan is right for you. Primarily, you should consider whether it is the right time to cash out your RRSP, and whether it is worth forgoing the future tax-sheltered growth potential in favour of reducing your mortgage size.
If you are thinking of buying or building a home for the first-time, the HBP program may be an effective tool. In addition to the points mentioned in this blog, you should consider speaking with your tax advisor to see if the HBP is right for you.