What is the RRSP Home Buyers’ Plan & How Does It Work (2022)

Trying to source for the mortgage down payment on your first home, and you are wondering how you can tap into the funds in your RRSP without any penalties? Then this article on Home Buyer’s Plan is just for you.

With the Home Buyers’ Plan, you can borrow up to $35,000 from your RRSP accounts for a down payment, tax-free.

Further, if you are purchasing with someone who is also a first-time home buyer, you can both access $35,000 each from your individual RRSP accounts to make up for a combined total of $70,000 in tax-free Home Buyers’ Plan loan.

While using RRSP for down payment sure sounds like good news, however, there are some essential things you need to know about the first-time Home Buyers’ Plan in Canada.

Without further ado, let’s talk about the Home Buyers’ Plan and how it works in Canada.

What is the Home Buyers Plan?

The Home Buyers’ Plan (HBP) is a Canadian scheme that enables first-time home buyers to borrow up to 35,000 Canadian dollars from their registered retirement savings plans (RRSPs) to pay for their mortgage down-payment.

An RRSP is a retirement saving and investment instrument available to Canadian workers and self-employed people.

The Registered Retirement Savings Plan (RRSP) can be a great source of down payment funding for your home purchase through the first time home buyer plan.

In an RRSP, money is invested pre-tax and grows tax-free until it is withdrawn and taxed at marginal rates.

The Home Buyers’ Plan is available to first-time homebuyers who have signed a formal contract to purchase or build a qualified home for themselves.

Additionally, people with disabilities and those who care for a relative who is disabled qualify for this program.

However, a homebuyer must withdraw no more than $35,000 from the program in a calendar year and must withdraw everything within the year.

Furthermore, the funds must be withdrawn 30 days after the buyer moves into the home. Also, required unpaid repayments are taxed as income at the end of the year.

How RRSP Home Buyers’ Plan Process Works

The home buyers’ plan (HBP) is a program administered by the Canada Revenue Agency (CRA) that enables qualifying first-time homeowners to make a tax-free withdrawal of up to $35,000 from their registered retirement savings plan (RRSP).

A homebuyer has 15 years to repay the loan by making deposits into their RRSPs after the second year of the withdrawal, with at least a minimum payment due each year.

Tax is not withheld from withdrawals from an RRSP if the withdrawal amount is under $35,000.

You can benefit from the tax savings associated with RRSP contributions while saving for a down payment on a property. The cash can then be withdrawn tax-free and used to purchase a property.

Also, RRSP funds can be withdrawn from more than one account as long as the same individual owns the accounts.

What is the Eligibility for First Time Home Buyers’ plan (HBP) with RRSP?

Not every RRSP account holder may be eligible for the first time home buyers’ plan (HBP).

To be eligible for the HBP, you must meet the following requirements:

• You must be a first-time home purchaser
• Willing to sign an agreement
• Your RRSPs funds must be in your for 90 days before withdrawal.
• Be a resident of Canada
• Willing to make the home your primary home within one year
• You must not have owned a home in the last four years
• All you must withdraw all the requested funds within 30 days of approval
• You must start your loan payment within two years of your approval.

Pros and Cons of the Home Buyers’ Plan

Pros

• Using the HBP is like getting a loan without interest
• By accessing HBP funds, you could make your first home buying experience more manageable and less expensive
• Claiming contributions reduces your taxable income
• You use the funds for the down payment on your home
• Prior to you having to repay the loan over a 15-year term, there is a two-year grace period
• Payment of the entire loan is not limited, so you are free to pay it back immediately if you wish

Cons

• Repayments must be made yearly
• A period of time in which you withdraw money from your RRSP can result in diminished investment/savings growth
• The withdrawal of funds means that you will not earn interest that might have accrued if the money had been invested
• The HBP must be repaid in full, and contributions to an RRSP to pay it back do not qualify as deductions
• Although the funds you withdraw is not a loan in the ordinary sense, it is nevertheless a personal loan that must be repaid within 15 years
• Home Buyers’ Plans are limited in time, so you’ll need to be very prepared
• You could lose tax-sheltered investment growth due to improper withdrawal.

How to Apply to the Home Buyers’ Plan

To begin the Home Buyers’ Plan application process, you must first download and complete form T1036, headed ‘Home Buyers’ Plan (HBP) Request to make a withdrawal from an RRSP.’

Also, Area 1 must be completed by you, while Area 2 is completed by the financial institution that holds your RRSP.

The funds will then be deposited into an account of your choice by your RRSP provider. You will also receive a T4RSP form from the financial institution.

With this slip, you will see the amount of money withheld from your RRSP and use it for your tax return the following year.

How to Withdraw RRSP Funds Under the Home Buyers Plan

Form T1036, Home Buyer’s Plan (HBP) Request to Withdraw Funds From an RRSP, is required to withdraw funds from your RRSPs under the HBP.

Every time you withdraw money, you must complete this form. Give your RRSP issuer the completed Area 1 of Form T1036. Area 2 is completed by the issuer.

A single withdrawal or multiple withdrawals can be made in the same calendar year.

However, you are considered to have withdrawn in the year you received the first withdrawal, even if you received a second withdrawal the following January.

Also, a maximum of $35,000 can be withdrawn from your HBP if you meet the eligibility requirements.

Amounts less than $35,000 in your RRSP will not be subject to tax withholding. For any amount over $35,000.00, you must report it on your income tax and benefit return for that year.

Furthermore, your RRSP issuer will be required to withhold tax on the excess amount at the time of withdrawal.

However, a withdrawal from the Home Buyers Plan is not permitted for contributions made within 90 days of a withdrawal.

Additionally, you must also utilize the funds on your new home within 30 days of taking possession of your new property, so don’t apply too soon.

How Much Can You Withdraw Under First Time Home Buyer’s Plan with RRSP?

You can withdraw up to $35,000 under the first-time Home Buyer’s Plan with RRSP.  This amount is tax-free once you keep up with your minimum repayment amount.

However, you can withdraw up to $70,000 if you are buying your first home with your spouse or common-law partner.

Furthermore, you can withdraw up to $70,000 for another first-time Home Buyer’s Plan after repaying the full previous HBP amount.

RRSP Home Buyers Plan Repayment

You will need to repay all the money you take out under the Home Buyers Plan every year. The repayment must begin in the second year of approval.

Overall, all funds withdrawn must be repaid within 15 years, and each participant must repay 1/15th of the amount withdrawn every year.

In addition to the total debt, the CRA will also provide you with a minimum payment due on your HBP account statement.

However, the deduction limit for RRSPs is not impacted by repayments. It is possible to contribute to your RRSPs, PRPPs, or SPPs while on the HBP and designate that amount as a repayment.

Also, you can find the HBP account balance on your Notice of Assessment, as well as in MyAccount.

While you have to make the required minimum payment each year, you may make further repayments to reduce the balance as quickly as possible.

If you repay your HBP balance with contributions, your contribution room is not affected. Your T-1 General Income Tax Return must include Schedule 7 for the repayment.

You cannot claim a tax deduction from your RRSPs when making RRSP contributions to repay the HBP loan.

On Schedule 7, any amount declared as an HBP repayment will be offset against RRSP contribution receipts.

Additionally, make sure you are directing RRSP contributions to the repayment of your HBP loan and not simply regular contributions.

Missing Payments Under First Time Home Buyers With RRSP

Even though you’re not taxed when you withdraw money to buy your first home under the Home Buyers’ Plan, you will be taxed if you miss a payment.

Here’s how it works: Once you miss your annual minimum repayment, you must include the amount as income when filing your tax.

All you need is to include the missed payment amount in line 129 of your tax return, excluding the minimum repayment you have made.

The federal government will tax the missed payment amount, reducing your HBP balance. This automatically undermines the purpose of your tax-free RRSP withdrawal.

Is Using RRSP for Down Payment a Good Idea?

Making a down payment is one of the most challenging aspects of homeownership.

For houses priced at $520,000 and above, you will need at least a 20% down payment.

However, to assist first-time homebuyers, the Home Buyers’ Plan (HBP) was developed by the federal government.

A down payment can be made with up to $35,000 tax-free from an RRSP account if one qualifies.

But, couples buying a house jointly can combine their withdrawals and deposit $70,000 toward their new property.

Nevertheless, getting access to retirement funds is not easy, and there are regulations, which means that not everyone qualifies.

Here are things you should know if you intend to use the HBP:

• A homeowner or builder must intend to live in the house for at least a year after purchasing or building
• A person can only withdraw tax-free funds after 90 days in an RRSP account
• Within 30 days of having taken ownership of the property, funds must be withdrawn
• Even though HBP is marketed to first-time buyers, the actual rule is that applicants cannot own a property within the previous four years.

Rules Around Cancelling the Home Buyers Plan

A participant whose RRSP is withdrawn and meets the other HBP requirements cannot cancel their participation.

Certain situations, however, may require you to cancel your participation.

Cancellation of your participation in the HBP is only possible in the following scenarios:

• Before you bought a qualifying home or built a replacement property, you became a non-resident
• No qualifying home or replacement property was purchased or built by you

You can also terminate your participation if you assist a family member with a handicap in purchasing a property, and one of the following scenarios applies:

• Before that individual purchases or constructs a qualified house or replacement property, you become a non-resident.
• No qualifying home or replacement property is purchased or built by the person

Steps to Cancel Your Participation

The following are the processes of cancelling participation from the first-time Home Buyer’s Plan with RRSP:

• Cancel all your existing RRSP payments by the due date.
• Fill the Form RC471, Home Buyers’ Plan (HBP) Cancellation and write to the CRA why you want to cancel your participation.
• Attach to your letter any receipts on cancellation payment or Form RC471 filling.
• Submit your letter, the filled out Form RC471 and receipts to one of the following addresses.

For	Address
Ontario Newfoundland and Labrador Prince Edward Island Nunavut Yukon Northwest Territories Québec City Montréal Sherbrooke Laval Gatineau Longueuil	Canada Revenue Agency Sudbury Tax Centre Pension Workflow Section Post Office Box 20000, Station A Sudbury ON  P3A 5C1
Alberta Manitoba Saskatchewan Nova Scotia British Columbia New Brunswick Any Quebec location not listed in the Sudbury Tax Centre	Canada Revenue Agency Winnipeg Tax Centre Pension Workflow Section Winnipeg Tax Centre Post Office Box 14000, Station Main Winnipeg MB  R3C 3M2

How to Report Repayments on Your Income Tax and Benefit Return

Once you have taken your first withdrawal from the HBP, you need to file an income tax and benefit return with the Canada Revenue Agency (CRA).

Every year, this will be done until you have paid back all your withdrawals as part of your income.

In addition to filing the tax and benefit return, you must also submit the form to the CRA even if you do not owe any taxes or have declared bankruptcy.

To obtain an Income Tax and Benefit Return, complete Schedule 7, Unused Contributions, Transfers, and HBP/LLP Activities, and attach it to your return.

Your total withdrawals and repayments for the year will also be shown on this schedule.

Additionally, you can use the calculation chart to figure out which portions of your contributions, or those of your spouse or common-law partner, are not deductible during any given year.

The CRA may ask you to provide your supporting documents to file your taxes and benefits electronically. Keep all the documentation for six years just in case.

RELATED: TFSA vs RRSP

Final Thoughts on First Time Home Buyer RRSP

Owning your own home is one of the most important investments you will ever make before requirements.

Whether it’s a condo, house, or any other living space, your choice matters because it affects so many aspects of your life.

However, using your RRSP funds to buy a home may be the right decision for you. It could help you to leverage your retirement savings to buy a home without incurring too much debt.

The decision should be well thought out because you will be subject to tax penalties if you withdraw the funds early.

Also, it is essential to know about the many advantages and disadvantages of using your RRSP for the first time home buyers’ plan.

Hopefully, you can now decide if the first time home buyers’ plan is worth your RRSP savings.

FAQs on First Time Home Buyer RRSP

Is RRSP Home Buyers Plan worth it?

RRSP is worth it if you’re looking to withdraw your savings without tax applications. However, not sticking to the rules will attract heavy penalties, which in turn may ruin your savings.

How long does it take to withdraw RRSP for a first-time home buyers?

You must withdraw the funds within 30 days of approval.

What happens if I don’t pay back my home buyers’ plan?

You will have to pay taxes on the amount you owe the government if you don’t repay the expected amount.

Can I pay off my home buyer’s plan early?

Yes. According to the RRSP withdrawal rules, you must begin repayments in the second year following the withdrawal. However, you can choose to pay all at once.

Can I use my RRSP to buy my first house?

Yes, you can withdraw up to $35,000 from your RRSP to buy your first house under the Home Buyer’s Plan. This amount is tax-free so far you keep up with your minimum repayment amount.

More so, you can withdraw up to $70,000 if you are buying your first home with your partner or taking another HBP loan.

What is RRSP First-Time Home Buyer disadvantages?

The strict penalty is the major disadvantage of a first-time Home Buyer’s Plan with RRSP. You are expected to pay the full HBP loan within 15 years or face tax charges. Missing the annual minimum payment also attracts tax charges.

Overall, you must be financially disciplined to keep up with your HBP loan because you will be repaying the loan while paying your home mortgage at the same time.

Can I use first time home buyer twice Canada?

Absolutely. Once you pay off your complete previous HB loan as at when due, you’ll be eligible for another loan.