The Home Buyers’ Plan (HBP) is a Canadian program that allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) to build or buy a qualifying home for yourself or a relative living with a disability.
With the Canadian government’s RRSP Home Buyers’ Plan, you can borrow up to $35,000 tax-free from your RRSP accounts for a down payment and pay back the funds within 15 years.
So if you are trying to source for a mortgage down payment on your first home, and you are wondering how you can tap into the funds in your RRSP without any penalties, you should take advantage of the Home Buyer’s Plan.
However, there are some essential things you need to know about the first-time Home Buyers’ Plan in Canada. This article will discuss everything you must know about the HBP and how it works, including eligibility conditions, applying, withdrawing, paying back funds, and many more.
Without further ado, let’s get into it.
What is the Home Buyers’ Plan, and How Does It Work?
The Home Buyers’ Plan (HBP) is a Canadian scheme that enables first-time home buyers to borrow up to $35,000 from their Registered Retirement Savings Plans (RRSPs) to buy or build their first home.
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. The current withdrawal limit is $35,000 per individual. A couple with different RRSPs can withdraw up to $70,000 with this plan.
Funds withdrawn from your RRSPs are usually included in your overall income and subject to taxes. However, withdrawing from your RRSP under the Home Buyers’ Plan is not considered income and will not be taxed at the time of HBP withdrawal.
Furthermore, the funds must be withdrawn 30 days after the buyer moves into the home.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.
The HBP is administered by the Canada Revenue Agency (CRA). Homebuyers have 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.
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 The cash can then be withdrawn tax-free and used to purchase a property.
Also, RRSP funds can be withdrawn from more than one account as long as the same individual owns the accounts.
Who is Eligible for the RRSP Home Buyers’ plan?
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 buyer
- You must have a written agreement to build or buy a qualifying home
- Be a resident of Canada
- Ready to occupy the qualifying home as your primary home within one year of buying or building it
Benefits and Downsides of the Home Buyers’ Plan
Like every other government program, the Home Buyers’ Plan has its pros and cons, and you should carefully consider them before making a decision.
- 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
- Before repaying 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
- Repayments must be made yearly
- A period in which you withdraw money from your RRSP can result in diminished investment/savings growth.
- The withdrawal of funds means 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 are 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 for the Home Buyers’ Plan
To begin the Home Buyers’ Plan application process, you must first download, and complete form T1036, the ‘Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP.’ Area 1 must be completed by you, while Area 2 must be 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 slip from the financial institution.
This slip will show the amount of money you have withdrawn from your RRSP and will serve as a supporting document 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 will be 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.
Your RRSP issuer will be required to withhold tax on the excess amount at the withdrawal time.
Note that your RRSP funds must be sitting in your account for at least 90 days to be eligible for a withdrawal under the Home Buyers’ Plan. Also, you must withdraw funds from your RRSP within 30 days of obtaining the title of your new home.
How to Repay the Funds Withdrawn from the RRSP Home Buyers’ Plan
HBP gives a 15-year period to repay toys RRSP funds withdrawn from the account under the HBP. However, your repayment period starts the second year after your first withdrawal from your RRSP for the HBP.
For example, if you withdrew funds in 2021, your first repayment will be in 2023. If you still choose to start your repayment earlier, you can do so, and your repayment period will stay the same.
If you repay before your required repayment date, the amount you have to pay will reduce for the first year.
You can contribute to your RRSPs, Pooled Registered Pension Plan (PRPP), or Specified Pension Plan (SPP) while on the HBP and designate that amount as a repayment. Each year, the CRA send you an HBP statement of account with your Notice of Assessment or Notice of Reassessment.
The statement will show the amount you have paid so far, your remaining HBP balance and the amount you have to contribute to your RRSP. PRPP, or SPP.
If you pay more than the required annual amount, your remaining HBP balance for later years will be reduced. If you pay less than the required annual amount, you must include the difference as RRSP income on line 12900 of your income tax and benefit return.
Example of Annual Repayment Amount Calculation
In 2021, Justin withdrew $18,000 from his RRSP to participate in the Home Buyers’ Plan. His minimum annual repayment starting in 2023 is $1,200 ($18,000/15).
Justin will make the required repayment for 2023.
Note: You cannot claim a tax deduction from your RRSPs when making contributions to repay the HBP loan. Ensure you designate your RRSP contributions to repay your HBP loan, not just regular contributions.
How to Cancel Participation in the RRSP Home Buyers’ Plan
You cannot cancel your participation if you withdraw funds from your RRSP and meet all the HBP conditions. However, you can cancel your participation in the RRSP Home Buyers’ Plan if:
- You or the person with a disability does not buy or build a qualifying home
- You or the person with a disability becomes a non-resident before buying or building a qualifying home
To cancel your participation, do the following
- Cancel all your existing RRSP payments by the due date.
- Fill the Form RC471, Home Buyers’ Plan (HBP) Cancellation and write to the CRA explaining why you want to cancel your participation. The letter must include the reason for cancellation, your last name, first name, address and Social insurance number (SIN).
- 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.
Locations 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 PO Box 20000, Station A Sudbury ON P3A 5C1 >Alberta >Manitoba >Saskatchewan >Nova Scotia >British Columbia >New Brunswick >Other Quebec location Canada Revenue Agency, Winnipeg Tax Centre, Pension Workflow Section, PO Box 14000, Station Main, Winnipeg MB R3C 3M2
>Newfoundland and Labrador
>Prince Edward Island
>Québec City (Montréal, Sherbrooke, Laval, Gatineau, Longueuil)
Canada Revenue Agency,
Sudbury Tax Centre,
Pension Workflow Section
PO Box 20000, Station A
Sudbury ON P3A 5C1
>Other Quebec location
Canada Revenue Agency,
Winnipeg Tax Centre,
Pension Workflow Section,
PO 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 CRA every year until you pay all of your HBP withdrawals or include them in your income.
You must also fill out and submit the income tax and benefit return to the CRA even if you do not owe any taxes or have declared bankruptcy.
Complete Schedule 7, RRSP, PRPP, and SPP Unused Contributions, Transfers, and HBP/LLP Activities, and attach it to your income tax and benefit return. This will inform the CRA of your total withdrawals and repayments for the year.
Additionally, you can use the calculation chart to determine which portions of your contributions, or those of your spouse or common-law partner, are not deductible during any given year.
Note: Ensure to keep all your supporting documents for at least six years because if you file your income tax and benefit amount electronically, the CRA may ask you to provide them later.
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Final Thoughts on First-Time Home Buyers’ Plan
Owning your own home is one of the most important investments you will ever make. 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 your right decision. 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, and consider the pros and cons before deciding. 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 from RRSP 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 repayment 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 RRSP Home Buyer’s Plan. This amount is tax-free as long as you keep up with your minimum repayment amount.
Moreover, you can withdraw up to $70,000 if you buy your first home with your partner or take another HBP loan.
What are RRSP First-Time Home Buyers’ disadvantages?
The major disadvantage of a first-time Home Buyer’s Plan with RRSP is that 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 buyers’ plans twice in Canada?
Absolutely. Once you pay off your complete previous HBP loan as of when due, you’ll be eligible for another loan.