RRSP Home Buyer's Plan in Canada: How Does it Work, Who Can Use It?
The Home Buyers Plan, or HBP, is a Canadian government initiative enabling homeowners to withdraw a maximum of $35,000 from their Registered Retirement Savings Plans (RRSPs) to assist in financing their initial home acquisition.
HBP applicants can utilize the funds to purchase or construct a home for themselves or a family member with a disability. An additional advantage of the HBP is that withdrawing funds from your RRSP in this manner is tax-free, provided that the borrowed amount is repaid on schedule.
While the program holds potential benefits, it’s essential to be familiar with various terms and conditions before completing an HBP application.
Who qualifies for the Home Buyers’ Plan?
You need to fulfill the following criteria to be eligible for a Home Buyer’s Plan:
- Reside in Canada.
- Possess an RRSP with adequate finances to withdraw.
- Qualify as a first-time home buyer. As per the Government of Canada, you meet this requirement if, within the four years preceding your participation in the HBP, you did not reside in a property that belonged to you or your current common-law partner or spouse. Plan to utilize the home as your principal residence within a year of constructing or buying it or by constructing or purchasing a principal residence for a disabled relative.
- Possess a written agreement to purchase or construct a home for yourself or for a family member with a disability.
- Intend to buy a qualifying category of residence situated in Canada. Many types of homes, such as condos and apartments, meet the criteria. While co-op housing may not always qualify, there could be exceptions.
Despite being designed for first-time home buyers, individuals can reapply for the Home Buyers’ Plan as long as they have fully repaid the withdrawn funds from their RRSP and fulfill all other eligibility requirements of the HBP.
How does the Home Buyers’ Plan work?
Upon approval for the Home Buyers’ Plan, you can withdraw a maximum of $35,000 from your RRSP. You do not incur any withholding taxes for this. Couples may be able to withdraw $35,000 each, resulting in a combined total of $70,000.
For your RRSP funds to qualify for withdrawal under the HBP, they must have been held in the account for at least 90 days. Additionally, you have until October 1 of the year following your withdrawal to complete the purchase or construction of your home.
It is also a requirement to withdraw from your RRSP within 30 days of acquiring the title to your new home. All withdrawals under the HBP must be completed within a single calendar year.
How to Repay RRSP Funds Used For the HBP
Home Buyers’ Plan participants must repay the withdrawn amount from their RRSP within 15 years. Calculating the minimum annual repayment amounts involves dividing the amount withdrawn by the loan repayment duration of 15 years.
For instance, withdrawing the entire maximum amount of $35,000 would result in minimum annual repayments of $2,333 ($35,000/15). The initial payment is due two years after the first withdrawal is made.
To repay the HBP, participants deposit the designated amount back into their RRSP before the annual RRSP deadline. The Canada Revenue Agency issues a Home Buyers’ Plan account statement in the notice of assessment detailing the amount already repaid and the remaining balance.
You can repay more than you owe, reducing your overall annual payments. Repaying the HBP does not impact your annual RRSP deduction limits.
Failing to repay the required amount in any of the years following your RRSP withdrawal results in the difference being considered RRSP income for that year, subject to taxation by the CRA.
Can I cancel the Home Buyers' Plan?
You cannot typically cancel your participation in the HBP, but there are some exceptions, including:
- Failing to purchase or construct a home by October 1 of the year after you withdrew the money from your RRSP will result in ineligibility.
- Becoming a non-resident of Canada before buying the home.
To cancel the Home Buyers’ Plan, fill out form RC471, titled “Home Buyers’ Plan (HBP) Cancellation.” Send the completed form to the CRA, accompanied by a receipt of repayment to your RRSP and a letter detailing your decision.
What is the Application Process for the Home Buyers’ Plan?
To initiate the application process for the Home Buyers’ Plan, download form T1036, titled ‘Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP.’ Complete Area 1, and have the financial institution holding your RRSP fill out Area 2.
Following this, your chosen RRSP provider will transfer the funds to your specified account. The financial institution will also issue a T4RSP slip confirming the amount withdrawn from your RRSP. This slip will serve as a supporting document for your tax return in the subsequent year.
Advantages and Disadvantages of the Home Buyers’ Plan
Advantages
- The HBP operates like an interest-free loan, provided you adhere to the repayment schedule.
- The HBP can expand your home-buying budget by $35,000, facilitating the process of securing a mortgage and purchasing your first home.
Disadvantages
- The HBP may not provide significant assistance if your RRSP does not already have substantial funds.
- Failure to make annual repayments will result in the taxation of your RRSP withdrawals by the Canada Revenue Agency.
- Lowering your RRSP involves giving up potential growth in tax-sheltered investments or savings.
How to Apply for the Home Buyers’ Plan
Download and complete Form T1036 (Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP) to start the Home Buyers’ Plan application process. You should fill out Area 1, while the financial institution overseeing your RRSP will complete Area 2.
Following your request, your selected RRSP provider will transfer the funds into your designated account. Simultaneously, the financial institution overseeing your RRSP will issue a T4RSP slip verifying the withdrawn amount. This slip becomes a crucial supporting document for your tax return in the upcoming year.
More Information for Home Buyers
Other national programs for first-time homebuyers include:
- Home Buyer’s tax credit. Qualified first-time home buyers are eligible for a $10,000 non-refundable income tax credit.
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- GST/HST New Housing Rebate. Home buyers eligible for the benefit can recoup a portion of the GST or the federal component of the HST paid on a newly constructed home.
- First-Time Home Buyer Incentive. The government grants eligible home buyers a tax-free loan, constituting 5% or 10% of the purchase price of a qualifying property.
Boost your home-buying budget by incorporating the Home Buyers Plan with the First Home Savings Account. Keep in mind that executing this strategy may require patience, as you can only deposit $8,000 annually into your FHSA.
If you intend to make use of both programs, refrain from touching your RRSP to ensure it continues generating returns while giving your FHSA savings the chance to grow.