Jordan Dawes
May 05, 2023
Canada’s RRSP Home Buyers’ Plan: How it Works, Who Can Use It
Looking to buy your first home in Canada? The new First Home Savings Account (FHSA) is officially here, but let’s not forget about the original Home Buyer Plan. Learn all about the RRSP Home Buyers' Plan, how it can be combined with the new FHSA, and how to take advantage of it.
The RRSP Home Buyer Plan
The Home Buyer Plan allows you to withdraw up to $35,000 completely tax-free from your RRSP to buy your first home. This may not seem like a lot, but with the ability to combine this withdrawal with the new FHSA account that became available on April 1st, we shouldn’t forget to use this too!
Who is eligible for the Home Buyers Plan?
This is meant for first-time home buyers. However, the definition of a first-time home buyer according to the CRA is not necessarily someone who has never owned a home. “You are considered a first-time home buyer if, in the four years, you did not occupy a home that you owned or one that your current spouse or common-law partner owned.” This means that if you are currently renting, but own a house for investment purposes, you could potentially use your HBP for another home that you intend to live in.
How does the Home Buyers Plan work?
Your financial institution will have you fill out and submit a T1036. It’s simply an attestation and questionnaire that confirms your eligibility. Once the form is given to your financial institution, they will attach it to the withdrawal and file it with the CRA so that they know not to charge any income tax on your RSP withdrawal.
Home Buyer RRSP Funds repayment schedule
One caveat to using the HBP is the repayment back into the RSP. You have 15 years after the second year in which you make the purchase to start putting money back in your RSP. That means if you took out $35,000 to buy a home in 2023, you’d have to commit to putting back almost $3000 a year starting in 2025, for 15 straight years. Now, here’s the thing. You don’t have to do it. However, what will happen is that 1/15th of your HPB withdrawal will count as income in the year you don’t repay it. So in the above example, if you failed to repay your RSP, you would have to add an additional $3000 to your taxable income.
If you happen to turn 72 before you have repaid your RSP, the entire amount remaining will count as income that year, and you’ll be taxed on the outstanding balance.
For example, Jimmy used $30,000 to help with the closing costs of his first home on his 65th birthday. Starting in the year of his 67th birthday, he must put $2500 back into his RSP each year. At age 72, he still has $15,000 left to repay his RSP. However, after 71, you cannot put any more money into an RSP. Therefore, he will have to pay income tax at his marginal rate on the outstanding balance of $15,000.
Benefits of The Home Buyers Plan
Tax savings: By withdrawing money from your RRSP under the HBP, you can reduce your tax bill. The withdrawal won't be subject to income tax, if you repay the amount back into your RRSP within the specified time frame. This also applies to the FHSA
Eases financial burden: Using the HBP can help make the purchase of your first home more affordable. Withdrawing funds from your RRSP can reduce the amount you need to save for a down payment, which can be helpful for those struggling to meet the required amount.
Interest-free loan: The HBP is essentially an interest-free loan from yourself, which can be repaid over a period of up to 15 years. You'll have more time to repay the loan than you would with a typical down payment loan.
Cons of The Home Buyers Plan
Reduces retirement savings: Using the HBP can reduce your retirement savings, as you'll be taking money out of your RRSP. This can have a significant impact on your future financial security if you're not able to repay the funds back into your RRSP in a timely manner.
Deadline for repayment: You must repay the funds back into your RRSP within 15 years, otherwise you'll face income tax on the amount. This can add additional financial pressure and can be difficult to manage if you're already struggling with other financial obligations. You also do not get a tax deduction on the repayment.
Risk of home value decrease: There's always a risk that the value of your home may decrease over time, especially in volatile housing markets. If this happens, you may not be able to recoup the full amount of your investment, which can further impact your retirement savings.
How To Apply for The Home Buyers Plan
Contact your financial institution today.
Conclusion
Overall, using the HBP can be a useful option for first-time homebuyers who are struggling to save for a down payment. However, it's important to carefully consider the potential impact on your retirement savings and ensure that you're able to repay the funds back into your RRSP within the specified time frame.