Understanding the Home Buyers’ Plan: Buying a Home Using Your RRSP

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Understanding how the Home buyers' Plan (HBP) works. Buy a first home using money in your RRSP. Borrow up to $35,000 and repay over 15 years

RRSP is a great tool used by many Canadians. By design, it is meant for retirement savings and the Canada Revenue Agency, CRA, discourages making withdrawals before you retire except under a few instances – the Home Buyers’ Plan (HBP) is one of them.

So, if you’re considering buying or building a home and you have some savings in your RRSP, you may want to consider the Home Buyers’ Plan.

What is the Home Buyers’ Plan?

The Home Buyers’ Plan allows you to make tax-free withdrawals from your RRSP for the purpose of buying or building a qualifying home for yourself or a related person with disability.

You can withdraw up to $35,000 from your RRSP starting March 19, 2019 (or $25,000 before then) under the HBP, for a total of $70,000 for families if both spouses meet the eligibility conditions

But there are some strict eligibility criteria to be aware of

Eligibility conditions for Home Buyers’ Plan

To be eligible for making withdrawals under the home buyers’ plan, you need to meet certain conditions

  1. You must be considered a first-time home buyer

Who is a first-time home buyer? According to CRA, “you are considered a first-time home buyer if, in the four-year period, you did not occupy a home that you owned, or one that your current spouse or common-law partner owned.”

The four-year period starts on January 1 of the fourth year before your withdrawal year and ends 31 days before the date you withdraw the funds. So, it’s not simply 4 calendar years.

Going by the definition, you may still be able to participate in the plan even if you or your spouse previously owned a home, as long as you meet all the other eligibility conditions.

  1. You must have a written agreement to either buy or build a qualifying home. The home can be for yourself or a related person with disability
  2. You must use the home as your primary residence. Also, you can’t use it for rental properties
  3. You must be a resident of Canada when you withdraw the money for HBP and maintain the status till you buy or build the home

What is a qualifying home?

A qualifying home is one you build or own alone or with other people. The home must be bought or built by October 1st of the year after your year of withdrawal.

If you’re unable to meet the deadline for the home you initially planned to buy or build, you may choose to cancel your participation in the plan or decide to buy or build a different home before the date.

To cancel your participation, simply contribute to any of your RRSPs and write a letter to CRA. The letter must state the reason for the cancellation and include receipts for the payments made.

The payments must be made by December 31 of the year after the year you made you withdrawal. Any amounts not repaid will be added to your income for the year you made the withdrawal and taxed.

Related person with disability

This is a person that qualifies for the disability amount (Line 31600 of the Income Tax return) and is related to you by blood, marriage, adoption or common-law relationship)

They don’t have to live with you to qualify under HBP.

HBP Withdrawals

RRSP withdrawals are generally subject to withholding tax, as high at 30% depending on the amount withdrawn. But HBP withdrawals are exempted from this rule but you need to let your RRSP issuer know the purpose of the withdrawal.

To make a qualifying withdrawal under HBP, you need to fill form T1036 Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP

The form will need to be completed for each RRSP account you have. For example, if you have an account with TD Bank and another one at Questrade, you’ll be required to fill and submit the form to each of them.

The form has two areas. Area 1 is to be completed by the HBP participant and has 3 parts:

Part 1 is a questionnaire with a series of Yes or No questions to determine your eligibility for the program

Part 2 is where you provide your personal information, and that of the related person with disability if applicable. You’ll need to provide your SIN and the address of the qualifying home you’re buying or building

Part 3 is where you specify the amount you’re withdrawing and certify that all the information you’ve provided are correct and complete

Once you’re done with all the parts from Area 1, submit the form to your RRSP issuer.

Area 2 will be completed by them and the withdrawal processed.

You’ll get form T4RSP Statement of RRSP Income close to tax time from your financial institution. The form contains your RRSP withdrawals for the year and the amount withdrawn under HBP.

This information will be used in your tax filing for that year to avoid the withdrawal getting added to your income and taxed.

Here are some withdrawal rules you should be aware of

90-day waiting period for withdrawals

Only contributions made to your RRSP within the last 90 days of the date of withdrawal will qualify for withdrawals under HBP. The rule also applies to contributions made to your spouse’s RRSP.

Any contributions within the 90 days may not qualify for tax deductions in any year.

This prevents a situation where you contribute to your RRSP to get a refund, then make a withdrawal almost immediately under HBP.

So it’s important for you to time your contributions and withdrawals properly. If possible, save any money you know you’ll be needing in the short term for your house in the TFSA or even a non-registered account.

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30-day time limit

You should have a written agreement to buy or build a home to be eligible for HBP. But you should know that HBP withdrawals can be made no later than 30 days after the closing date of your new home. Any withdrawals after this date will not qualify and will be added to your income for that year and taxed at your marginal rate.

How To Make HBP Repayments

Many people forget that HBP withdrawals are loans, even if it’s interest-free. And like all loans, you need to repay at some point.

With HBP, repayments can be delayed for 2 years after the withdrawal, but the full amount must be paid within 15 years after that.

Each year, you must pay a minimum of 1/15 of the amount borrowed. Early repayments are allowed so if you pay more than the minimum amount for a particular year, the payments for the subsequent years will be reduced.

On the other hand, if you repay a lower amount, the difference will be added to your income for the year.

For example: if you borrowed $15,000, the minimum annual repayment will be $1,000. There are 3 possible scenarios for the first year of repayment.

  1. You repay the $1,000
  2. You pay a lower amount or nothing: Let’s assume you paid $600. The balance of $400 will be added to your income and taxed
  3. You paid $3,000: That’s an extra $2,000, so the beginning balance for year 2 is $12,000 and the new minimum repayment is updated to $857 ($12,000/14)

So how do you make a repayment for Home Buyers’ Plan? Simply contribute to your RRSP and designate all of it, or a portion, as HBP repayment by filling Schedule 7, RRSP and PRPP Unused Contributions, Transfers, and HBP or LLP Activities.  

But note that some contributions can not be used for HBP repayments. These include contributions you made to a spousal RRSP, designated as repayments for Lifelong Learning Plan, already deducted from your income in a previous year and so on.

Are there penalties for not repaying?

Yes. The required repayment for the year is added to your income.

If you fail to designate a contribution as repayment for HBP, it will be treated like a regular RRSP contribution. You’ll get a tax deduction for the contribution, but it is offset by the tax due for not making the required repayment.

What happens if you die with an HBP balance still owing?

The general rule is for the balance owing to be added to the HBP participant’s income for the year and taxed.

However, this can be avoided if the deceased participant has a spouse or common-law partner and the surviving partner makes an election, together with the deceased’s legal representative, to take over the balance.

Does HBP Repayments affect RRSP contribution room?

No, they don’t. Any contribution designated as HBP repayment will not count towards your RRSP deduction limit.

Should you use the Home Buyers’ Plan? Pros and Cons

Before deciding if participating in HBP is a good idea, you should consider the pros and cons and your individual circumstances.

Pros of using HBP:

  • It can help you increase your down payment. A higher down payment means you’ll carry a lower mortgage and may entirely eliminate the need for CMHC mortgage loan insurance.
  • Repayments are not due until after 2 years
  • It’s an interest-free loan
  • You can choose to repay a higher amount than the minimum annual repayment if you want.

Cons of taking HBP Loans:

  • You forgo future tax-sheltered income in your RRSP, especially if you don’t repay the money
  • It’s a loan and must be repaid
  • There’s a limit to how much you can borrow. At just $35,000, it may not nearly be enough depending on your location and the type of home you’re buying
  • There are a number of restrictions around when you can withdraw. See the 30 and 90-day rules above.

If you decide to go ahead with withdrawing from your RRSP for HBP, remember it is not free money and you’ll need to repay it at some point.

Also, it’s not as straightforward as other RRSP withdrawals. So, you’ll need to carefully plan ahead.

Some Frequently Asked Questions

How do I buy a home using RRSP?

You can buy a home using the money in your RRSP by taking advantage of the Home Buyers’ Plan (HBP) that allows $35,000 withdrawal from the RRSP without any tax withheld.

What is the Home Buyers’ Plan (HBP)

The Home Buyers’ Plan is a program that allows you to make tax-free withdrawals from your RRSP for the purpose of buying or building a qualifying home for yourself or a related person with disability.

How much can I withdraw under Home buyers plan?

You can withdraw up to $35,000 from your RRSP starting March 19, 2019 (or $25,000 before then) under the HBP to buy a home, for a total of $70,000 for families if both spouses meet the eligibility conditions

How long do I have to repay the loan?

Repayments can be delayed for 2 years after the withdrawal but the full amount must be paid within 15 years after that, with a minimum of 1/15 due every year. If you repay an amount below what is expected for each, the difference will be added to your income for year and taxed.

Is there a tax on HBP withdrawals?

You won’t have to pay a withholding tax on your HBP withdrawals.

Final Thoughts

Don’t just participate in the plan simply because it’s available and you think it’s an interest-free loan. You should consider all your other options, the advantages, and disadvantages of Home Buyers’ Plan, and how the withdrawal may affect what you have available at retirement.

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Simon is a CPA by day and a Personal Finance Blogger by night. With over a decade experience in financial services, he's passionate about personal finance, investing and helping people take control of their financial life.

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