In Canada, home ownership (whether right or wrong) seems to be one of the foundational pieces of most family’s lifetime goals. Although at times it can be a challenge to able to afford a home, and more specifically being able to come up with the down payment, the Government and the Banks love it when people buy homes. One of the incentives the Government provides to assist people in the process of purchasing a home is the use of their RRSPs. This strategy of withdrawing from the RRSP for a home purchase is called a Home Buyers Plan (HBP).
What is Home Buyers Plan?
The HBP is strategy whereby one would use the funds within their RRSP towards the purchase of a qualified home. In essence, the HBP strategy is just a temporary tax-free “loan” from your RRSP to yourself — you must pay back the amount you borrow from your RRSP for the Home Buyer’s Plan within a certain timeline or some/all will be added to your taxable income.
An individual may withdraw from an RRSP as long as they are the owner (annuitant) of the plan, and they may withdraw from more than one RRSP. Withdrawals from locked-in plans (such as a Locked-In RRSP) are not permitted and some group RRSPs will not allow for the participation of the HBP.
How does it work?
The Home Buyers’ Plan (HBP) allows an annuitant to withdraw up to $25,000 cumulatively from their RRSPs for the purchase of a qualified home. This means that you can withdraw from more than one RRSP, as long as the total amount does not exceed the $25,000 limit. Withdrawn funds are not taxable income in the taxation year in which they are withdrawn.
For homes purchased jointly, each purchaser may withdraw up to $25,000 from their own RRSPs under the HBP. HBP funds may also be withdrawn from a Spousal RRSP where the annuitant (the non-contributing spouse) is the participant (purchaser) of the HBP.
Withdrawn funds are required to be paid back within a 15-year timeline, starting from the 2nd year after the original withdrawal. So, for example, if you made withdrawals from your RRSP for the HBP in 2016, then you would have to start repayment of those funds for the 2018 tax year (either in 2018 or within the first 60 days of 2019). The minimum payment back to the RRSP must be 1/15 of the HBP balance, or that amount will be taxable to the annuitant. For example, if you withdrew the maximum of $25,000, then the minimum payment would be $1,666.67, calculated as 1/15th of $25,000.
In order for your RRSP contribution to be designated as a repayment of the HBP balance, a form (Schedule 7 – RRSP Unused Contributions, Transfers, and HBP or LLP Activities) must be completed and submited along with your Income Tax Return, which will show which portion of the RRSP contribution will be designated as a repayment. For example, if you contributed $5000 to the RRSP, and you wanted to designate only $1,666.67 to the HBP repayment, then this will be clarified on the form and you will only get a tax deduction on $3,333.33. One important thing to note is that you cannot make the HBP repayment into a Spousal RRSP – it must be your own individual RRSP.
Even though there is a 15-year timeline to pay the funds back into the RRSP, the balance can be repaid in full any time within those 15 years. For example, if you wanted to put a lump sum repayment in the 1st year of repayment, that is allowable as well.
Eligibility
Although many term this strategy as the ‘First Time Home Buyers’ Plan’, you don’t necessarily have to be a first time home buyer. In order to be considered a ‘first time home buyer’ for the HBP, the primary requirement is that you and/or your spouse have not owned a home in the current calendar year, or any of the 4 calendar years preceding the current year. For example, if you wanted to buy a home in 2018, you could not have owned a home from 2014 to 2018 inclusive, to qualify for the HBP. In other words, you could not have been a home owner in the last 5 calendar years (including the current one).
It is also possible that, if buying a home jointly, that only one spouse may qualify for the HBP. It is not necessary that both need to meet the eligibility requirements in order to qualify for the HBP. There are often cases where only one spouse withdraws from their RRSP for the HBP because the other does not qualify.
Conditions for participating in the HBP
1. You buy or build a qualifying home for yourself
2. You are a person with a disability and buy or build a qualifying home for yourself
3. You buy or build a qualifying home for a related person with a disability
4. You help a related person with a disability buy or build a home
A qualifying home is generally considered as a housing unit in Canada, including single-family homes, semi-detached structures, apartment buildings (including duplexes and triplexes), condominium units, and mobile homes.
Conditions to be met BEFORE applying for the HBP:
– You enter into a written agreement to buy or build a qualifying home
– You intend to occupy the qualifying home as your principal place of residence
– You are considered a ‘first time home buyer’ as per the above definition
– Your Home Buyers’ Plan balance on January 1 of the year of the withdrawal is zero
Conditions to be met WHEN a withdrawal is made:
– Neither you nor your spouse or common-law partner owns the qualifying home more than 30 days before the withdrawal
– You are a resident of Canada
– You have to complete form T1036 for each eligible withdrawal
– You have to receive all funds within the same calendar year
– You cannot withdraw more than $25,000 for the HBP
Conditions to be met AFTER all your withdrawals are made:
– You have to buy or build the qualifying home before October 1 of the year after the year of withdrawal
In general, you are responsible for making sure that all Home Buyers’ Plan conditions that apply to your situation are met, however, it is recommended to consult with a qualified professional such as a Financial Advisor/Planner or Tax Professional before going through the process. If a condition is not met while you are participating in the plan, your RRSP withdrawal will not be considered eligible and you will have to include the RRSP withdrawal as income on your income tax return for the year you received the funds.
A HBP may or may not be the right solution for people, but it’s always good to understand your options and the pros and cons of them. To have a more thorough discussion or to see if using this strategy does make sense for you, it’s always advisable to sit down with a knowledgeable and Elite level Financial Advisor so as to ensure you get all the details, answers and perspectives on whether there’s a fit for you or not. Get in touch with me and I can help guide you down to the right decision for you!
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