What is the RRSP First Time Home Buyers Plan?

Homeownership is without a doubt a coveted life goal for most people. It not only perks up the quality of life but can also elevate financial stability.

However, with the cost of housing being at an all-time high and lending rules getting tougher by the day, achieving this life-changing milestone seems to be next to impossible.

In a bid to assist more of its citizens in getting into the real estate market, the Canadian government introduced the Home Buyer’s Plan in 1992.

With the HBP, people who have funds under the Registered Retirement Savings Plan can withdraw money from their accounts without incurring any taxes to purchase their first house.

As of now, the maximum withdrawal amount stands at $35,000, which you will be required to pay back over 15 years.

You may be asking yourself: “Is it a plausible cause?”

Read on to find out!

Do you meet HBP eligibility requirements?

First and foremost, you must be a Canadian citizen to access this program. 

Secondly, the building or property being bought must be in Canada, and it must become your principal residence a year after your RRSP withdrawal. If you happen to be related to a person with a disability, you can offer them the money from your RRSP as a gift.

The only important factor to be considered is that whoever benefits from the HBP must live at the property as their primary residence. 

Moreover, you must be a first-time homebuyer in Canada. And if you have already used the HBP to purchase a house before, you may qualify to reuse the program once more!

This only works if you wait four years between home purchases and have paid back the total amount of your RRSP withdrawal before the stipulated deadline. 

Finally, the buyers should have a minimum down payment of 5% of the home’s total purchase price. In addition to that, the household income must be below $120,000 and you must sign an agreement stating that the funds you have withdrawn from your RRSP through the HBP will solely be used for purchasing your first home.

Withdrawing from your RRSP under the Home Buyer’s Plan

The process begins at the Canada Revenue Agency. You will need to download and fill out the T1036 Home Buyer’s Plan request form to withdraw funds from an RRSP. This form is then submitted to the financial institution that issued your RRSP account.

Consequently, if you have multiple RRSP accounts with different institutions and fully intend to withdraw from each, you will need to submit individual forms to each of them. All these withdrawals for the HBP must be made within the same calendar year.

Once confirmation has been done that the funds have been in the account for not less than 90 days, a green light for the transaction is given. The bank then transfers money into your account, and a down payment can now be made.

In addition to this, your financial institution will issue you a T4RSP form. This form substantiates the amount withdrawn from your RRSP under the HBP. More importantly, it can help guarantee that no tax is withheld on your withdrawal when filing taxes that year.

It is of essence to make the withdrawal within 30 days of taking the home’s title. Failure to do so will make you no longer eligible for the HBP. 

Repaying the Home Buyers’ Plan

As aforementioned, the HBP is a loan from yourself that requires full repayment within 15 years. The Canada Revenue Agency (CRA) requires you to pay back 1/15th of the amount withdrawn annually. Any contributions made to your RRSP will be considered as repayments towards the loan and will therefore not be tax-deductible.

The CRA sends you an annual statement of your HBP account indicating your remaining balance and the annual payment due. Failure to pay this annual minimum will result in the amount being added to your yearly taxable income.

Despite having a minimum annual payment, you can repay more to reduce the repayment term.

Should I use the Home Buyers’ Plan?

Factually, there is no easy answer to this question, as situations vary from one person to another. However, the pros and cons listed below can help you make the most suitable decision.

Advantages of RRSP first time HBP

• The HBP is an interest-free loan you can take from yourself
• There is no maximum payback limit
• Under the four-year rule, you can reuse the HBP for another purchase

Disadvantages of RRSP first time HBP

• A poorly timed withdrawal could result in you losing out on significant tax-sheltered investment growth.
• The RRSP contributions to pay back the HBP loan will not count towards a deduction from your taxable income
• Withdrawing money from your RRSP means you are losing out on the substantial income you could earn through compound interest if the amount remained invested

Cancellation of your HBP

There are only two specific conditions for which the government allows cancellation. The first is if you did not end up buying a home or replacement property, and the other is if you become a non-resident after making your RRSP withdrawal.

You can cancel and repay the full amount to your existing RRSP account in case of either. You will be required to write a letter to the CRA explaining why you cancelled your participation.

Alongside the letter should be a completed RC471 Home Buyer’s Plan HBP Cancellation form. The cancellation letter must be received within 60 days of your repayment deadline. Any funds not repaid by the deadline will be taxed at your marginal tax rate.

Conclusion

The RRSP Home buyer’s Plan provides the opportunity for an individual to choose between saving for retirement or saving for a home. As much as it brings you one step closer to the reality of owning a home, the idea of raiding your retirement fund needs careful consideration.

This process may seem daunting and confusing but don’t stress it. As your local Edmonton mortgage expert I am here to help!

For further information regarding the RRSP HBP, book a call with me.

Are you ready to purchase your first home with your RRSP? Reach out to me directly or start your application here: www.sandraforscutt.ca/mortgage-application/