Understanding the RRSP Home Buyers’ Plan (HBP) in Canada
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Buying your first home is one of life’s biggest milestones. And it’s also likely the largest purchase you’ll ever make. That’s why it’s beneficial to understand programs – such as the Home Buyers’ Plan (HBP) – that will help you reach this milestone quicker so you can begin building home equity.
- The Home Buyers’ Plan (HBP) enables first-time home buyers to take advantage of up to $35,000 of their registered retirement savings plan (RRSP) contributions ($70,000 as a couple) to put towards the purchase of a first home tax- and interest-free
- You’re considered a first-time home buyer if you didn’t occupy a home that you or your current spouse or common-law partner owned in the past four years
- You have up to 15 years to pay back your RRSP loan in annual instalments
Are you a first-time buyer?
What is the RRSP Home Buyers’ Plan (HBP)?
The federal government’s Home Buyers’ Plan (HBP) enables first-time home buyers to take advantage of their registered retirement savings plan (RRSP) contributions to put towards the purchase of a first home. This withdrawal is tax-free and interest free, up to the allocated amount per person.
How does the RRSP Home Buyers’ Plan Work?
Canada’s RRSP Home Buyers’ Plan allows first-time buyers to withdraw and use funds from their RRSP accounts towards a home purchase without penalty. Under the plan, a single person can withdraw up to $35,000 ($70,000 as a couple) from their RRSP, tax-free and interest free. You can use your RRSP loan to pay for anything related to your home purchase, including your down payment, closing costs and/or real estate fees.
The funds need to be in the RRSP account for 90 days prior to withdrawal. To take full advantage of the Home Buyers’ Plan, consider taking out a bank loan for the amount you’d like to withdraw so you can deposit the money into an RRSP three months in advance.
Repaying RRSP funds used for the Home Buyers’ Plan
Generally, you must repay all withdrawals to your RRSP within a period of 15 years. You’ll have to repay an amount equivalent to one-15th to your RRSP each year until your HBP balance is zero. If you don’t repay the amount due for a year, it will then have to be included in your income for that year.
Each year, Canada Revenue Agency (CRA) will send you an HBP statement of account, with your notice of assessment or notice of reassessment. This statement will include:
- The amount you have repaid so far (including any additional payments, and amounts you included on your income tax and benefit return because they were not repaid)
- Your remaining HBP balance
- The amount you have to contribute to your RRSP and designate as a repayment for the following year
Repayments don’t affect your RRSP deduction limit. You can still contribute to your RRSP and designate that amount as a repayment under the HBP, even if your RRSP deduction limit is zero.
To make a repayment under the HBP, you have to make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year. Once your contribution is made, you can designate all or part of the contribution as a repayment. Repayment works out to about $2,333/year ($194/month) over 15 years on a $35,000 withdrawal.
And, if you decide to repay more than the amount you’re required to repay for the year, your remaining HBP balance for later years will be reduced.
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Who is Eligible for the RRSP Home Buyer’s Plan?
Canadian residents who are first-time homebuyers are eligible for the RRSP Home Buyers’ Plan. You are considered a first-time homebuyer if you didn’t occupy a home that you or your current spouse or common-law partner owned in the past four years.
Calculating this time period can be confusing. The four-year period begins on January 1st of the fourth year before the year you withdraw funds and ends 31 days before the date you withdraw the funds. For example:
- If you withdraw funds on April 30th 2023, the four year period begins January 1st, 2019.
- The four-year period ends on March 30th, 2023 (31 days before your withdrawal date)
- You and your partner cannot have owned a home between January 1st, 2019 and March 30th, 2023 in order to be considered a first-time home buyer.
If you are not a first-time homebuyer, you are not eligible for the RRSP Home Buyers’ Plan unless you have a disability or are assisting a relative with a disability with purchasing or building a new home. The purpose of the new home must be to better accommodate the needs of the disabled person.
What are the Pros and Cons of the Home Buyers’ Plan?
Here are some benefits and disadvantages of the Home Buyers’ Plan.
Pros of the Home Buyers’ Plan
The pros of the RRSP HBP speak for themselves. If you are a first-time homebuyer, taking the time to research and participate in this program can only save you money in your home buying journey.
Cons of the Home Buyers’ Plan
Normally, RRSP contributions are deductible. However, under the HBP, you might not be able to deduct part of the amount you withdrew from your RRSP when you’re doing your taxes.
To calculate the part of your contributions that are not deductible, simply deduct the value of what’s left in the RRSP after your withdrawal from the amount you contributed to the RRSP during the 89-day period before your withdrawal. If the result is negative, then the amount is 0.
How Do I Apply?
In order to apply to the RRSP Home Buyer’s plan, you need to request to withdraw funds from your RRSP under the plan by filling out Form T1036 with the Canadian Revenue Agency (CRA). After filling out the first section of the form, you must give the form to your RRSP issuer (your bank).
Missing your RRSP payments
If you fail to repay the RRSP loan amount due for the year, it will then have to be included in your income for that year, which means you’ll have to pay extra income tax. You’ll also still be responsible for paying back the required amount to your RRSP.
Frequently Asked Questions (FAQ)
What is the RRSP Home Buyer’s Plan?
The RRSP Home Buyers’ Plan is a federal government program that helps Canadians take the plunge and purchase their first home. It allows them to dip into their RRSP savings to help finance the cost of a new home even sooner, tax-free and interest-free.
Which is better: RRSP or TFSA?
Both an RRSP and a tax-free savings account (TFSA) are important tax-free savings tools. While an RRSP is mainly used for retirement savings, a TFSA can be used to save for any type of future use. As such, RRSP savings are deductible from taxable income and funds are only taxable when withdrawn. With a TSFA, on the other hand, savings are not deductible from taxable income but withdrawals are tax-free.
How much can I withdraw from my RRSP under the HBP?
As a single person, you can withdraw up to $35,000 from your RRSP under the HBP. As a couple, the amounts are combined for a total of $70,000.
In short, buying a first home can be both exciting and daunting. Programs like the RRSP Home Buyers’ Plan (HBP) are meant to make your home purchase easier and knowing how to take advantage of them is a must. In turn, take another step in the right direction and get in touch with one of our mortgage experts. They can give you the tips, tricks, and the guidance you need to make those ever-elusive homeownership goals become reality.
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