If you’re looking to buy a home, the current real estate environment can be very daunting.Between the pandemic, rising inflation, and the housing crisis, becoming a homeowner seemsmore unattainable than ever. In this article, you will find an overview of…
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
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.
Under the HBP, you can withdraw up to $35,000 ($70,000 as a couple) from your RRSPs tax- and interest-free to buy or build a qualifying home for yourself or a related person with a disability.
Tip: Since the RRSP funds only have to be in the account for 90 days prior to withdrawal under the HBP, consider getting a bank loan for the amount you’d like to withdraw so you can deposit the money into an RRSP three months in advance
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First-time homebuyer eligibility in Canada
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. 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 withdrew the funds. For instance, if you withdrew funds on March 31st, 2021, the four-year period begins on January 1st, 2017 and ends on February 28th, 2021.
The only time you don’t have to be considered a first-time home buyer to take advantage of the HBP is if you have a disability or you’re helping a related person with a disability buy or build a home. The new home must, however, be a better fit for the needs of the disabled person than their current home.
Important: 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
Withdrawal rules for first-time home buyer couples
As a couple purchasing a home together, the HBP enables you each to withdraw up to $35,000 – $70,000 combined – to put towards buying your home.
Repaying the RRSP Loan
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.
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 benefit of an RRSP in Canada?
Contributing to an RRSP in Canada is beneficial because it enables you to save a certain amount of money per year tax-free. Essentially, you’re reducing your current year’s income amount – and, therefore, the income tax you’re required to pay – and saving for retirement at the same time.
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.
At what age can I withdraw from my RRSP?
You can make a withdrawal from your RRSP at any age as long as your funds are not part of a locked-in plan. It’s important to note, however, that your withdrawal is subject to withholding tax and the amount also needs to be included as income when filing your taxes.
Other articles in this guide: “First-Time Home Buyer Mortgage Guide”
- What is the First-Time Home Buyers’ Tax Credit?
- First-Time Home Buyer Land Transfer Tax Rebates Across Canada
- First-Time Home Buyer Programs in Canada
- First-Time Home Buyer Grants in Canada
- First-Time Home Buyer Loans in Canada
- Who Can Benefit From the Home Buyers’ Tax Credit (HBTC)?
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