Lisa MacColl is a writer, investor and former compliance consultant in the group retirement and individual wealth management fields. Lisa has written about personal finance for 14 years and currently writes about investing and investment providers for Wealthsimple. Lisa's past work has been published in Canadian Money Saver, Advisor’s Edge, CBC, and CreditCards.ca. She was a nominee for the 2015 Oktoberfest Women of the Year, Professional Category. Lisa holds an M.A. and B.A. from the Wilfrid Laurier University.
What is the RRSP Home Buyers’ Plan?
The Home Buyers’ Plan (HBP) is a program through the Canada Revenue Agency (CRA) that allows eligible first-time homebuyers to withdraw up to $25,000 tax-free from their RRSP, to be used towards a down payment on the purchase of the home. You can take advantage of the tax deductions that RRSP contributions provide while saving for a down payment on your home. Then, you can withdraw the funds tax-free and use them towards a home.
This may sound well and good (and it kind of is) but you must remember, there's a little catch — you'll need to pay the money back at a later date. Michael Craig, Associate Portfolio Manager at Wealthsimple points out:
“The Home Buyers’ Plan is a great option when a lump sum of capital is needed towards a home purchase, however, it's important to remember that although it is a loan from yourself, it still is a loan that has conditions attached to it in terms of repayment. For this reason, sometimes it's better to use other alternatives such as money saved in a TFSA or other savings account first since there are no repayment terms on that money.”
How Does the RRSP Home Buyers’ Plan work?
The first step is contributing to an RRSP. If you already have one, great! If not, consider opening an RRSP. Next, you'll need to meet some criteria to qualify for the Home Buyers Plan. Here are the criteria—in a nutshell. You can get more details about eligibility here.
You have to be a Canadian resident (if you're not sure of your residency status - can check here).
You'll also need to be a first-time buyer. If you already own a home, you're not eligible for the Home Buyers Plan. And there's no “faking it till you make it!” You'll need to have proof that you're actually building or buying a home. There's one exception to the rule; you can avail of the Home Buyers Plan if you're helping a disabled relation in purchasing their primary home.
If you've already participated in the Home Buyers Plan in the past, you need to have a zero balance on your Home Buyers Plan account before participating for the second time.
Provided you meet these criteria, you just need to fill some forms and then 'Bob's your uncle' you just got up to $25k of tax-free dough to put towards your future home. Speaking of forms, this one asks you a series of questions that will help determine your eligibility for the Home Buyers Scheme. Now for the fun part — withdrawing it!
How to withdraw RRSP funds under the Home Buyers Plan
To withdraw funds tax-free as part of the Home Buyers plan you'll need to fill form T1036. This is called the “Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP”. You should submit this form to your financial institution to let them know your intention to withdraw funds. It's not possible to withdraw the money from your RRSP and then claim it was part of the Home Buyers Plan so make sure to do it the right way. It's very possible to make multiple withdrawals under the Home Buyers Plan in the same year, provided you don't exceed the $25,000 limit.
Naturally enough, you can only take money from accounts in your name, for example, a contributor can't withdraw from a spousal account because the account is in the spouse’s name. You're in luck if your spouse also qualifies as a first-time homebuyer — they can withdraw from accounts in their name to a maximum of $25,000. This means if you're a couple who are both first-time homebuyers you can withdraw up to $50,000 from your RRSPs.
If you were thinking of ramping up your contributions right before you apply for the Home Buyers Plan — think again. Contributions made within 90 days of the withdrawal are not eligible for Home Buyers Plan withdrawal. If you attempt to make a withdrawal more than 30 days after getting the title of your home, then your withdrawal won't eligible for the home buyers plan and you'll be taxed on the withdrawal.
RRSP Home Buyers Plan Repayment
Now for the not so nice news. All that money you plan to take out under the Home Buyers Plan actually needs to be repaid each year. These repayments need to start in the second year after the Home Buyers Plan withdrawal was completed. Think of the Home Buyers Plan kind of like a loan, but without interest. Participants must repay 1/15th per year, and all of the funds withdrawn must be repaid within 15 years.
The CRA will send you an HBP account statement with the total amount owing, and the minimum payment due. Your HBP account balance is also shown on your Notice of Assessment, and your MyAccount information with CRA. You can also contact CRA at 1-800-959-8281 to inquire about your HBP balance.
You'll need to report the repayment on Schedule 7 and submit with your T-1 General Income Tax Return. You must make the annual minimum payment but you are also welcome to do further repayments in order to reduce it quicker.
Contributions made to repay your HBP balance do not affect your contribution room. You are not able to use the RRSP tax deduction for RRSP contributions made to repay your HBP loan. RRSP contribution receipts will be offset by the amount declared on Schedule 7 as an HBP repayment. You also need to ensure that you're are designating RRSP contributions as repayments of the HBP loan rather than regular contributions to your RRSP. Many Canadian's fail to do this and as a result, they default on their HBP.
RRSP Home Buyers Plan Rules
The First-time Home Buyer Rule
You are considered a first-time home buyer if you have never purchased a home. If you live in the home your spouse purchased, you would not be considered a first-time homebuyer.
The 4-year rule
You can become eligible for the HBP if you do not own a home or live in a home purchased by your spouse for 4 calendar years. For example, if you and your spouse split up (or you sell your home) and you move to an apartment, you would be eligible to participate in the HBP 4 calendar years after you move out of the house. Any previous HBP balance must be paid in full before you can participate a second time.
The definition of a related person with a disability
A related person includes someone related to you by blood, marriage, common-law relationship or adoption. They do not have to live with you in the same home. A person with a disability refers to someone who is entitled to a disability amount and has a Disability Certificate T2201 on file with CRA. You can find more information here.
Rules around cancelling the Home Buyers Plan
You may have to cancel your participation in the Home Buyers Plan for the following reasons:
You or the related person with a disability were unable to buy or build a qualifying home by October 1 of the year following the date of withdrawal.
You became a non-resident of Canada before you or the related person with a disability completed the purchase/build of a qualifying home.
In order to cancel the Home Buyers Plan, you must complete form “RC471 Home Buyers' Plan (HBP) Cancellation” and include a letter of explanation and a receipt for the re-deposit of funds. You can deposit the funds into an RRSP in your name. HBP repayment does not count as a contribution for tax purposes. If you choose not to repay the full amount you withdrew, any funds that are not re-deposited will be treated as a normal RRSP withdrawal, must be declared as income and will be subject to your marginal tax rate.
Cancellation repayment must be made by December 31 of the year after you made the withdrawal.
Rules around purchasing a different home or where occupancy is delayed
The CRA will consider the replacement home if you still meet eligibility requirements for the program. You must notify the CRA of the replacement property, which must meet all the same conditions. Include your name, address, social insurance number and address of the replacement property. You must also state that you intend for the replacement property to be your principal place of residence within one year after you buy or build it. If you buy that property before October 1st of the second year after the year of the withdrawal, it will be considered a qualifying home.
Here are the addresses to send your notification of delay to:
Sudbury Tax Centre Pension Workflow Section P.O Box 20000, Station A Sudbury ON P3A 5C1
Winnipeg Tax Centre Pension Workflow Section P.O Box 14000, Station Main Winnipeg MB R3C 3M2
If you are building a home, and the closing is delayed, CRA will consider your occupancy delayed if you can show that you paid contractors or suppliers (as long it is arm’s length — if it’s the family business, you won’t qualify) for materials towards the construction of a home after the date of your withdrawal, and before October 1st of the year after you withdrew the funds that was at least equal to the total of all HBP withdrawals you made.
RRSP Home Buyers Plan for Second Ho
The HBP is intended for the purchase or construction of your primary residence, or the primary residence of a related person with a disability. You cannot use HBP for a second home or rental property. If you previously owned a home, you would have to meet eligibility criteria, follow the 4-year rule and have paid back any previous HBP balance before you could use the program again. (See plan rules above)
Wealthsimple is a very attractive option for an RRSP — if we may say so ourselves. We'll help you on the road to retirement with offer state-of-the-art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service. Ready to get started — sign up here.