The Canadian Home Buyers Plan is a way to borrow from your RRSP in order to come up with a down payment for your first home. Having bought my first home recently, I found the home buyers plan information on the Canada Revenue Agency website a bit difficult to understand (must be all that government lingo), so I thought I would simplify it in easy to understand terms and spell it out step by step on how take advantage of the HBP.
In case you aren’t familiar with the HBP, let’s start with the fact that it allows a first-time home buyer to $25,000 from your RRSP tax-free. If you are a political junkie you may remember that there were promises of a $35,000 limit during the 2015 Federal Election, but that won’t be happening any time soon. If you or your significant other have owned a home before you cannot access this plan. If neither you, nor the significant other you are purchasing a home with (if this is the case) have ever owned a home, each of you can withdraw $25,000 from your respective RRSPs in order to come up with a down payment.
The semi-catch is that you have to pay back that $25,000 over the next 15 years – it’s not “free money” or anything crazy like that.
Why Bother with the Home Buyer's Plan?
The reason a person might choose to save for a housing down payment within their RRSP rather than in a basic chequing account or TFSA is that the tax-free savings ability allows you to save up for a home much quicker. The idea is that when you contribute to your RRSP the government will give you a tax refund. The size of that cheque from the CRA depends on the amount you contributed and what your marginal tax rate was (i.e. how much income did you have last year). For more information on the specifics of the RRSP click here. If you take this cheque and deposit it back into your RRSP, you can supercharge your saving. This would allow your savings to grow much quicker, than if you did things the traditional way, by getting your paycheque from your job (with the income tax taken off – no tax refund in this case) and then putting it in the bank.
If you’re looking for more information on buying a home for the first time, we recommend checking out our completely free eBook: Getting Your Foot in the Door.
Eligibility Conditions for the HBP
- You have to be a first-time home buyer (or you buying a home for someone who is disabled).
- You must enter into a written agreement to buy a home or build a home (offer of purchase). Getting a preapproval from the bank doesn’t cut it.
- You have to be a Canadian resident (not necessarily a citizen – and citizens don’t automatically qualify).
- You plan to use the home as a principal residence (not for rental income).
- This is the big one: you cannot own the home for more than 30 days before the withdrawal takes place. (So as you can see, it’s a bit time sensitive!)
- You have to build or buy the home before October 1 on the year or after the year of withdrawal.
- You have to have money in your RRSP (duh) and it must be in your RRSP for at least 90 days before you take it out.
How to Take Money From Your RRSP for the HBP
For each withdrawal from each RRSP account (if you have more than one like I do), you will need to complete a T1036 form and answer their questions. You then bring that to the RRSP issuer (i.e. your bank, credit union, discount brokerage, etc.) and they will help you take the money out so that it’s not subject to the RRSP withholding tax.
Starting the year following your withdrawal, the minimum you will have to repay back to the government is 1/15 of the amount that you took out from your RRSP in the first place. Here’s an example:
Let’s say you took out $25,000 for a down payment for your condo (got the best rate through your mortgage broker) in 2016. In 2017 you will have to let the government know that you have re-deposited 1/15th of the money back into your RRSP account, otherwise that 1/15th will be included as income for your 2017 taxes. The idea is that it would be equivalent to taking money out of your RRSP for any other reason, so it is fully taxable at that point. If at all possible you want to avoid this. As a rule of thumb, I recommend getting that money paid back to your RRSP as quickly as possible so that it can gain compounding returns for you going forward, and so that you don’t have to worry about the logistical paperwork any longer. The 1/15th amount in our hypothetical case is $1,667.
In order for you to let the CRA know that you have been good and made repayments back into your RRSP, you will have to fill out another form for the CRA (Schedule 7). Unfortunately, these repayments are NOT tax deductible because you already got your tax refund cheque back when you were saving for the down payment.
Remember that you cannot withdraw from your RRSP any contributions that you have made within 90 days of the withdrawal or else you will get DINGED. This happened to a friend of mine, and she was not a happy camper. For some reason she thought that if she was using a Canadian robo advisor - this rule didn't apply?!!! Well, it turns out an RRSP is an RRSP no matter what platform or way you dress it up!
Also, some investments that you can put into an RRSP such as certain types of mutual funds don’t allow you to take money out for a period of time. Don’t let your adviser talk you into this sort of product! In fact, ditch the adviser all together, read through this site, and then invest your housing down payment money in something really safe such as a high-interest savings account that will be there waiting for you in a couple years when you’re ready to buy your home. Here are some great Canadian online banking options that will give you a solid interest rate.
PROS of Using the Home Buyers Plan
- It’s money that has been tax sheltered and you can take advantage of the growth in your RRSP.
- You don’t have to start paying it back until about a year-and-a-half after you buy your home
- If you plan on going back to school, or if your net income somehow gets lower in any calendar year (e.g. you started up a business and have tons of deductions), you don’t have to pay the 1/15 owed back and instead, can just leave it as income for that year. You will have low(er) income that year anyway, so you don’t have to worry about paying too much tax (if any) on that income.
- There is no maximum pay back. You could pay back the full $25,000 that you took out if you wanted to at any point.
- It’s an interest-free loan to yourself over a 15-year period basically.
CONS of Using the Home Buyers Plan
- It’s more debt… debt to your own RRSP (interest free).
- Lost opportunity cost of compounding investments over the next 15 years (unless you pay it back right away).
- If you have lost more than your marginal rate in your RRSP portfolio (e.g. you got $3,200 back from the government for your RRSP contribution, but your portfolio is down $5000 from the market), then you are essentially selling for a loss of $1800 and not really gaining any benefit from tapping into your RRSP. You don’t have to worry about any of this if you keep your investments simple with basic high-interest savings accounts or GICs.
- There’s a small window of opportunity to take advantage of it (namely within 30 days after possession date).
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