Monday, March 4th, 2019
With the average price of a house in Canada being almost $469,000 as of February 2019, saving up for a down payment can seem like a daunting task. Some Canadians opt to use the Home Buyers' Plan (HBP) to help raise their down payment.
The HBP is a program that allows first-time homebuyers to make a withdrawal of up to $35,000 from an RRSP/RSP to help buy a home.
(The older withdrawal limit of $25,000 was increased to $35,000 in the Canadian federal budget for 2019, and this new limit became effective as of March 19, 2019.)
Normally when you withdraw funds from an RRSP/RSP, the funds are treated as taxable income, but withdrawals under the HBP are not taxed — provided you put back the money within a specified time-frame.
Here's how it works.
You can use the HBP as long as you qualify as a "first-time home buyer," and it's actually possible to qualify as a first-time home buyer more than once in your life. As long as neither you nor your partner owned a home that was your principal residence during the four calendar years before the year you plan to use the HBP, you'll be eligible.
The 2019 federal budget also introduced a new provision that allows people to qualify for the Home Buyers' Plan if they don't meet the definition of a first-time home buyer but have “experienced a breakdown in their marriage or common-law partnership." However, this provision won't be available until after 2019.
To make an HBP withdrawal of up to $35,000 per person (so a total of $70,000 for a couple), you need to submit a T1036 form to the financial institution where your RRSP/RSP is held. You have up to 15 years to repay the full amount back to your plan, but the 15-year repayment period doesn't start until the second calendar year after you make the withdrawal. For example, if you use the program in 2019 to make the withdrawal, you don't need to start making repayments to your RRSP/RSP until 2021.
Although you have up to 15 years to repay the funds you withdrew under the Home Buyers' Plan, you're expected to make payments each year. The annual repayments required are 1/15th of the original withdrawal amount. So if you borrowed $15,000 from your RRSP/RSP under the HBP, the annual payment required would be $1,000 per year for 15 years. Repayments under the HBP don't generate tax relief like a regular RRSP/RSP contribution. Remember, you're paying back what you withdrew, and would've received the tax benefit when you originally contributed the money.
If you're unable to make the required annual repayment amount, then the annual repayment amount is added to your income and you will owe tax on that amount. So if your required annual repayment amount is $1,000 and you only repaid $500 in a particular year, then the remaining $500 is included as taxable income for that year.
When you're contributing to your RRSP/RSP with the intention of using the Home Buyers' Plan program in the near future, you might choose to use a low-risk investment option since you may not want to risk exposing your down payment amount to the short-term fluctuations of a stock market investment.
But when you make repayments as part of the Home Buyers' Plan, there is no requirement to make those repayments to the same RRSP/RSP account that you withdrew from.
In fact, you can claim contributions to any RRSP/RSP, Pooled Registered Retirement Plan (PRPP), or Specified Pension Plan (SPP) as Home Buyers' Plan repayments. These accounts may be focused on the longer-term objective of retirement income, which could include higher allocations to equities.
More information on the HBP can be found on the Canada Revenue Agency website.