If you are considering purchasing (or building) your first home, the Federal Government’s Home Buyers’ Plan (HBP) is an option you may want to consider. This plan was first introduced in the 1992 Federal Budget to assist first time home buyers. The plan allows you to withdraw up to $35,000 from your RRSP. There is no tax withheld on this withdrawal, however, the funds must be repaid in annual minimum amounts over a period of 15 years. Its main goal is to help new home buyers like you take advantage of the savings you have when you need them the most.
Am I eligible?
The HBP has a list of eligibility criteria you should be aware of:
You are a Canadian resident;
You are a first-time home buyer. Generally speaking, you are a first-time home buyer if you did not occupy a home that you or your current spouse owned in the past four years;
NOTE: this does not apply if you are a person with a disability.
NOTE: for the HBP’s purposes, “the last four years” starts on January 1 four calendar years ago, and ends 31 days before your planned withdrawal.
The home you are buying must become your principal residence;
You have a written agreement to buy or build a home in Canada that qualifies for the HBP;
You acquire your home by October 1 of the year following the year in which you withdraw your money;
The funds you intend to borrow from your RRSP (or RRSPs) have been in your account for at least 90 days before the withdrawal date;
You receive all withdrawals within the same calendar year;
Neither you nor your spouse can own the qualifying home for more than 30 days before the withdrawal is made;
You have no outstanding HBP balance from any previous uses of the HBP;
You repay your withdrawal within the next 15 years, starting the second calendar year after the withdrawal (see “How do I repay my HBP withdrawal?” section below for more details).
If you’re buying a home with your spouse or common-law partner and you’re both eligible for the HBP, then you can both take advantage of it. You can each withdraw up to $35,000 from your RRSPs. If only one of you qualifies, then only that person can withdraw.
How can I take advantage of the HBP?
Once you’ve confirmed that you’re eligible, and if you decide to take advantage of the HBP, you’ll have to complete two forms:
Form T1036, the Home Buyer’s Plan Request to Withdraw funds from an RRSP;
A Letter of Authorization with instructions on how to send the funds (i.e.: cheque or Electronic Funds Transfer);
To make the process easier, you may submit them through Scotia iTRADE®. We will then send you a T4RSP form, so you won’t be taxed for withdrawing from your RRSP.
How do I repay my HBP withdrawal?
HBP withdrawals are considered loans by the government – loans that must be repaid to your RRSP account within 15 years. After making a withdrawal, the Canada Revenue Agency (CRA) will send you a “Notice of Assessment” detailing the balance of your loan and the minimum payment amount. You’ll have two years to make the first payment. The repayment must be done within 60 days of the year after the contribution is due. It can’t be done any time.
Repaying the loan isn’t very different from contributing to your RRSP. To make a repayment, just make a contribution, then declare any amount as a repayment when you file your taxes. The more you pay, the more your loan’s balance will decrease – but remember, you have to make the minimum payment each year. The minimum payment is always the total balance of the loan divided by the number of years left. If you were to withdraw the full $35,000, your minimum payment would be ($35,000 / 15 years) = $2,333 per year.
What if I miss a payment?
If you don’t make the minimum payment one year, you’ll have to declare the amount you didn’t pay as RRSP income. In other words, if your minimum payment is $2,333 and you pay $1,333, you’ll owe tax (at your highest marginal rate) on an extra $1,000 of RRSP income. However, your outstanding HBP balance will be reduced by the full $2,333.
One more important point
By withdrawing funds from your RRSP under this plan, you are forgoing the investment income and the related tax-deferred compounding of that income during the time that this money would have been in your RRSP. This results in the reduction of your RRSP balance and subsequently the income available to you during your retirement.
In the end
So, although the decision to use RRSP funds is never an easy one, as long as you weigh both the advantages and disadvantages of the Home Buyers’ plan, you will be in a much better position to make an appropriate decision.
This publication has been prepared by Scotia Capital Inc. (“Scotia iTRADE”) and is intended as a general source of information and for educational purposes only and should not be considered as personal and/or specific financial, tax, pension, legal or investment advice. This publication does not take into account the specific personal, financial, legal or tax situation or particular needs of any specific person. No information contained in this publication constitutes a recommendation by Scotia iTRADE to buy, hold or sell any security, financial product or instrument discussed therein. The information contained in this publication neither is nor should be construed as an offer or a solicitation of an offer by Scotia iTRADE to buy or sell securities or to follow any particular investment strategy. Scotia iTRADE does not make any determination of your general investment needs and objectives, or provide advice or recommendations regarding the purchase or sale of any security, financial, legal, tax or accounting advice, or advice regarding the suitability or profitability of any particular investment or investment strategy. You will not solicit any such advice from Scotia iTRADE and in making investment decisions you will consult with and rely upon your own advisors regarding the appropriateness of implementing strategies before taking any action based upon the information contained in this publication. Opinions and projections contained in this publication are our own as of the date hereof and are subject to change without notice. While care and attention has been taken to ensure the accuracy and reliability of the material in this publication, neither Scotia iTRADE nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of such material and disclaim any liability resulting from any direct or consequential loss arising from any use of this publication or the information contained herein. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of Scotia iTRADE.