What is Home Buyer Plan?

Under the first-time Home Buyer’s Plan, you can withdraw up to $35,000 from your RRSP account to use as a down payment toward purchasing your primary residence. If you’re considering buying a house and looking for a source of down payment, your RRSP savings might be the potential source.

How to Qualify for the RRSP Home Buyer’s Plan?

To qualify for the first-time home buyer’s program, you must meet the following guidelines:

  • You must be a resident of Canada
  • Have entered into a written agreement to purchase or build a qualifying home for yourself;
  • You have not purchased or occupied a property you or your spouse own in the five calendar years, including the current year of the withdrawal.

In short, you haven’t purchased a property, and this will be the first home you’re buying a principal residence.

Why Use the RRSP Home Buyer’s Plan?

Usually, any withdrawals from an RRSP account trigger a withholding tax ranging from 10%-30%, depending on the amount being withdrawn. However, when utilizing the Home Buyer’s Plan, a withholding tax is not applied to the funds withdrawn.

For example, a $35,000 withdrawal from an RRSP without the Home Buyer’s Plan would net you only $24,500 as $10,500 of the withdrawal will be held at the source. Additionally, the $24,500 received would also count as income received in that year.

By completing the withdrawal under the RRSP Home Buyer’s Plan, you will get the entire $35,000, which is not added to your income as long as you repay the funds per the plan’s requirement.

How to Repay the RRSP Home Buyer’s Plan

The funds being pulled under the RRSP Home Buyer’s Plan must have been in your RRSP account for at least 90 days before being withdrawn. Once the money has been drawn from your RRSP account to purchase a home, you have 15 years to repay the money back into your RRSP account.

You are required to pay back 1/15 of the amount each year until it’s fully repaid. Repayments start in the second year after the money is pulled. Any amount you fail to repay in any year will be added to your income in that particular year and might result in additional taxes.

For example, if you were to pull the entire $35,000.00 from your RRSP account to help purchase a new home. You would be required to pay back approximately $2,333.33 ($35,000/15) per year, which works out to about $194.44 ($2,333.33/12) per month. Any year you fail to pay the total balance, that amount is added to your income.

The repayment of funds begins in the second year following the withdrawal. You can make more than the yearly minimum payment if you wish (see below for why you may not want to).

To withdraw funds from your RRSP for the home buyer’s plan, you will need to complete Form T1306, which your financial institution provides. The form outlines and confirms details regarding the program, such as the property’s address and confirmation that you’ve entered into an agreement to purchase a home.

Avoid Paying More than the Yearly Minimum RRSP Home Buyer’s Plan Amount

It’s best to pay the yearly minimum amount required under the home buyer’s plan, as this enables you to claim more of your contribution to offset your income earnings. If you had $2000 in yearly repayment required into your RRSP, but in the year you made $5,000 in contributions.

You should only claim $2,000 as your RRSP Home Buyer’s Plan repayment and the remaining $3000 against your income. This will enable you to apply those additional funds to reduce your tax liability, rather than simply reducing a balanced owed on money borrowed at 0% interest.

When Do You Have to Purchase a Home if Using the Home Buyer’s Plan?

You must purchase the home you plan on using your RRSP home buyer’s plan by October 1 of the following year after your withdrawal of the funds from your RRSP.

Can Lock-In RRSP be used for the Home Buyer’s Plan?

You can withdraw any funds available in your RRSP as long as they have no restrictions. For example, if you have a locked-in GIC, which cannot be withdrawn for 3-years, you will be unable to access these funds for the home buyer’s plan as you cannot withdraw this fund due to restrictions attached to the investment within the RRSP account. Similarly, locked-in RRSP or locked-in retirement account funds may not be pulled if restrictions on the account do not allow you to draw funds before a certain age.

As such, you must review the type of investments within your RRSP and ensure no restriction is placed on them, as applying for withdrawal under the home buyer plan will not release you from the investment restrictions.

Can you use the Home Buyer’s Plan if you previously owned a home?

Yes, you can. If you previously used the home buyer’s plan to purchase a home and paid off the RRSP funds borrowed in full. You also must not have owned a home in the past five calendar years, which includes the year you wish to make the purchase.

The five-year qualification can be waived for individuals who are disabled or their relatives who are purchasing a home to make it more accessible for that individual. You also do not have to meet the five-year requirement if your marriage or common-law relationship breaks down.

Is it Possible to Cancel your Participation in the Home Buyer’s Plan?

Yes, you may cancel your participation in the home buyer’s plan at any time, assuming funds have not been utilized and all funds are returned to the RRSP.

What are Some Disadvantages of Using the Home Buyer’s Plan?

Like anything in life, there are some drawbacks to this program. One of the most significant drawbacks is you give up any potential future growth of the money in your RRSP might have had if you had continued to invest the money. The compounding gains you might have had over the lifetime of the investment might far exceed the interest cost savings gained by using the funds for a downpayment.

Secondly, the yearly repayment requirement might cause some cash flow problems. You must ensure you can afford the repayment requirement before pulling the money from your RRSP account under the program. Sometimes, first-time buyers fail to account for repaying this loan.

Tips on Using Home Buyer’s Plan?

While most people use the first-time home buyers program as a down payment, it’s not the only thing you can use the funds for. As long as you qualify for the first-time home buyer plan, what you ultimately decide to use the funds for is up to you. For example, the funds could cover moving or legal costs.

If you are getting married and your spouse already owns a home but plan to buy a new one together, avoid living at your spouse’s home before pulling out your RRSP under the program.

You can also use a spousal RRSP for the home buyer’s plan. The funds used will not be attributed to the contributor as long as they are used towards the home purchase.

The first-time home buyer program is my favourite type of financing. It allows you to be the lender, the customer, and the borrower. But more importantly, you get all the benefits and future profit when using this program to buy your first home.

Related Articles

Responses

Your email address will not be published. Required fields are marked *