How to Use the RRSP Home Buyer’s Plan

What is the Home Buyer’s Plan? In Canada, you can use some of your Registered Retirement Savings Plan (RRSP) to purchase a home. It’s called the Home Buyer’s Plan and it can help you get on the first rung of the property ladder. Of course, you need to have an RRSP account; it all sounds very adult. Well, it is. So what is the Home Buyer’s Plan and how does it work?

Your first home purchase will likely be one of your most significant personal milestones. You likely have to shop for a mortgage and get home insurance. After that, it’s often accompanied by a sense of excitement and adventure, not to mention celebrated with exuberant housewarming parties. It’s regarded as a key aspect of your graduation into adulthood, a way to gain independence, and of course, being able to live life on your terms. 

Sadly, acquiring a home is a formidable task for many people. It can be fraught with challenges and constant frustration. In most cases, lack of money is the culprit that hinders aspiring homeowners from achieving this goal. 

In Canada, you are required by law to put a minimum 5% down payment on a home you wish to purchase. So, for a home listed at $500,000, that translates to a $25,000 down payment. However, many people want to contribute more to avoid being saddled with a colossal mortgage, and that entails saving a staggering sum of money.

So, the Home Buyer’s Plan (HBP) was set up by Canada’s federal government to help offset some of the costs associated with buying your first home. It is a way to help people access their own money to put toward a down payment. Of course, you want to know more, so here we go.

What is Canada’s Home Buyer’s Plan?

The HBP is a federal program that allows you to withdraw money from your RRSP account to help finance a home purchase. The home could be either for yourself or an individual related to you who has a disability. The program is a product of the federal government.

Implemented in 1992, the HBP aims to relieve some of the financial burden first-time homebuyers face when purchasing a property. Even then, the cost of a house left people out of the market. By making first time homeownership more affordable, greater numbers of Canadians can establish their career and family life without dealing with crippling mortgage payments. 

Suppose you’re struggling to collect money to contribute to a down payment. In that case, you could use a portion of your RRSP balance to cover the shortfall. Under the HBP, the money you withdraw from your RRSP functions as a loan you make to yourself.

As with any loan, you must eventually repay this money back to your RRSP account over a prescribed time period. That requires smart money management. You have to have room in your budget for your mortgage payments and your RRSP repayment. 

Anyone who owns an RRSP is likely aware of the nasty tax consequences triggered by early cash withdrawals. Luckily, any funds you remove from your account under the HBP program are tax-exempt, which means that you’re not required to report the withdrawn funds on your tax return. And you also won’t get slapped with an early withdrawal tax. 

How the Home Buyers’ Plan works

In a nutshell, the HBP consists of two steps: withdrawing money from your RRSP and re-depositing it in the future over a predetermined schedule.

Withdrawing funds from your RRSP

As described above, the HBP allows you to withdraw funds from your RRSP tax-free to put towards your down payment. The maximum amount you can withdraw is $35,000. Prior to March 19, 2019, the limit was $25,000. If you’re purchasing a home with your spouse, common-law partner, or another person who qualifies for the program, your maximum withdrawal limit is $70,000 between the two of you; $35,000 each.

You can withdraw your desired amount as a lump sum or in increments during the same calendar year, as long as you don’t exceed the maximum of $35,000, or $70,000 with a partner. You can also access funds from multiple RRSP accounts. Be careful not to withdraw more than the maximum permitted otherwise you’ll need to report the overage as part of your taxable income.

Though the rules stipulate that you must complete all your withdrawals in the same calendar year, there’s one exception. Suppose you make one withdrawal in a calendar year and then the second one the following year in January. In this case, the Canada Revenue Agency (CRA) will consider both withdrawals to have occurred in the year of the first withdrawal.

Assuming you meet the eligibility criteria, you must fill out Form T1036, which is a formal request to access your RRSP funds under the HBP. The section you need to fill out is called Area A. You’ll have to fill out this form each time you make a withdrawal, so it’s wise to anticipate your needs ahead of time so you can take out what you need in one shot.

Once complete, you need to send the form to the financial institution that holds your RRSP account. They will fill out Area B of the form and approve the release of the funds to your bank account, which you can use for your home purchase. As tax season approaches, your financial institution will issue you a T4RSP slip, indicating the total amount withdrawn and allocated to the HBP. These details will also confirm to the CRA that the withdrawal is valid and tax-exempt so that you don’t incur a hefty tax bill. 

Home Buyers Plan in Canada: the RRSP withdrawal restrictions

There are a couple of restrictions you need to be aware of before accessing your RRSP funds under the HBP:

90-day rule. You’re permitted to only withdraw money that you’ve held within your RRSP account for a minimum of 90 days. Any cash held within your RRSP that’s less than 90 days old doesn’t qualify. Don’t get too hasty with ramping up your contributions at the last minute.

Home purchase time limit. Though many homebuyers elect to withdraw money from their RRSP before purchasing a home, postponing the withdrawal is also permitted. However, there’s a time limit if you intend to pursue this plan. You must withdraw your desired amount within 30 days of taking possession of your home. Should you initiate your withdrawal later you’ll have to report it as taxable income, which will disqualify its use under the HBP.

Repaying withdrawn funds back to your RRSP

The money you withdraw from your RRSP account under the HBP functions like a traditional loan, which means you’re responsible for repaying it in full. There is also a timeline that you need to respect. Luckily, you have years to do it.

You have a total of 15 years to redeposit the amount you borrowed for your home purchase back into your RRSP account. The repayment period commences in the second year following the year of withdrawal. For example, if you took out the money in 2021, your repayment schedule officially begins in 2023.

A nice aspect of HBP repayments is the flexibility. You have the option of making repayments earlier rather than waiting for your grace period to end. By doing this, you can get a head start and reduce your outstanding balance quicker. If you wish, you can also settle your balance in a single payment.

However, the rules do require that you pay something each year. You must contribute at least a minimum repayment each year, equal to one-fifteenth of your total withdrawal. Thus, if you took $30,000 out of your RRSP, your minimum annual repayment would be $2,000.

Being conscious of your minimum annual repayment is crucial. Should you fail to redeposit this amount, you’ll have to include it in your taxable income, which will increase your tax payable for that year. The inclusion will reduce your HBP balance accordingly.

To help keep you in the loop once you begin the repayment phase, the CRA will issue an HBP statement indicating your outstanding balance and minimum payment required. You can also find these details on your Notice of Assessment (NOA) or by logging into your MyAccount through the CRA website.

Cancelling participation in the Home Buyers’ Plan

Suppose you’ve already withdrawn funds from your RRSP for the Home Buyer’s Plan, but discover soon after that you didn’t meet all the eligibility requirements. In that case, you can promptly cancel your participation in the program and redeposit your funds. You’ll have a limited time to do so.

Let’s assume you did satisfy all the eligibility criteria and you withdraw RRSP funds for the Home Buyer’s Plan. Unforeseen circumstances arise suddenly, you decide not to buy a home and you want out of the HBP. Unfortunately, it’s too late to reverse your decision under this scenario, for the most part. You may cancel your participation only if you:

• Didn’t purchase or build a qualifying home
• You became a non-resident before you were able to buy or build your home

If you applied for the HBP and withdrew funds to acquire or build a home for a related person with a disability, the same criteria above apply, as well.

Suppose that you cancel your participation due to not buying or building a qualifying home. In that case, you must redeposit the money to your RRSP account by December 31 in the year following the year you made the withdrawal. Again, plan what to do with the money in the meantime so that you do not spend it elsewhere.

If your cancellation resulted from you becoming a non-resident following your withdrawal date, your repayment deadline varies according to when your status changed. Suppose you became a non-resident before you filed your tax return in the year of withdrawal. In that case, your repayment date is the earliest of:

• The date you filed your tax return in the year of your withdrawal; or
• December 31 of the year following the year of your withdrawal

Suppose you became a non-resident after filing your taxes in the year of your withdrawal. In that case, your due date is December 31 in the year following the year of the withdrawal.

Follow these steps to cancel your participation in the HBP:

1. Redeposit your withdrawal into your RRSP by the due dates previously stated.
2. Write a letter to the CRA informing them of the reason for your cancellation using Form RC471.
3. Attach your RRSP deposit receipt(s) to the letter.
4. Send the letter, receipt(s), and form RC471 to the CRA.

Using your RRSP for the Home Buyer’s Plan in Canada: the eligibility requirements

If you’re keen on applying for the HBP, there are certain conditions you’ll have to satisfy first before being approved.

• You must be a first-time homebuyer
• You must have valid legal agreement to buy or build a qualifying home, either for yourself or a person with a disability
• You must be a Canadian resident at the time you withdraw funds and up until you purchase or build your home
• You must intend to use your home as your principal residence within one year of its purchase or construction. The same rule applies if the home is intended for a related person with a disability
• If you’ve previously participated in the HBP, you can reapply if your Home Buyer’s Plan balance is zero on January 1 of the year you plan to withdraw funds and you meet all other conditions.

For the most part, the eligibility requirements are self-explanatory. Still, specific terms, such as “first-time homebuyer,” have precise meanings and, as a result, merit further clarification.

Important Definitions for the Home Buyer’s Plan in Canada

The Home Buyer’s Plan is an interest-free loan to yourself with terms and conditions. It has financial implications, so it makes sense that there are clear definitions of who and what is involved. This protects everyone involved. 

First-time homebuyer. It’s possible to be classified as a first-time homebuyer even if you’ve lived in and owned a home in the past. As long as you didn’t occupy a home that you owned or your partner owned during the year of withdrawal, and the previous four years. If this is your situation, then you can legally enroll in the HBP program. 

Four-year rule. According to the HPB rules, as long as you haven’t owned a home in the past 4 years, you are considered a first-time homebuyer and can use the HBP to purchase a home, even if you already used it in the past. For example, if you sold your last home in 2017, you will be eligible to participate again in 2022. The only other requirement would be that you have a zero HBP balance at the time you reapply.

Person with a disability. Under the HBP rules, a person with a disability is one who is related to you by blood, marriage, common-law partnership, or adoption. They don’t have to reside in the home in which you live. Furthermore, the individual must be entitled to the disability tax credit.

Qualifying home. A qualifying home refers to a housing unit located in Canada or a share of a cooperative housing corporation that entitles you to occupy and own an equity interest in a unit located on the property, like a condo. In case you want to use the plan to buy a property in another country, you are out of luck.

Replacement property. The CRA will recognize a replacement home if you’re unable to legally occupy or build the one indicated on Form T1036 before October 1 in the year following your withdrawal date. You must send a letter to the CRA informing them of the replacement property, which must satisfy the same condition as your original one. Be sure to include your name, address, social insurance number, and the replacement home’s address. You must also state in the letter that you intend to occupy the replacement property as your primary residence within one year after you purchase or build it.

Breakdown of a marriage or common-law partnership. Relationships break down and the government knows it. It’s worth highlighting recent amendments made to Canada’s Home Buyer’s Plan qualification criteria, which became effective in 2020. These changes relate to cases involving a relationship breakdown and affect persons who made withdrawals after March 2019. 

You may be eligible to enroll in the program if:

• You’re living independently from your partner due to a divorce or relationship breakdown
• You’ve lived independently from your partner for at least 90 days
• You were living independently from your partner in the year you made your withdrawal or any time in the four prior years.
• You were living independently from your partner at the time you made your withdrawal
• Your current principal residence is not owned and occupied by a new partner
• You sold your previous principal residence within two years after the end of the year in which you made your withdrawal.
• You must have an HBP balance of zero at the beginning of the year in which you make your withdrawal.

How to report RRSP Home Buyers’ Plan withdrawals and repayments on your tax return

The CRA requires that you report every withdrawal and repayment you make under the HBP. To avoid unfavourable tax consequences, you must fill out and attach with your tax return each year form 5000 – Schedule 7. By doing this, both you and the CRA will be on the same page regarding the tracking of repayments and updating your outstanding HBP balance.

It is a process that is spread over two years. In the year of withdrawal, you complete Part E of the form. Specifically, you note on line 24700 the total amount you accessed under the HBP for the year. 

Now for the second step. In the second year following your withdrawal and repayment years, you need to fill your Part B. Here, you indicate on line 24600 the portion of your RRSP contribution you’re designating as an HBP repayment. Remember not to include any amounts above on line 12900, RRSP income, and line 20800, RRSP deduction, on your tax return.

Advantages of using your RRSP for the Home Buyers’ Plan

Using the Home Buyer’s Plan has many benefits for Canadians looking to access the real estate market. The most obvious perk is helping you come up with an appropriate down payment. But that’s not the only benefit.

Increase your down payment

Putting extra money toward your down payment means you’ll need a smaller mortgage to cover the remaining cost of your home. Your mortgage can easily absorb a massive chunk of your budget. By topping up your down payment, you could dramatically reduce your regular payments. You can even test this using a mortgage calculator.

Of course, a smaller mortgage to contend with means you’ll save on interest charges, too. Furthermore, suppose your partner or spouse qualifies as a first-time homebuyer. In that case, you can double your maximum withdrawal limit from $35,000 to $70,000.

A larger down payment also comes with a couple of other perks. By contributing more than the minimum down payment required, which is 5% of the home’s selling price, you’ll qualify to pay a discounted rate on your mortgage insurance premium. To see this with your own eyes, try out different numbers on this calculator that takes into account Canada Housing and Mortgage Corporation (CHMC) premiums.

If your down payment is more than 20% of your home’s selling price, you’ll be exempt from paying mortgage default insurance altogether, further saving you money. A mortgage where you put down 20% or more is called a conventional mortgage. In addition, if you’re able to secure financing for a conventional mortgage, you have the option to extend your mortgage amortization period to 30 years. This option is not available for homeowners who contribute a down payment of less than 20%.

Purchase a larger home

Have you discovered your dream home, only to find the price tag a bit out of your financial comfort zone? By adding a little extra to your down payment, courtesy of your RRSP and the Home Buyer’s Plan, a home you once deemed to be out of your price range suddenly becomes much more affordable. If you have ample funds in your RRSP that you can use through the HBP, you’ll be able to finance a broader range of properties.

Borrow money at zero percent interest

This is the best part of the RRSP Home Buyer’s Plan relationship. The HBP is the equivalent of a loan, but one that you extend to yourself, and at a zero percent interest rate. Instead of applying for borrowed down payment programs, you could use your own money and never pay a dime in interest charges.

Flexible payment schedule

The HBP repayment period is 15 years, which is much longer than a typical personal loan. As a result, you can repay your total withdrawal in smaller increments. In addition, you can increase your minimum payment size at your discretion to extinguish your balance sooner and without incurring a prepayment penalty.

Get more from your RRSP investments

Suppose you’ve earned underwhelming returns over the last few years because the stock market has flatlined or a recession is ravaging the economy. It could happen. Or you hold in your account assets that generate conservative returns by their very nature, such as Guaranteed Investment Certificates (GIC) or government bonds. 

It might be more financially prudent to put your money to work by topping up your down payment in these situations. In the process, you could earn a superior return over time through your home’s equity, especially if the real estate market soars. You could dramatically improve your financial standing by saving on housing costs rather than investing your money in investment products that produce meagre returns.

Disadvantages of using your RRSP for the Home Buyers’ Plan

Of course, no financial product is perfect. Every financial move you make has a tradeoff. The Home Buyer’s Plan does have some drawbacks to consider.

Foregone investment growth

The Home Buyer’s Plan takes present value money out of your future value money. The primary purpose of an RRSP is to hold investment products to build up wealth for your retirement years. The tax deferral attributes of an RRSP account make it the ideal financial tool to accomplish this, allowing you to realize gains on money that would ordinarily be subject to tax.

By withdrawing funds from your RRSP, you’re giving up tax-deferred gains those funds would have generated in future years. The opportunity cost might be considerable, especially if your investment portfolio is impeccably constructed and consistently performs well. By the time you repay the money owed, you may be nearing retirement, which means you won’t have much time to reap the benefits of compounding returns. As a result, you could end up with less money in your RRSP account once you retire than initially projected.

Another loan to repay

You’re responsible for making timely repayments on your HBP balance like any other loan. If you’re already heavily in debt, tacking on an additional payment obligation will further strain your finances. At 15 years, the HBP repayment schedule is quite generous.

Still, each time you fail to pay your minimum amount, it gets added to your taxable income. Not surprisingly, your tax liability will increase. The result is even less money in your bank account.

Repayments don’t offer tax advantages

Unlike regular RRSP contributions, repayments you make under the HBP aren’t tax-deductible. The reason for this is that the CRA already awarded you with a tax deduction when you initially deposited the funds in your RRSP. They’re not going to let you double dip!

While it seems fair enough from the CRA’s perspective, this feature doesn’t bode well if you routinely rely on your RRSP contributions to net you a tax refund. Fortunately, your HBP repayments do not count towards your total allowable RRSP contribution room for the year. However, before you allocate money to your RRSP for tax purposes, you must first repay your minimum amount for the HBP. Keep in mind the larger your repayment, the less room you have in your budget for your regular contributions. Make sure you clearly report which RRSP deposits are to repay your HBP, and which ones are your normal RRSP contributions.

Bankruptcy doesn’t discharge repayments

Filing for bankruptcy won’t absolve you of your HBP repayment obligation, unlike other loan payments you might be responsible for servicing. The same applies if you decide to pay your home to reduce your debt burden. As a result, you could end up making RRSP repayments while not garnering the benefits of homeownership. 

Is it worth it to use your RRSP for the Home Buyers’ Plan?

With real estate prices in Canada rising, sometimes at a dizzying speed, homeownership is becoming an increasingly challenging goal. For this reason, the HBP can be an enticing option for those struggling with the financial hurdles that accompany homeownership. Who wouldn’t want to get their hands on some extra cash at a zero percent interest rate, and without incurring any adverse tax consequences? 

If you’re pondering over whether to raid your RRSP account to help finance the purchase of your first home, ensure you first carefully assess the pros and cons. Ask yourself what you value more: owning a piece of real estate that has the potential to build your equity. Or the growth of your RRSP savings to fund the retirement you envision for yourself years from now.

The HBP can boost the size of your down payment. This trims your resulting mortgage payments. But participating in the program means sacrificing potentially lucrative gains from your RRSP investments.

Also, evaluate your personal and financial goals and how allocating a portion of your RRSP balance might impact them. Here are some questions to ask yourself:

• How much disposable income do you require each month? 
• What are your household expenses? 
• Can you afford to make HBP repayments every year for 15 years?
• Do you foresee your income growing steadily in future years to cover repayments? 
• Do you have a contingency plan to cover any shortfall in your retirement savings from withdrawn funds?

By asking these questions, you can obtain a clearer picture of the costs and benefits of enrolling in the HBP. You can then make an informed choice based on what’s best suited for your lifestyle, budget, and goals.