How to get the most out of the RRSP Home Buyers Plan (HBP)
Tuesday, 13 April 2021
An RRSP or Registered Retirement Savings Plan is the traditional tool that Canadians use to save for retirement. It offers tax-deferral on contributions as well as any interest your account receives. That means you can rack up some serious compound interest on your savings before paying tax. You will only have to pay tax on the funds that you withdraw from the RRSP in the future when you retire.
But the RRSP has another trick up its sleeve, you can it for your entire or partial down payment on your first home?
Typically, the funds in your RRSP stay there until you retire, as there are tax penalties for earlier withdrawals. However, the RRSP Home Buyers Plan (HBP) is an exception to that rule, at least for first-time home buyers. With the Home buyers plan, you can withdraw up to $35,000 from your RRSP for a down payment on a home, which can expedite home ownership without sacrificing your retirement. The only caveat is that you must pay back the amount within 15 years.
If you’re thinking of using the RRSP for your next home purchase, here are the top things to know first before making a withdrawal.
The maximum Size of the Withdrawal (Good news! It’s per person!)
The HBP lets you withdraw a maximum of $35,000 from your RRSP. If you’re buying your first home with your partner (or another first-time home buyer) then that amount is double, you can withdraw a maximum of $70,000.
You can withdraw from multiple RRSPs as long as they are in your name but cannot exceed the maximum of 35,000 unless you are purchasing with a partner or another first time home buyer.
Don’t Forget the 90-day Withdrawal Rule
Any funds you withdraw from your RRSP must have been in your RRSP account for minimum 90 days regardless of its intended use (ex. Home Buyers Plan, Lifelong learning plan, etc.) Make sure whatever funds you are withdrawing from your RRSP have been in your account for at least 90 days, otherwise it may not be tax-deductible for that year.
When You Can and Cannot Make a Withdrawal
You can apply to make a withdrawal from your RRSP before you build or buy a home, with some conditions. First, you must already have a written agreement to buy or build a home when you make the withdrawal. As well, you will need to be a Canadian resident at the time you make the withdrawal, including up to when the home is built or bought.
Another helpful fact is that you can also make the withdrawal AFTER you buy or build the home, but there is a time limit. You must withdraw within 30 days of the possession date. Wait any longer than 30 days and your withdrawal won’t be eligible for the HBP and you will be taxed on the amount you withdrew.
You Can Withdraw From Multiple RRSP’s
That’s right! You can withdraw from multiple RRSPs, as you are the owner of each plan. Make sure to stay within the limits per person ($35,000 CAD). Also, keep in mind that it’s generally not possible to withdraw from locked-in RRSPs or a group RRSP.
To make a withdrawal, first complete a T1036 form for each RRSP you want to borrow money from, and submit each form to the issuer of your RRSP (ex. if you have RRSPs at both ATB and Scotiabank, you will need to submit a separate T1036 form to each bank. Make sure to also submit each of your T1036 forms at the same time to ensure you claim the full HBP amount you borrow in one calendar year on your taxes for that year.
Although the entire HBP amount needs to be withdrawn and claimed on your tax in the same calendar year, there is one small exception. If you make a withdrawal in one calendar year and a second withdrawal in January of the following year, the CRA (Canada Revenue Agency) will consider the latter withdrawal to have been made in the same calendar year as the initial withdrawl.
Repaying it Back…
This part deals with paying back what you withdrew in the beginning. First off, your first repayment is not due until 2 years after you made your initial withdrawal. And the full amount must be repaid within 15 years. Now you can start making repayments anytime, and you can even repay the full amount early with no penalty, but these are the minimum repayment requirements.
One thing to note is if you do pay more than the minimum, your remaining balance for future years will be reduced. The amount that you have to repay each year is equal to 1/15th of the total amount you borrowed from your RRSP. You’ll be able to find your full repayment schedule in your CRA My Account. The CRA will also send you a yearly Home Buyers’ Plan statement of account.
What Happens if I Don’t Repay On Time?
It’s best to at least make your minimum payments on time. If you don’t, you will have to include the missed amount you did not pay as RRSP income on your taxes. To do this, subtract any amount you did repay from your minimum repayment amount and put the answer in-line 129 on your next return. This amount will be taxed negating the purpose of this tax-free loan! Also, your HBP balance will be reduced accordingly.
That’s it! You are now an expert on the Home Buyers’ Plan! As a first-time home buyer, it can be difficult to save for a down payment. But if you’ve been diligent with contributing to your RRSP, then the Home Buyer’s Plan might just be the best way to complete your down payment.
Your mortgage broker will also be a valuable resource for outlining how and when to utilize your RRSP savings and helping you understand the program in its entirety. For a full list of qualifying conditions for the RRSP HBP, as well as a list of important dates, visit the CRA website.