The Home Buyers’ Plan (HBP) is a federal government program that allows qualified first-time homebuyers to withdraw funds held in their Registered Retirement Savings Plan (RRSP) to purchase a home.
Instituted in 1992, the HBP program aims to make homeownership more affordable for first-time homebuyers.
By using funds from their RRSP, aspiring homeowners can contribute a greater amount to their down payment, thereby reducing their mortgage burden.
A unique feature of the HBP is you can withdraw funds from your RRSP without incurring an early withdrawal penalty (referred to as the withholding tax).
You’re also not obligated to report the withdrawn funds as income on your tax return.
However, you must repay the “borrowed” funds into your RRSP in the future over a set time period.
Suppose you’re facing challenges in gathering the funds required for a down payment.
In that case, the HBP could be key to helping you move into your dream home sooner rather than later.
Let’s explore how it works in some more detail.
Home Buyers’ Plan Eligibility
You’ll need to satisfy the following criteria to get approved for the HBP:
- You must be a first-time homebuyer.
- You must be a resident of Canada.
- You must possess a formal agreement with a seller to purchase or build a home. The home could be for yourself or an individual related to you who has a disability.
- You must have a clear intention to occupy the home and maintain it as your principal residence within one year after it becomes suitable for living. The same condition applies to a person related to you who has a disability.
As per the CRA, the definition of “first-time homebuyer” doesn’t just mean that you have never owned a home before.
Under the program’s rules, you’re still deemed a first-time home buyer if, during a four-year period, you didn’t live in a home that you owned or your spouse owned.
This rule also applies if four years have elapsed since you last owned and occupied a property.
As a result, it’s possible to enroll in the HBP multiple times during your life.
According to the Canada Revenue Agency, the four-year period works in the following manner: it starts on January 1 of the fourth year before you withdraw money from your RRSP and ends 31 days before the withdrawal date.
For example, if you sold your home on July 31, 2020, the earliest you can re-apply for the HBP is on June 30, 2025.
Withdrawing and Repaying Funds from Your RRSP
The HBP functions much like a loan in that you’re borrowing funds to help finance your home purchase, which you have a responsibility to pay back.
But instead of a bank extending credit to you, you’re loaning the money to yourself by drawing directly from your RRSP account.
Naturally, you must “pay yourself back” by redepositing the amount you initially withdrew.
To withdraw funds from your RRSP without triggering any tax consequences, you must fill out and submit form T1036.
This document serves as a formal request, asking permission from the CRA to grant you access to money in your RRSP to buy a home.
The maximum amount of money you can withdraw from your RRSP under the HBP is $35,000.
You can remove the funds as a lump sum or a sequence of smaller amounts, but the total withdrawal must occur during the same year.
Furthermore, you can only access funds that you’ve held in your RRSP for a minimum of 90 days.
Your repayment obligation commences in the second taxation year following the withdrawal, and you have 15 years in which to repay the entire amount back into your RRSP.
At a minimum, you must repay one-fifteenth of the total balance each year.
For example, if you withdrew $25,000, your annual payment obligation is $1,666.67.
However, you can choose to pay more than the minimum each year to reduce your balance at an accelerated rate.
Should you fail to repay the minimum a particular year, it will be added to your taxable income, which will increase your tax liability.
Reporting Withdrawals and Repayments on Your Income Tax Return
You must report each withdrawal and repayment your make under the HBP on your income tax return.
The required form you must attach when you file your taxes is 5000 – Schedule 7.
During the year of withdrawal, you complete Part E of the form.
Here, you declare on line 24700 that the amount you withdrew from your RRSP is strictly for the HBP.
Once you begin the repayment process, you must fill out Part B.
On line 24600, you state the amount of your RRSP contribution you wish to designate as an HBP repayment.
Pros and Cons of the Home Buyers’ Plan
Before applying for the HBP, ensure that you carefully evaluate the pros and cons of the program.
Pros
- The HBP is the equivalent of an interest-free loan with flexible payment terms and ample time to pay back the balance – a much better deal than a standard loan from a bank.
- By applying funds from your RRSP toward your home, you can drastically reduce your mortgage payments and save on interest charges.
Cons
- Any funds you withdraw won’t benefit from the tax-sheltered growth of investments you hold in your RRSP.
- Repayments under the HBP aren’t tax-deductible like they would be if they were regular RRSP contributions.
Frequently Asked Questions
- Is the Home Buyers’ Plan a good idea?
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Yes, but only under specific circumstances. Suppose you’re not earning a significant rate of return on the money in your RRSP. In that case, it might be more financially prudent to use it to reduce your mortgage payments. Also, you should ensure that you’ll be comfortable servicing the repayments each year.
Conversely, if you’re adamant about hitting your retirement goals and have an investment portfolio providing you with stellar returns, it would be unwise to raid your RRSP account to finance your home. You could miss out on considerable tax-advantaged investment growth.
- Who is eligible for Home Buyers Plan?
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The HBP is open to all Canadian residents considered first-time homebuyers as per the CRA’s criteria. In addition, homebuyers must possess a written agreement that validates the purchase, and intend to use the home as their principal residence.
