RRSP Home Buyer's Plan - detailed explanation in simple terms.
Friday Jul 09th, 2021
We have been asked on many occasions about the RRSP Home buyers plan and thought it would be a good idea to explain the details from the beginning to the end of how it works, and what to do.
What is Home Buyers Plan.
A home buyers plan allows you to withdraw up to $35,000 per person (if you are a couple you can withdraw up to $35,000 each, for a total of up to $70,000) for the purchase of the qualifying home for yourself or for a related person with a disability. You can only withdraw from RRSP, the plan does not apply to locked in company pension plans or the amounts you have contributed to the Canada Pension Plan, locked in group RRSP plans may not allow to withdraw from them as well.
Do I qualify for the Home Buyers Plan.
There are number of criteria’s to be met in order to qualify for the HBP.
- You must be considered to be a first-time home buyer.
- You must have an agreement to purchase or build a home for yourself or a related person with a disability (a person entitled to a disability amount).
- You must be a resident of Canada.
- You must intend to occupy the property you are buying or building as a principal residence withing one year of buying it.
- If you participated in the HBP previously you may be able to participate again if all of the above criteria are met and the previous RRSP HBP withdrawals have been repaid by January 1st of the year of the new withdrawal.
How is the first-time home buyer defined.
You are considered to be a first-time home buyer if, in the four year period you did not occupy a home that you owned, or one that your current spouse or common-law partner owned. The four-year period is a period prior to the home purchase, and it begins on January 1 of the fourth year before the year you withdraw from RRSP, and ends 31 days before the date you withdraw the funds.
What is a qualifying home.
A qualifying home must be located in Canada, and in addition to the most common types of housing such as freeholds and condos units such as mobile homes, apartments in duplexes, triplexes, fourplexes, apartment buildings as well as equity co-operatives also qualify.
How much can a withdraw under the plan.
As previously mentioned, you can withdraw up to $35,000 per person, it means a single person will be able to draw up to $35,000, and a couple can draw up to $70,000. If one spouse has $100,000 sitting in his or hers rrsp, and the spouse has $5,000 in the rrsp the maximum allowed withdraw will be $35,000 for spouse A, and $5,000 for spouse B, for the total of $40,000. The withdrawal allowance does not get transferred to the other spouse.
When can the funds be drawn.
The rrsp contribution must be in the plan for at least 90 days before it can be withdrawn, the withdrawal must be made no later than 30 days after the property was purchased, and you must have an agreement of purchase and sale in place.
For example, the property is purchased on Sept 1, 2021 (title transfer) and you already have firm offer accepted. You have contributed to the RRSP $10,000 on May 1, 2021, and $5,000 on August 1, 2021.
The first contribution will be in the RRSP for 90 days as of July 30, 2021, and you can withdraw the $10,000 as part of the home buyers plan between July 31, 2021 and September 30, 2021 (no later than 30 days after the purchase).
The second contribution of $5,000 will be in the rrsp for 90 days on October 30, 2021, therefore it will not be eligible for HBP withdrawal because the 90 days will fall more than 30 days after the purchase date (Sept 1 – the purchase day plus 30 days).
Can I withdraw from more than one rrsp account.
Yes, if you have more than one rrsp account at the same or different financial institutions you can withdraw from all of them.
What can the funds be used for.
The funds can be used for anything, they don’t have to be used for down payment or anything related to a house.
In order to withdraw the funds from the RRSP for the purpose of Home Buyer’s Plan the form T1036 must be prepared and submitted to your financial institution. For details how to submit the form please contact your bank or broker. The form itself is pretty self-explanatory.
Reporting the withdrawal to CRA.
In the year of the withdrawal you will received T4RSP slip from your financial institution (more than one slip if you withdrew from more than one account), in addition to your name, SIN and address on the slip there will be an amount in box 27 indicating how much was withdrawn, and box 27 indicates this was for the home buyer plan and no tax was withheld, and the amount is not taxable. Even though the amount is not a taxable income it must be reported on your tax return, this way the CRA will know the amount that was withdrawn (they would have known in regardless since the financial institution would send the info to cra) and the repayment schedule will be established. Any decent personal tax software will be to track the repayment schedule for you.
The details of the HBP will be available on your notice of assessment from CRA or your online CRA account.
Let’s talk about repayments of the home buyer’s plan.
The repayment schedule starts on the third year after the funds were withdrawn, and it must be repaid within the following 15 years, if you prefer you can repay sooner but it usually it’s not advisable to do so.
Let’s look at an example, in 2020 a single first-time home buyer purchased a house and withdrawn $35,000 as part of the plan.
The withdraw happened in 2020 so the first year for the repayment is 2022 (year 1 is 2020, year 2 is 2021, and year 3 is 2022). The minimum repayment in the year is $2,333.33 ($35,000 / 15 years), and if you don’t repay more than a minimum each your you last repayment will be in 2036.
Designating the repayment amount.
Designating the repayment amount is not done when you make a contribution to the rrsp, it is simply done on your personal tax return. You can contribute to RRSP to the same account or a different one, it doesn’t matter, when you or your accountant prepare the personal tax return the repayment amount can be designed when preparing the return. Usually, the minimum repayment amount is designated, it rarely makes sense to allocate more to the repayment of the HBP.
What if I don’t make any RRPS contributions during the repayment year.
In such case you will not be able to repay the minimum amount, and the minimum amount will be added to your taxable income. If your minimum repayment amount was $2,333 but you only contributed $1,000 to the RRSP in the year, the $1,000 can be designated as the repayment of the HBP, and $1,333 will be added to your income and you will be taxed on it.
What if I repay more in the year than the minimum required.
It rarely makes sense, but you can do it if you like, in that case the minimum repayments for the following years will be reduced. As an example, you have designated a repayment of $4,000 instead of $2,333 in the first year, the minimum repayment for the following years will be $2,214 ($35,000 - $4,000) / 14 years.
Fees to withdraw from RRSP as part of the HBP.
Please check with your financial institution for the charges related to the withdrawals, for example RBC is charging $25, but they may vary.
If you are invested in mutual funds or GIC you may have to pay fees for redemptions or wait until the investment matures.
Do all financial institutions offer HBP withdrawal.
Most do but not all. Some discount brokerages don’t offer HBP plan withdrawals, as of the time of the writing of this blog Interactive Brokers doesn’t offer HBP withdrawal option, if you are invested with a company that doesn’t offer the option you should transfer your RRSP elsewhere prior to buying the property if you wish to participate in the plan.
Cancelling RRSP HBP.
You can’t cancel the participation except for one of the two situations:
- You did not buy or build the qualifying home.
- You became a non-resident before buying or building a qualifying home.
If you cancel the HBP the repayments are due by December 31 of the year after the withdrawal was made, for detailed steps regarding the cancellation process please visit the CRA website.
Spousal RRSP and HBP.
Spousal RRSP is in a nutshell contribution made by one spouse to another spouse rrsp, it is typically advantageous when once spouse’ income is in a tangibly higher tax bracket.
When withdrawing from a spousal rrsp the couple making a purchase as a first-time home buyer can make a total withdrawal of up to $70,0000 (up to $35,000 from the higher earner RRSP and up to $35,000 from the spousal RRSP the higher earner contributed to).
When the repayments start the participants have an option to repay the HBP or not, the income attribution rules are exempt under the HBP therefore if the annuitant of the spousal RRSP does not repay the minimum balance the income will be taxed in the hands of the annuitant and not the contributor. In essence the contributor (spouse with higher earnings) got a tax deduction when making the RRSP contribution, but if the repayment is not made the income will be taxed in the hands of the annuitant (spouse with the lower earnings).
If the annuitant has no or very little income during the years he or she is required to make the repayment it may make sense not to repay the RRSP HBP.
The breakdown of marriage.
Effective January 1, 2020, Canadians experiencing a breakdown in their marriage or common-law partnership may qualify to withdraw money from their Registered Retirement Savings Plan (RRSP) to purchase a new home, without incurring a tax penalty.
The Home Buyers’ Plan (HBP) is a program through the Canada Revenue Agency (CRA) that allows eligible first-time homebuyers to withdraw up to $35,000 tax-free from their RRSP. The Federal Government increased the withdrawal limit from $25,000 to $35,000 in the 2019 budget.
If you live separate and apart from your spouse or common-law partner for a period of at least 90 days as the result of a breakdown in your marriage or common-law partnership, generally, you may qualify to participate in the Home Buyers’ Plan even if you do not meet the first-time home buyer requirement.
What are the requirements?
You may qualify for the Homebuyers’ Plan after breakdown of a marriage or common law partnership if the following requirements are met:
You must have been living separate and apart for at least 90 days due to a marriage or relationship breakdown;
You must be living separate and apart at the time the withdrawal is made and began to live separate and apart in the year in which the withdrawal is made, or any time in the four preceding years;
You will be required to dispose of the previous principal place of residence no later than two years after the end of the year in which the HBP withdrawal is made;
This requirement will be waived if you buy out the share of the residence owned by your spouse or common law partner.
The existing rule that individuals may not acquire the home more than 30 days before making the HBP withdrawal will also be waived in this circumstance.
In the case where your principal place of residence is a home owned and occupied by a new spouse or common-law partner, you will not be able to make a Homebuyers’ Plan withdrawal under these rules.
Home Buyers Plan for a person with disability.
Under the plan the new home must be better to fit the needs of the person with disability than the current home.
A person with disability is someone who is entitled to a disability amount and it includes you or relative by blood, marriage, common-law partnership or adoption, and the person does not have to reside together with the contributor.
A contributor can use a HBP for a related person with a disability for purchase or built a new home, when all other HBP conditions are met.
In this blog we have outlined the process, terms and details of the HBP but purposely omitted discussing if the plan is worth participating in as there are divided opinions, if you have any questions regarding the plan please contact us.