According to data we published in December 2017, the average cost of buying a home in Canada is nearing the $500,000 mark.
Fortunately for first-time home buyers, there’s help. Say hello to the Home Buyers’ Plan (HBP) — lobbied for by the Canadian Real Estate Association on behalf of REALTORS®, and offered by the Government of Canada — that makes home buying more accessible for first-time purchasers! According to the website, this is how it works:
The Home Buyers’ Plan (HBP) is a program that allows you to withdraw up to $25,000 from your Registered Retirement Savings Plans (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability.
The one thing to keep in mind is that the HBP comes with several strings attached. Break them, and you will face financial penalties, so here are nine things every first-time home buyer in Canada must know.
1. The HBP is geared to first-time home buyers
In case you are wondering, the HBP only applies to first-time homebuyers, but that doesn’t mean that you can’t ever use it if you or your spouse has owned a home. The definition of a first-time homebuyer, as outlined by the Government of Canada, is a Canadian resident or citizen who who hasn’t inhabited a house owned by themselves or their spouse (including common-law). So, if you already bought one within the last four years, you don’t qualify for the benefits, but if you lived in a house five or more years ago, sold it and have been renting ever since, you do.
2. You need an existing Retirement Savings Plan to play
To proceed with HBP, you need to have a Registered Retirement Savings Plan (RRSP). An RRSP is a provision by the Canadian government to encourage Canadians up to the age of 71 to save money for retirement. RRSPs are a great way to save for retirement in that they offer tax benefits.
Like regular investment accounts, RRSPs allow you to make contributions and withdrawals. But because RRSPs guard your retirement money, withdrawals are not easy and can result in tax implications. However, under the Home Buyers’ Plan, the rules are somewhat relaxed: you can withdraw a certain amount without incurring tax as long as it’s repaid in time.
3. The money needs to be present in your RRSP account for a period of time
You should note that you cannot just put money into an RRSP and then withdraw it immediately in order to shelter it from taxes.
At the time of requesting an HBP withdrawal, you will need to confirm that the amount you wish to withdraw from your RRSP has been present in your account for at least 90 days. This means that if your very first deposit into your RRSP was made on June 1, you won’t be able to make a withdrawal before August 29. If you do, your withdrawal would not qualify for an RRSP deduction.
4. $25,000 is the limit…but is it?
The HBP enables a first-time home buyer to withdraw up to $25,000 once in a lifetime (without tax penalty) from their Retirement Savings Plan.
The withdrawal is tax-free, but the HBP does insist that you use the entire amount to pay for any expense related to your home purchase, such as mortgage down payment, closing costs, REALTOR® fees, renovations, etc. So, no, you can’t use part of the HBP money to buy the rottweiler pup you’ve always wanted!
Are you married or in a common-law relationship? Is your partner also a first-time home buyer, and are they investing in the property with you? Then the joys of HBP may double, since your significant other is also eligible to withdraw from their RRSP. You now have up to $50,000 of tax-free funds available to put towards your home purchase!
5. You’re not going anywhere without a written agreement
Before you begin the application process to withdraw funds from your RRSP, you need to have a written agreement to buy or build a home with the condition that your final withdrawal under the HBP can be no later than 30 days after the closing date. Any withdrawals after the 30-day period would be included in your income and subject to tax.
6. You will need to fill out and forward Form T1036 to make a withdrawal
So now that we have confirmed you are a Canadian resident or citizen, a first-time home buyer, that you have an RRSP account, and a written agreement to buy, what’s next?
As per the steps outlined by the government, you’ll need to access Form T1036 (“Home Buyers’ Plan Request to Withdraw Funds from an RRSP”) and fill out Area 1. You must then forward the one-page form to the financial institution that hosts your RRSP account (“RRSP issuer”). They will fill out Area 2. Please note that you will need to fill out a new T1036 for each withdrawal you make.
Your RRSP issuer will send you Form T4RSP (“Statement of RRSP Income”), showing the amount you withdrew under the HBP in box 27. You need to attach this slip to your income tax return.
7. You cannot use the HBP to fund an investment property
For your RRSP withdrawal application to succeed, you must confirm your intent to move into your home as your principal place of residence within one year after buying or building it. If you fail to move in within the specified time limit, you may face financial penalties.
8. You need to pay this money back into your RRSP in a specified amount of time
Even though the money you have withdrawn from your RRSP is your own, it’s actually a loan you have taken against your retirement fund and must be paid back.
The Government of Canada has outlined the payback procedure as such: payback begins after a two-year grace period with annual installments that can stretch up to a maximum of 15 years. You can also pay back the entire sum at once or in larger sums, as long as you don’t miss payments.
Each time you repay an installment, you’ll need to fill out relevant portions of Schedule 7 and include it with your tax returns. For each year until your repayment is done, the Canada Revenue Agency (CRA) will send you a Home Buyers’ Plan Statement of Account, which will include information like the amount you have repaid so far and your remaining HBP balance.
If you default on your repayment, then the CRA will treat your RRSP withdrawal as an income, and will tax you for it.
9. Be prepared to demonstrate compliance
When the CRA comes knocking — figuratively, of course — be prepared to show you have complied with various HBP requirements. You may be asked to provide proof of your home purchase and closing date, prove that you had withdrawn funds from your RRSP within 30 days of the closing date, or present proof regarding your move-in date and self-occupancy.
The Home Buyers’ Plan was introduced in 1992 as a result of successful lobbying efforts by REALTORS® to help keep homeownership within reach for Canadians. This is why your REALTOR® can come in very handy helping you navigate through its rules and regulations. Having a REALTOR® in your corner could make the difference between blissful homeownership and stressful financial worries.
Happy house hunting — and let us know if you plan to use the HBP for your purchase!
The article above is for information purposes and is not financial advice or a substitute for financial counsel.