What Is The Home Buyer's Plan (HBP)?

Essentially, it’s a loan you can borrow from yourself in order to buy a house and make it a home. But how can you do that if you don’t have any money? With the HBP you can use the funds you’ve accumulated in your Registered Retirement Savings Plan (RRSP) tax-free to purchase your first house. Sounds too good to be true, right? Well, almost. There are conditions and rules involved in using your RRSP to buy a house, but overall it’s a pretty great way for Canadians to achieve homeownership and build wealth. So why borrow from your future to finance today?

All across Canada, the average price of homes have seen staggering growth in the last 30 years. And that growth has significantly outpaced that of the average Canadian salary. Owning real estate has proven to be a powerful way to accumulate wealth. But with housing prices at all-time highs, more and more Canadians are being priced out of the housing market and the opportunity to achieve financial freedom. That’s why in 1992, the Government of Canada introduced the Home Buyer’s Plan so that more people could carve out their piece of the pie. Here, we tell you everything you need to know about using your RRSPs to buy a house.


Who Created The Home Buyer's Plan?

In the 90s, the Government of Canada introduced the Home Buyers Plan in an effort to make homeownership more accessible to Canadians. Originally, you could borrow up to $25,000 tax-free from your Registered Retirement Savings Plan to use as a down payment on your first home. However, as of March 2019, that maximum withdrawal amount was increased to $35,000. Since its inception, millions of people have used the Home Buyer’s Plan to invest in real estate and become homeowners.


How Does The Home Buyer's Plan Work?

Well, first you need to have an RRSP. And of course, it needs to have money in it. The program is run through the Canada Revenue Agency (CRA), and they allow you to access the funds in your RRSP account tax-free. That means the sum of your withdrawal will not be subject to income tax, nor will it be included in your income for the year in which it is withdrawn.

As long as the money you are trying to access has been held within the RRSP for at least 90 days (about 3 months), you can withdraw it under the Home Buyers Plan. Even better, if you are buying a home jointly with a partner or significant other, you are both eligible to withdraw up to $35,000 each from your own respective RRSP accounts. That’s a potential $70,000 down payment on a home.

Furthermore, if you have more than one RRSP account, you can withdraw from all of them so long as those individual withdrawals do not add up to exceed the $35,000 total maximum limit.

Not only have you gotten to reap the tax benefits of contributing to your RRSP in the first place, but now you can actually borrow from yourself, tax-free and without interest, to help you achieve your dream of homeownership.


Am I Eligible For The Home Buyer's Plan?

But as easy as this all may seem, there are some conditions that need to be met before you can take advantage of this program. You have to meet the eligibility requirements.

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First of all, you need to be a Canadian resident. No if’s, and’s, or but’s about it. If you don’t actually live here, you cannot access this program. The house you are buying also has to be located in Canada. The property you are buying or building needs to become your principal residence by October 1st the year after your RRSP withdrawal. So no, you cannot buy timeshares or vacation properties outside the country. Nor can you use this program to purchase income properties such as a rental house.

Secondly, you have to be a first-time homeowner. If you already own a home then you cannot use the program for additional properties. Having said that, If you already used the HBP in the past to buy your first home, you may still qualify to access the program again. As long as you have not owned a home in the previous four years, have paid back the total of your RRSP withdrawal amount before the deadline and your remaining balance is zero. You must also have a signed agreement to buy or build a home and you must be living in it within a year.

Lastly, you need to repay everything you withdrew from your RRSP within 15 years. If you accessed the maximum amount of $35,000 to purchase your first home, you have to pay it all back. That could affect your budget and ability to afford a home once you factor in other homeownership expenses like the mortgage, property taxes, insurance, utilities and upkeep.


How Do I Withdraw From My RRSP For The Home Buyer's Plan?

So you’re ready to take the plunge and actually buy a house. That means it’s time to withdraw the money from your RRSP. In order to do that, you need to fill out the T1036 Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP. You submit that form to the financial institution that issued your RRSP account. If that was CIBC, for example, you would submit form T1036 to CIBC.

If you have several RRSPs at different institutions and plan to withdraw from them too, you will need to submit individual forms to each of those institutions. And remember, all withdrawals for the HBP need to be done within the same calendar year. Unless one withdrawal was made one year, and a second was made in January of the following year, then the CRA would consider both withdrawals as taking place in the same calendar year.

After confirming that all the funds you intend to withdraw have been in the account for at least 90 days, you can go ahead with your transaction. You can withdraw the funds anytime after the 90 days, but not longer than 30 days after you take possession of your home.

Voila! You now have a decent chunk of change in your account. You are ready to start house hunting and making offers! Just don’t forget to claim your total Home Buyers Plan RRSP withdrawal on your income tax return.


Home Buyer's Plan: When Do I Need To Repay It?

But while you’re caught up in the excitement of house hunting and bidding wars, don’t forget you need to pay this all back. And Canada Revenue Agency (the people who tax all your hard earned bacon – known as the CRA) are actually super strict on how and when you do it.

You have 15 years to pay back the total of what you withdrew but you can’t just do it willy-nilly on your own schedule.

You are required to pay back 1/15th of what you withdrew every year, for 15 years. And you need to start doing that the second calendar year after you made the withdrawal. So that means if you accessed the full $35,000 in 2021, you would need to pay back $2,333.33 a year, every year for 15 years starting in 2023. That’s just shy of $200 a month for 180 months.

Every year the CRA will send you an annual statement of your HBP account outlining your remaining balance and the annual payment due. You can also find that information on your Notice of Assessment (NOA) after you file your taxes, as well as on your CRA online account. Once you’ve made your payment, you’ll need to report it on Schedule 7 of your T-1 General Income Tax Return.

While you have a minimum annual payment to satisfy, you absolutely can make additional payments whenever possible to pay the balance down faster. Just make sure you are specifically designating those payments to your HBP balance in order for them to be credited properly. Otherwise, CRA doesn’t know the difference between additional payments to the HBP or regular RRSP contributions. You may accidentally default on your repayment requirement.


Home Buyer's Plan: What If I Don't Pay It All Back In Time?

Well, that would be really unfortunate and would defeat the purpose of using your RRSPs to buy a house. The CRA is pretty strict about the repayment requirements and they keep meticulous records, because of course they do. 

If you fail to meet your annual minimum payment, you will have to report the shortfall as taxable RRSP income. So for example, if your minimum payment is $2,333.33 but you only paid $1,200.00 you would subtract that from the $2,333.33 minimum and report $1,333.33 on line 129 of your income tax return. It will be added to your total income for the year and taxed accordingly.

For example, if you make $60,000 and fail to pay the full annual minimum payment, you would add the shortfall to your total income for the year. Using our previous example, you would then need to claim your income as $61,333.33. In Canada, depending on your province of residence, the federal marginal tax rate on a $60k annual salary is about 31%. That means you need to pay 31% tax to the government on that $1,333.33 you failed to pay as agreed. At that rate, you might as well have just gotten a loan, it would have been a lot cheaper (ill advised, but cheaper).

The payments you make towards your Home Buyers Plan are not part of your regular RRSP contributions and, therefore, are not tax-deductible. In order to get the tax benefit from RRSP contributions, you’ll need to make excess payments beyond your minimum annual repayment amount. As mentioned earlier, you need to make sure you are always designating which contributions go where so you don’t unintentionally default on your repayment schedule.


What If I Don't Have Any RRSPs?

Don’t worry, there’s a hack for that! It’s a little convoluted but it can be done. Fair warning, this is not financial advice and not an appropriate strategy for everyone, so consult with your financial advisor. 

In order to use the HBP without an RRSP you would need to apply for a personal loan in the amount you need, but not over the $35,000 maximum allowed. If approved, you would take the funds from the loan and deposit them into an RRSP account. Then you have to leave the money in there for the full 90 days required by the HBP. After the 90 days are up, you would then withdraw the funds and pay back the loan in full plus whatever interest charges accumulated in that time. You would then claim that RRSP contribution on your Income Tax Return. Once the government issues you the tax return you can use those funds as a downpayment on a house. Finally, pay it all back within the 15 year requirement!


Home Buyer's Plan: What If I Don't End Up Buying A House?

The good news is that you can cancel your HBP if something goes awry. But since the government loves restrictions, you’ll need to meet some pretty specific cancellation requirements.

You can cancel under one of two conditions. Either you did not end up buying or building a home or replacement property, or you became a non-resident after making your RRSP withdrawal.

If you meet those requirements, you can cancel your participation and repay the full balance to your existing RRSP account, or even a new one in your name. The cancellation payment(s) will need to be done no later than December 31st the year after you withdrew the funds.

Then, you will need to write a letter detailing the reason you cancelled your participation and send it to the CRA along with a completed  RC471, Home Buyers' Plan (HBP) Cancellation form. Make sure you include your full name, address and social insurance number. Your cancellation letter must be received within 60 days of your repayment deadline. You are required to attach receipts proving you repaid the funds back into your RRSP account. Any funds not repaid by the deadline will be taxed at your marginal tax rate.

The Takeaway

The average price of homes in Canada have skyrocketed in the last few years. As a result, many Canadians have been left feeling like their dream of homeownership might never come true. The Government of Canada introduced the Home Buyer’s Plan to help make that dream a reality. The HBP presents an incredible opportunity for Canadians who might have had to choose between saving for retirement or saving for home. The HBP, you can do both. The best part? The HBP can help you pull together enough of a down payment to avoid the costly CMHC premiums that accompany down payments less than 20%. If you’re thinking about buying your first home, there are many advantages to using your RRSP account to help you find the perfect place to hang your hat.

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