How to Use Your RRSP to Buy a House: A Guide to the Home Buyers’ Plan (HBP)

Posted on by Tax Partners
30
Dec

Introduction

Buying your first home is an exciting milestone, but it often comes with financial challenges. For many Canadians, the Home Buyers’ Plan (HBP) offers a valuable way to use Registered Retirement Savings Plan (RRSP) funds tax-free to make a down payment. 

Let’s explore how the HBP works, its advantages, and key scenarios to consider.

The Home Buyers’ Plan (HBP) at a Glance

The HBP allows first-time homebuyers to withdraw funds from their RRSPs without immediate tax consequences to purchase or build a qualifying home.

To Qualify for the HBP

You must meet the following conditions:

  1. First-Time Home Buyer:
    • In the 4-year period before the home purchase, you or your spouse/common-law partner must not have:
      • Owned a home in which you lived, or
      • Lived in a home owned by your current spouse/common-law partner.
  2. RRSP Contribution Timing:
    • Contributions to your RRSP must remain in the account for at least 90 days before withdrawal to qualify as tax-deductible.
  3. Purchase Agreement:
    • You must have an agreement to buy or build a qualifying home by October 1 of the year following the withdrawal.
  4. Principal Residence:
    • You must intend to occupy the home as your principal place of residence within one year of purchase or construction.
  5. Residency Requirement:
    • You must be a Canadian resident both at the time of withdrawal and when you purchase or build the home.

Note: The 4-year period begins on January 1 of the fourth year before the withdrawal and ends 31 days before the withdrawal date.

Key Advantages of the HBP

  1. Maximized Withdrawal Amounts:
    • Currently, you can withdraw up to $35,000 per person ($70,000 for a couple).
    • Proposed changes in Budget 2024 would increase this limit to $60,000 per person for withdrawals after April 16, 2024.
  2. Flexible Repayment Terms:
    • Repayments begin the second calendar year following the withdrawal.
    • You must repay at least 1/15th of the total withdrawal annually to avoid income inclusion.
    • Budget 2024 proposes a temporary repayment deferral, delaying the start of the 15-year repayment period by an additional three years for first-time participants withdrawing between January 1, 2022, and December 31, 2025.
  3. Combine with the First Home Savings Account (FHSA):
    • You can use the HBP alongside the FHSA to increase your funds for the same home purchase.

Scenarios to Understand How the HBP Works

Scenario 1: Using the HBP for a Down Payment

Aarav and Priya plan to purchase a $450,000 townhouse in 2023.

  • They each withdraw $12,000 from their RRSPs to meet the minimum 5% down payment of $22,500.
  • They must close the purchase by September 30, 2024.
  • Starting in 2025, they must repay at least $800 annually into their RRSPs to meet the 15-year repayment requirement.

Scenario 2: What Happens if You Don’t Close on the Home?

Maya withdrew funds under the HBP in 2022 to buy a condo, but the purchase fell through.

  • She opted not to purchase another home by October 1, 2023.
  • Maya must cancel her HBP participation and repay the funds to her RRSP by December 31, 2023, to avoid penalties.

Scenario 3: What Happens if Construction Is Delayed?

Ethan withdrew funds in 2022 but couldn’t meet the October 1, 2023, deadline to buy or build a home.

  • He can meet the requirements if:
    • He has a written purchase agreement in effect by October 1, 2023, for a home to be completed by October 1, 2024, or
    • He has made payments by October 1, 2023, for construction materials or towards the home that equal the total HBP withdrawal.

Scenario 4: Is the HBP Right for Everyone?

Sarah and Liam are considering using the HBP to avoid a Canada Mortgage and Housing Corporation (CMHC)-insured loan by increasing their down payment on a $500,000 home.

  • They are hesitant to withdraw $35,000 each from their RRSPs because it could reduce their retirement savings.
  • For them, using the HBP may not align with their long-term financial goals.

Potential Drawbacks of the HBP

While the HBP offers great flexibility, it’s essential to consider the trade-offs:

  • Reduced Retirement Savings: Withdrawals impact your RRSP growth, especially if repayment timelines are missed.
  • Lost Opportunity for Compound Growth: Funds withdrawn cease to earn tax-sheltered returns until repaid.
  • Repayment Obligation: Failure to repay means the unpaid amounts are added to your taxable income.

Conclusion

The Home Buyers’ Plan (HBP) can be an effective tool for first-time homebuyers, allowing tax-free withdrawals from RRSPs to fund down payments. However, it’s essential to evaluate whether the HBP aligns with your financial goals and circumstances.

For tailored advice on maximizing the benefits of the HBP and navigating repayment obligations, consult a financial advisor. With the right strategy, the HBP can help turn your dream of homeownership into a reality without compromising your long-term financial security.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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