When you put money into your RRSP (Registered Retirement Savings Plan) you can deduct the amount you contribute from your taxes in the same year. If you withdraw funds from your RRSP you would then have to pay the applicable taxes on that amount.
There are, however, some ways to withdraw money to help with important life changes, that do not require you to pay tax on the amount. One of these is the Home Buyer Plan (HBP).
This plan allows first-time home buyers to borrow money from their RRSP to help with the down payment to purchase a home.
As of 2019, if you have entered into an agreement to buy or build a home, you can withdraw up to $35,000. If your spouse also has an RRSP, they can withdraw up to $35,000 to apply to the purchase of a new home. These amounts will be totalled and applied to the down payment of the home.
While the amount is not subject to tax or interest, it must be paid back to your RRSP within 15 years. You must also intend to occupy the house within a year of it being bought, i.e. you can’t use the HBP for a home you intend to rent.
What Is A First Time Homebuyer?
This may sound like a straightforward concept but there are actually some exceptions to the first time rule.
A home buyer qualifies as a first-time buyer if they previously lived in a house owned by them or their spouse/common-law but sold it before January 1 four years prior.
Example:
You owned and lived in a house until 2015 when you sold it. That means that as of 2020 you are allowed to make another withdrawal using the HBP.
Those who are disabled or have a disabled relative and are buying a home that is more accessible or better suited to the disabled person's needs do not have any waiting period. They can withdraw from their RRSP using the HBP at any time regardless of when they last owned and lived in a home.
In addition, spouses or common law partners who separate for at least 90 days can also take advantage of the HBP without waiting 4 full calendar years. However, the house they previously lived in must be sold within 2 years or they have to buy out their ex.
Repayment
As mentioned earlier, the amount taken from your RRSP for the HBP must be paid back within 15 years. You must make the first payment within 60 days after the second year following the purchase. For example, if you bought a house in 2020, you would have to make the first payment by March 1, 2023.
The annual repayment amount is usually 1/15 of the $35,000 ($2,333). However, if additional payments are made in any given year, the following annual payments will be reduced.
However, you do not need to keep track of payments as a Statement of Account will be included with each year's Notice of Assessment.
Payments are made as RRSP contributions and must be designated as a payment for HBP on Schedule 7. This amount will not be deducted from your taxable income as it was previously deducted when you originally contributed it.
If you are not able to make the full payment in any given year, the difference between will be added to your income and taxed accordingly.
For more information on HBP and determining whether it is right for you, please contact us today.