Update 2009: the limit was increased from the $20,000 cited throughout below to $25,000, effective for withdrawals made after January 27, 2009
“First time” home buyers may borrow up to $20,000 tax-free from their RRSPs to use towards the purchase of a home in Canada. In order to qualify as a “first time buyer”, you must be a Canadian resident and neither you nor your spouse can have owned a home in the previous five calendar years prior to purchase. The five year requirement is waived for disabled people who are purchasing homes more suitable to their care needs. Each of a couple may withdraw up to $20,000 from their own respective RRSP plans, if the house is acquired jointly.
If you have previously withdrawn funds from your RRSP under the HBP, you may be able to participate in the plan again under the following circumstances:
- your HBP balance is zero on January 1 of the year in which you plan to make another HBP withdrawal. This means that either you have repaid all previous withdrawals from your RRSP under the plan, OR you have included any un repaid amounts in your income in years prior to the year of the new withdrawal, AND
- you meet all of the afore-mentioned qualifications necessary for any first-time home buyer
Each of a couple may withdraw up to $20,000 from any number of individual RRSPs of which they are the annuitant, so long as the total of funds withdrawn does not exceed the $20,000. Thus, spousal contributions made by one spouse to another spouse’s plan belong to the latter spouse.
You may not transfer funds between a couple’s respective RRSPs in order to build up each of their Home Buyer withdrawals.
You must file a Form T1036 which specifies the property you will acquire. You may designate a replacement property if the original purchase falls through. In any event, you must acquire a property by October 1st of the year following your first RRSP withdrawal under this Plan. Furthermore, you have one year after the date of acquisition to actually move into the home.
If you fail to acquire a home by the required date, you have until December 31st of that year to repay the funds to your RRSPs. In this case, you are considered never to have utilized this Plan, and therefore would be eligible to do so again, ignoring the five year rule above.If the funds are not returned by the deadline, you must include the amount in your income in that year. Where some of the withdrawal was funded by spousal contributions, the “three year rule” calculations would attribute the income back to the contributing spouse.
Remember that you must withdraw cash from your RRSPs under this Plan. Therefore, any existing investments in stocks, bonds, GICs, mutual funds etc first must be liquidated.
A Special Catch
For some reason, the government doesn’t wish this program to be used entirely deliberately. You will not be allowed to deduct any RRSP contributions against earned income made less than 90 days prior to the withdrawal to the extent that the contribution is greater than your RRSP balance after the withdrawal.
In its simplest application, this rule would work against someone who doesn’t have any RRSPs, and contributes, say, $20,000 against contribution room, in anticipation of making a Home Buyer’s withdrawal within 90 days. That $20,000 tax deduction would be denied. In effect, your $20,000 deposit towards the home purchase would not be made under this Plan.
To avoid this trap, any contribution must be made at least 91 days in advance of anticipating a withdrawal under this Plan.
On the other side, this special catch for offside contributions does not apply to someone who has an RRSP already existing with sufficient balance to fund the amount of the desired withdrawal under this Plan.
The situation is more complex if you did have an existing RRSP, or spousal RRSP, and made further contributions within the 90 days. Due to the complexity of this calculation, you are advised to seek professional counsel with respect to your situation. In summary, the tax deduction will be denied for such contributions to the extent that your RRSP balance after the withdrawal is less than the amount of the offside contribution.
The government will report the annual repayment obligations to you. At minimum, the principal must be repaid evenly over fifteen years. No interest is charged. The first repayment is due by sixty days after the year which is the second year following the year in which the withdrawal is made. For instance, if you make a withdrawal in 2001, your first repayment will be due by February 28, 2004.
Each subsequent payment is due within sixty days of the end of the year, i.e. the “normal” RRSP deadline for earned income contributions.
If you do not make the required payment by the required deadline in any year, that shortfall is added to your income for that year. Such shortfalls cannot be caught up later. Where a couple fails to make repayment to what was a spousal plan, the “three year” attribution rule does not apply, and therefore the annual income inclusion will not accrue to the contributing spouse.
You are allowed to make greater payments than are required. In this case, your future payments will be reduced accordingly.
On the other hand, you are not allowed to take into income amounts greater than your annual amount less your designated repayment. In other words, you cannot cherry pick a low-income year to bring some or all of the balance into income as it suits your advantage.
The repayment “system” is quite simple. You make a payment to the RRSP at your financial institution, who will give you a tax receipt, just like a normal RRSP contribution. In other words, the financial institution doesn’t need to know that you are making a Home Buyer’s repayment, not a regular earned income contribution. On your tax filing for that year, you report the amount of your payment as per the tax receipt but then designate it as a Home Buyer’s repayment; therefore, it is not tax deductible as a regular contribution.
You are not required to make the repayment back to the specific RRSP plan from which you took the funds. For instance, over the ensuing years you may have chosen to transfer your RRSP investments from one financial institution to another, so that the original RRSP doesn’t even exist any more. However, you must make the repayments to a plan of which you are the annuitant, so repayments to a spousal plan would not qualify.
If you become a non-resident of Canada, you must either repay the outstanding balance in your final year of residency or else include that balance in income on your final Canadian return.
If you die with an outstanding balance, you must include that balance in income on your date-of-death return, less any payments designated in your final year. If you have a surviving spouse, the outstanding balance may be transferred to your survivor, who will assume the normal repayment obligation terms.
If you have an outstanding balance in your 69th year, you must either repay the full amount by December 31st of that year, or else take the required annual repayment amount into income each year until you die or the balance is drawn to nil. This is purely practical, because you cannot own an RRSP after your 69th year, and you may not make repayments to a succeeding RRIF.
- It may be smarter to take an annual income inclusion to a spouse from spousal contributions withdrawn under this Plan, rather than designating repayments, and utilize such contributions as deductible against earned income by a higher income spouse.
- It may be smarter not to repay the outstanding balance in your 69th year, if your marginal tax bracket will be lower for the ongoing future income inclusion.
- If your tax bracket is high in your 69th year and will be lower afterwards, it also may be smarter to use your available funds to make deductible earned income contribution in your 69th year, and take the annual income inclusion afterwards.
- If you become non-resident and your final marginal tax bracket is low, it may be smarter to take the income inclusion and not repay the loan, thus preserving cash flow for other things in your new locale.
- On the investment side, if you anticipate buying a home soon and utilizing the Home Buyer’s Withdrawal Plan, and are fully invested in stocks, bonds and mutual funds in your RRSPs, you may wish to keep a close eye on the market, so that you don’t have to liquidate investments after a significant downturn in stock market values.
- If you are still paying off an old Home Buyer’s loan and wish to, and qualify to, take out a new one, you should consider re-paying the old balance and then borrowing up to the entire $20,000 maximum balance for your new home.