Saving for a down payment is a challenge for many first-time home buyers. It can be the only hurdle standing in the way of homeownership. The Government of Canada acknowledged the difficulty first-time home buyers were facing and established the Home Buyers’ Plan (HBP).
The Home Buyers’ Plan allows first-time home buyers, people who have not owned a home in the past four years, to withdraw money from their RRSP’s to purchase a primary residence. A maximum of $35,000 can be withdrawn from an RRSP. If you are married or purchasing a home with another first-time home buyer, each person can withdraw up to a maximum of $35,000 from their RRSP’s for a combined total of $70,000.
To withdraw funds from your RRSP’s under the Home Buyers’ Plan, the RRSP provider will require you to fill out a tax form. The RRSP funds need to be deposited for a minimum of 90 days prior to withdrawing them. In most cases, also not secured by a loan in order to use them as a down payment.
Normally you have 15 years to repay your RRSP’s. The repayment period will start the second year after the funds were withdrawn. Your HBP statement will show that you need to repay 1/15 of your RRSP each year. Every dollar not repaid will be added as income on your tax return for that year.
Strategy 1
The Home Buyers’ Plan can be used as a tool to maximize your tax refund. If a first-time home buyer has money in an account, the money can be transferred into an RRSP account, as long as there is contribution room available. Look at the bottom of your last Notice of Assessment for this information. The RRSP contribution will result in a tax refund. The RRSP can be withdrawn 90 days later under the Home Buyers’ Plan and used as a down payment on a home. When you file your taxes for the year, you will receive a tax refund.
Strategy 2
Your RRSP can be established with borrowed funds, an RRSP loan. The RRSP contribution will result in a tax refund. The RRSP can be withdrawn once you purchase a new home under the Home Buyers’ Plan and used to pay off the RRSP loan. Since the money is secured by an RRSP loan, it usually can only be withdrawn to repay the RRSP loan. When you file your taxes for the year, you will receive a tax refund. This refund can be used to top up your down payment. Timing is important if you plan to use your tax refund towards the purchase of a home.
To come up with a strategy that will work best for you and your situation, let’s chat. I will be able to advise if the Home Buyers’ Plan will work for you. For more information visit the Government of Canada website.