Buying a home for the first time is exciting, but affording your dream property can be challenging when it is a potentially life-defining investment. For most people, buying a home is the largest investment in their lives. You may also need to spend more if you are a first-time buyer looking to meet your needs and preferences. The good news is that you can use the Home Buyers’ Plan to withdraw money from your Registered Retirement Savings Plan (RRSP).
What Is the Home Buyers’ Plan?
The Home Buyers’ Plan (HBP) is a program through the Canada Revenue Agency (CRA) that lets eligible first-time home buyers borrow up to a maximum of $35,000 from their RSSP in a single tax year for withdrawals made after March 2019. You can also benefit from the tax deductions offered by RRSP contributions, withdraw the funds tax-free, and use them for your home. It works like a loan, but with no interest.
Is There a Downside to Participating in the Home Buyers’ Plan?
The HBP offers many benefits, especially for first-time home buyers. It is ideal when you need a lump sum of capital towards a home purchase. But remember, the catch is you will have to pay the money back at a later date.
While HBP is a loan from yourself, it is still a loan, and you have to adhere to the conditions in terms of repayment. On the other hand, if you want an alternative with no repayment terms on the money, you can consider the money saved in a TFSA or additional savings accounts first.
What Are the Criteria for the Program?
To take advantage of the HBP’s benefits, you have to meet the requirements to qualify for the program. Here are the criteria:
- You have to be a Canadian resident
- You have to be a first-time home buyer
- If you are not a first-time home buyer, you can take advantage of the program if you are helping a person with disability in purchasing their primary home
- If you have already used the program in the past, you need to have a zero balance on your Home HBP account before participating for the second time
How Do I Withdraw Funds Under the Home Buyers’ Plan?
If you meet all of the requirements, you have to fill out some forms to participate in the program. You will then be eligible for withdrawing up to $35,000 to put towards your future home.
You have to fill out form T1036, also known as the Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP, to withdraw funds tax-free. Submit the completed form to your financial institution to inform them of your intention to withdraw funds.
Can I Make Multiple Withdrawals?
Note that you can make multiple withdrawals under the HBP in the same year, provided that you don’t exceed the $35,000 limit. For example, suppose you made withdrawals from the first quarter of the year under the old maximum of $25,000. In that case, you can withdraw more money not exceeding the maximum limit of $35,000. Ensure you have not lived in your new house for more than 30 days after the last withdrawal.
Can I Take Funds From a Spousal Account?
You can only withdraw funds from accounts in your name. If you have a spousal account, your spouse cannot take money as a contributor if the account is in your name. However, they can withdraw from accounts in their name to a maximum of $35,000 if your spouse also qualifies as a first-time home buyer. In short, if you and your spouse are both first-time home buyers, you can withdraw up to $70,000.
Can I Pay My Contributions Before Applying for the Program?
It’s not advisable to pay your contributions right before applying for the HBP. Contributions made within 90 days of the withdrawal date are ineligible for the program withdrawal. If you are considering applying too early, it’s also not recommended because you have to use the money on your new home within 30 days of taking ownership of your new house.
What Is Involved in the Repayment Process?
The money you took out under the HBP has to be repaid yearly. The repayment process will start in the second year after the program withdrawal was completed. You are required to repay 1/15th per year, and all of the funds have to be repaid within 15 years.
Your HBP account statement will be sent by the CRA with the total amount you owe and the minimum payment due. Note that your account balance can be seen on your Notice of Assessment and MyAccount information with CRA. to inquire about your balance, you can directly contact CRA.
To get started in the repayment process, you will have to report the repayment on Schedule 7 and submit your completed T-1 General Income Tax Return form. You have the option to make the annual minimum payment, but you can also make further repayments. Make sure that you are designating contributions as repayments of the HBP loan instead of regular contributions to your RRSP to avoid defaulting on your HBP.
What Is the Process Involved in Helping a Person With a Disability?
You can benefit from the program even though you are not a first-time home buyer if you are helping a person with a disability. They are described as someone who is entitled to a disability amount and has a Disability Certificate, ,form T2201, on file with CRA. Although they do not have to live with you in the same house, they should be related to you by blood, marriage, common-law relationship, or adoption.
Can I Cancel My Participation in the Home Buyers’ Plan?
You are allowed to cancel your participation in the HBP for the following reasons:
- You or the related person with a disability became a non-resident of Canada before you completed the purchase or construction of a qualifying home.
- You or the related person with a disability were unable to purchase or construct a qualifying home by October 1 of the year following the withdrawal date.
To cancel your participation in the HBP, you have to fill out form RC471 Home Buyers’ Plan (HBP) Cancellation and submit a letter of explanation and a receipt for the re-deposit of funds. You can deposit the funds in your name.
Cancellation repayment should be made by December 31 of the year after you made the withdrawal. If you decide not to repay the total amount you withdrew, the funds you did not re-deposit will be treated as a regular withdrawal. Therefore, they must be declared as income and will be subject to your marginal tax rate.
Affording a home as a first-time home buyer can be stressful, but you can get sufficient funds for your new house by participating in the HBP. To avoid costly mistakes and take full advantage of the program, remember the information stated in this guide. You can also consider consulting your tax accounting service provider for further guidance.
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