The RRSP First Time Home Buyer Plan was introduced to enable Canadians to use their RRSP funds to purchase a home or apartment. Thousands of first-time homebuyers have used their RRSPs to buy a house and realize their dream!
Given Canada’s property market has exploded in recent years, the RRSP First Time Home Buyer Plan will become more popular as down payments rise considerably. The RRSP home buyer’s program will become a vital aspect of the home-buying process for many Canadians.
This article answers all the frequently asked questions about the RRSP Home Buyers’ Plan. This includes using an RRSP to purchase a house and how First Time Home Buyer’s RRSP Plan repayments operate, the advantages and benefits of the RRSP first-time home buyer plan, and all the relevant information you need to know.
What is The RRSP First Time Home Buyer Plan?
A Registered Retirement Savings Plan (RRSP) can be a great way to save money for the mortgage down payment. First-time homebuyers can borrow up to $35,000 for a down payment from their RRSPs under the government’s House Buyers’ Plan (HBP). If someone buys a property with another first-time buyer, they can take out $35,000 from your RRSP for $70,000. However, note that HBP is a loan scheme and should be repayable within 15 years.
How is the RRSP First Time Home Buyer Plan Different from Other HBP Plans?
There are many other HBP Plans apart from RRSP First Time Home Buyer Plan. Like the land tax rebate, you can rebate from 0.5 % to 2.0 % of the taxes. Or the first-time home buyer’s tax credit, where you can receive around $750 of non-refundable taxes. Another housing plan you will hear of often is the GST/ HST housing plan rebate. This plan is more helpful in renovating existing buildings and repairing damaged houses.
RRSP plan is unique because it allows you to borrow $35000 tax-free withdrawal from your RRSP funds and can be utilized to buy the dream house with a lower down payment.
How to Qualify for RRSP?
To take advantage of the first-time home buyer RRSP plan, you must comply with a few requirements:
- Must be a Canadian citizen.
- Must be qualified as a first-time home buyer in Canada with an RRSP
- Must have a documented contract to purchase or construct an eligible house.
- Within a year of purchasing or constructing the home, they must move into it as their primary residence.
- If someone is purchasing or building a home for a disabled relative, he must be eligible for the RRSP First Time Home Buyer Program.
- A person not living on his/her own house or their spouse/common-law partner’s owned for the four years preceding their RRSP withdrawal.
If a person meets the first-time home buyer RRSP requirements, they are eligible to withdraw from their RRSP to buy a property without incurring any tax repercussions. The RRSP withdrawal maximum for HBP withdrawals for first-time homebuyers is $35,000 per person. However, if a couple uses an RRSP to buy a house or an apartment, they can withdraw $35,000 each, for a combined $75,000 if they qualify.
Restrictions and more conditions:
The total qualifying RRSP withdrawal must be in the same calendar year. Other RRSP Home Buyers’ Plan restrictions include:
- Only the RRSP holder can withdraw funds from the account.
- Most first-time homebuyer RRSP plans do not allow you to withdraw funds from locked-in RRSPs.
- Someone must have been in their first-time homebuyer RRSP for at least 90 days to become qualified to withdraw.
- Form T1036 must be completed for every withdrawal from the RRSP.
- The RRSP Home Buyers’ Plan does not apply to purchasing a second home since you must live in the house purchased with RRSP funds.
- The amount to be withdrawn for the home buyer’s plan must have been in the account for at least 90 days.
How to Apply for RRSP First Time Home Buyer Plan?
The process starts with filling out the T1036 form to apply for RRSP Home Buyers’ Plan. After completing Section 1, return the form to the concerned financial institution to meet Section 2. Their bank will send them a T4RSP form, which will indicate how much money could be taken from the RRSP as part of the RRSP First Time Home Buyer’s Plan—then attach a copy of this form to the income tax return for the same year of withdrawal.
Note that the withdrawal should be within 30 days of receiving the title to the house. If a withdrawal is attempted more than 30 days after taking ownership of a residence, the withdrawal will no longer be eligible for HBP, and the amount withdrawn will be taxed.
The RRSP loan must be repaid over 15 years; repayment starts 1 year after the purchase. The Canada Revenue Agency will give them a Notice of Assessment, which will show how much of the debt they have repaid, how much is still owed, and how much their next payment will be. The borrower must contribute to their RRSP in the year the loan is due or during the first 60 days of the following year to begin repaying the loan.
How to Use an RRSP to Buy a House or Apartment?
With the First Time Home Buyers RRSP scheme, withdrawals are pretty straightforward.
- For each withdrawal, complete the first-time home buyer RRSP Form T1036.
- Send the form to the financial institution that owns the RRSP after completing Section 1 of the document.
- The banking institution will complete Section 2 of the Form and release funds tax-free.
- One can withdraw funds from several RRSPs but must submit a first-time homebuyer RRSP form for every withdrawal.
RRSP First Time Home Buyer Plan: Pros and Cons
The RRSP First Time Home Buyer Plan enables many Canadians to purchase their first home. Yet one of the significant disadvantage of the RRSP First Time Home Buyer Plan is its 15 years of fixed tenure. It can be a strain on their finances for some people.
Another disadvantage is that you can’t own your primary home within four years of applying. So, in this case, you would have to wait until the four-year period was up before using it.
How Does RRSP Participation in Home Buyers Plan Get Cancelled?
The following condition may lead to the cancellation of the RRSP First Time Home Buyer Plan:
- One did not buy or build a qualifying home
- one became a non-resident before buying or building a new home
And either of the above also applies when someone buys for a related person. If the borrower repays the total amount, they will not be taxed. However, any amount they don’t pay back must be shown as tax return on income.
How to Cancel RRSP First Time Home Buyer?
- Return the funds to the RRSP before December 31 of the year one has received them.
- Explain why someone is canceling their RRSP Home Buyers’ Plan in a letter to the CRA.
- Fill out Form RC471 and attach it to the letter.
- Receipts for cancellation repayments should be attached to the appropriate address and send the letter, form, and permits.
How to Repay First Time Home Buyers’ RRSP Plan?
Because the Home Buyer is, in fact, a loan, the borrower must repay the money they took out of their RRSP over 15 years, with the first payment due one year after the borrowing time. The Canada Revenue Agency will give a Notice of Assessment, including the amount of the loan they’ve paid off, the amount still owed, and the amount of their subsequent payment. The borrower must contribute to their RRSP in the year the loan is due or during the first 60 days of the following year.
Consider the following scenario: you purchased a property in 2013 and withdrew $19,500 from your RRSP for a down payment. Your first payment is due in 2014, which is one year later.
Step 1: Determine the RRSP minimum annual repayment.
$19,500 total RRSP withdrawal 15-year repayment period = $1,300 minimum annual repayment
If you choose to contribute more than the minimum annual contribution in a particular year, your minimum monthly payment will be adjusted proportionately. Continuing with our previous example, let’s say you made the $1,300 minimum payment in 2015. You decided to make a substantial donation of $8,075 in 2016; hence, the annual contribution for 2017 and all subsequent years will be recalculated.
Step 2: After the lump sum payment, calculate the adjusted annual RRSP repayment.
$1,300 from RRSP withdrawals totaling $19,500 Repayment of RRSPs in 2015 = $18,200
$18,200- $8,075 2016 RRSP repayment = $10,125 RRSP loan balance remaining
$778.85 annual payback = $10,125 remaining RRSP loan total x 13 remaining repayment years
What Happens if You Miss Payment?
If someone fails to make minimum repayment for a year, they must include the amount on their taxes. How to calculate the amount? Subtract any amounts they repaid from the minimum repayment amount and enter the result on line 129 of their tax return. This sum will be taxed (which defeats the point of taking out a tax-free loan) and deducted from the HBP balance.
1st step: Determine your taxable income due to an RRSP underpayment.
$1,300 minimum yearly RRSP payback amount – $1,000 actual annual payment made = $300 taxable income
What is a Spousal RRSP First Time Home Buyer Plan?
If you and your spouse (or common-law partner) meet the first-time homebuyer eligibility requirements, you can each take out $35,000 from your RRSPs for a total of $70,000.
If you only qualify as a first-time homebuyer, you can still get the $35,000 if you haven’t resided in a house owned by your husband/wife or common-law partner as your permanent residence.
Is the RRSP First Time Home Buyer Plan Worth it?
The RRSP plan is worth more than other plans as it allows you to pay off the down payment at some point or initial high necessary costs that you need to clear off during a house purchase. It’s best if someone takes the RRSP Plan loan with a plan to repay it a few years before retirement so that they can clear it off by the due date. To sum up, I must say, the RRSP First Time Home Buyer plan is a highly beneficial tax-free loan scheme that helps first-time home buyers minimize hefty repayments and helps them realize their dream house.