One great source of funding for your mortgage down payment is a Registered Retirement Savings Plan (RRSP). The Canadian government’s Home Buyers’ Plan (HBP) allows first time home buyers to borrow up to $25,000 from your RRSP for a down payment, tax-free. If you’re purchasing with someone who is also a first time homebuyer, you can both access $25,000 from your RRSP for a combined total of $50,000. However, since the HBP is considered a loan, it must be repaid within 15 years.
First-time Homebuyer Eligibility
In order to be eligible as a first-time homebuyer, you must meet the following criteria1:
- RRSP funds you borrow must be in your account for at least 90 days prior to withdrawal
- You cannot have owned a home within the previous four years
- If you’re buying with a spouse (or common law partner) who is not a first time homebuyer, you cannot have lived in a house they owned for 4 years
- You have entered into a written agreement to buy or build a qualifying home
- You mush intend to live in the home within one year of purchase as your primary residence
- If you have used the Home Buyers’ Plan before, you cannot have any outstanding balance due
- You must make the withdrawal from your RRSP within 30 days of taking title of the home
- You must be a Canadian resident
If you make a withdrawal from your RRSP, but do not meet the first-time homebuyer eligibility requirements, this withdrawal will be taxed and you must include it in your income tax statement as taxable income.
Buying With a Partner
If both you and your spouse (or common-law partner) meet the first-time homebuyer eligibility requirements, each of you can withdraw up to $25,000 from your RRSPs for a total of $50,000.
If only you qualify as a first-time homebuyer, you will still be able to withdraw the $25,000, provided you have not lived in, as your primary residence, a house owned by your spouse or common-law partner.
How the HBP Process Works
It’s important to note that any funds you withdraw for the homebuyers’ plan must be in your account for 90 days prior to your withdrawal.
In order to participate in the Home Buyers’ Plan, you must print off a copy of Form T1036 . This form is available from Canada Revenue Agency’s website (www.cra-arc.gc.ca). You must fill out Section 1 then give the form to the financial institution that holds your RRSP so they can fill out Section 2. Your financial institution will send you a T4RSP form, which will confirm how much you withdrew from your RRSP as a part of the Home Buyers’ Plan. You must reference this form in your income tax return for the year you made the withdrawal.
Don’t forget you must make the withdrawal within 30 days of taking title of the home. If you try to make the withdrawal more than 30 days after you take title of the home, your withdrawal will no longer be eligible for the HBP and you will be taxed on the amount you withdraw.
Finally, beginning 2 years from your purchase you must make annual payments over 15 years to pay back the loan to your RRSP. Canada Revenue Agency will send you a Notice of Assessment, which will indicate the amount of the loan you have repaid, the balance left to be repaid, and the amount of your next payment. To start repaying the loan, you must make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year.
Repaying the Loan
Since the Home Buyers’ Plan is considered a loan, you must repay the amount you withdrew from your RRSP within 15 years, with the first payment due two years after you first withdrew the money. Canada Revenue Agency will send you a Notice of Assessment, which will indicate the amount of the loan you have repaid, the balance left to be repaid, and the amount of your next payment. To start repaying the loan, you must make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year.
Let’s look at an example where you buy a home in 2013, and withdraw $19,500 from your RRSP to put towards your down payment. Your first payment is due two years late, in 2015.
Step 1 : Calculate the minimum annual RRSP repayment
$19,500total RRSP withdrawal÷15years to repay=$1,300minimum annual repayment
If you decide to contribute more than your minimum annual payment in a given year, your go forward minimum monthly payment will adjust accordingly. Continuing with our example above, let’s assume you contributed the minimum payment in 2015 of $1,300. In 2016, you decide to make a large contribution of $8,075. We now must calculate the minimum annual contribution for 2017 and all subsequent years.
Step 2 : Calculate the adjusted annual RRSP repayment after lump sum payment
$19,500total RRSP withdrawal$1,3002015 RRSP repayment=$18,200outstanding balance
$18,200 – $8,0752016 RRSP repayment=$10,125remaining RRSP loan balance
$10,125remaining RRSP loan balance÷13remaining repayment years=$778.85annual repayment
If you do not make your minimum repayment one year, you have to include the amount you did not pay as RRSP income on your taxes. To do this, subtract any amount you did repay from your minimum repayment amount and put the answer in line 129 on your return. This amount will be taxed (which defeats the purpose of taking out this tax-free loan), and your HBP balance will be reduced accordingly.
Step 1 : Calculate your taxable income due to RRSP underpayment
$1,300minimum annual RRSP repayment amount$1,000actual annual payment made=$300taxable income
References and Notes