Starting your RRSP Early Can Help you Buy your First Home

Typically, you have until the 60th day of the year to contribute to your RRSP. For the 2019 tax year, this contribution deadline falls on March 2nd, 2020. With this deadline quickly approaching, it is a good time to review a valuable program that is provided under the RRSP – the Home Buyer’s Plan.

When withdrawing money from an RRSP, funds are typically treated as taxable income – with one exception. The Home Buyer’s Plan (HBP) allows first time home buyers to withdraw a lump sum of capital from their RRSP tax-free to put towards a down payment on a purchase of their first home. On March 19, 2019, the amount an individual was permitted to withdraw tax-free increased from $25,000 to $35,000, under the HBP.

In a way, the HBP is the government’s way of incentivizing and rewarding you for contributing to your retirement savings. The program allows you to start saving early for retirement while putting away more for your first house at the same time.  Plus, we could all use a little help considering how housing prices have skyrocketed in the past few decades.
 
Who is eligible for the Home Buyer’s Plan?
As with anything, you must meet certain requirements in order to be eligible to take part in the program. It is important to understand your eligibility so you can sort out how you are financing the purchase of your new home.

• You must be a first-time home buyer.

• The property you are purchasing must be your principal place of residence, rather than a vacation property or property purchased for the intention of providing you with a rental income.

• You must have entered into a written agreement to buy or build a qualifying home, rather than merely obtaining mortgage pre-approval from the bank.

• The withdrawal cannot be made more than 30 days after you own the house.

Note: There are some exceptions to the rules that can allow you to participate in the HBP more than once.

• If it has been 4 years since you and/or your partner have owned your principal place of residence, you are eligible to apply for the HBP again. This could be the case if you and your spouse were renting for years prior.

• Additionally, if you are assisting a family member who is disabled purchase their home, you can withdrawal from the HBP a second time.

For more details surrounding your eligibility for the HBP, please visit this CRA website.
 
How do I withdraw funds through the Home Buyer’s Plan?
Make sure you understand this step in the process before you withdraw your funds.

It is important that you withdraw funds by filling out Form T1036 ‘”Home Buyers’ Plan Request to Withdraw Funds from an RRSP”. If this form isn’t filled out and approved prior to withdrawing funds, the funds will be treated like income on which you will be taxed.  

If you are buying your first home with a partner who is also a first-time home buyer, you can both independently fill out the T1036 form and be eligible to receive $70,000 to put towards your down payment.

With the HBP, you can also do multiple withdrawals (not exceeding $35,000 in total) to space out the income you receive from your RRSP contributions. This can be helpful if you have a payment schedule that allows you to space out your house payments.
It is important to note, too, that with the HBP, money that was put into your RRSP accounts for less than 90 days prior to your withdrawal date is not eligible to withdraw. Ensure that this time-sensitive period is accounted for when you are determining how much you are eligible to withdraw from your account.
 
What is the repayment process?
Through the Home Buyer’s Plan, withdrawn funds act like a loan that must eventually be repaid.  It is essentially an interest-free loan that you take out from yourself. As with any loan, you are required to pay it back in full at a later date.

Starting the day that you withdraw funds, you have a two-year grace period before you have to start repayment. After this two-year period, you have 15 more years to pay off the entirety of your loan. Minimum payments of 1/15th of the total amount of the HBP loan are to be paid annually. For example, if you take out $35,000 under the HBP in 2019, you must begin making minimum annual payments of $2,333 ($35,000/15) in 2021 until it is fully repaid by 2036.

If you are unable to make the required annual repayments, then it is added to your overall income and you are taxed on that amount. Following along with the previous example, if you can only afford to pay back $1,500 of the $2,333 annual amount one year, $833 will be added to your taxable income.

When making repayments, it is crucial that you identify the contributions to your RRSP as being loan repayments, rather than regular contributions. Without doing this, the CRA will not recognize them as HBP repayments. It is not uncommon for Canadians to default on their HBP because of this which can greatly damage your credit score.

Furthermore, your repayment won’t generate the tax relief that usually accompanies RRSP contributions. When you originally contributed that money into your RRSP, you would’ve already received the tax benefit, so it makes sense why you wouldn’t receive this tax benefit twice. It is also important to note that the contributions you make to repay your HBP balance have no effect on the amount you are allowed to contribute to your RRSP every year. This caveat allows you to continue to build your RRSP and take advantage of compound interest while paying back your HBP loan.
 
If you are looking to buy your first home, the RRSP Home Buyer’s Plan is a great way to finance your purchase. Not only will your RRSP contributions provide you with lower taxes, but it also provides you with the opportunity to obtain an interest-free lump sum of capital to kick-start your home purchase. If you have any more questions regarding your eligibility for the Home Buyer’s Plan, or the process of withdrawing or repaying your HBP loan, please do not hesitate to reach out to any of our team members at the Bongard Wealth Advisory.

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