Buying your first home is one of the most significant financial decisions you will make. While it may seem daunting with the current housing crisis across Canada, there are ways to help alleviate some of that pressure. For example, to help make buying your first home more attainable, the Canadian government offers the Home Buyers’ Plan (HBP). Here is a breakdown of everything you need to know.
What is the Home Buyers’ Plan?
Firstly, the Home Buyers’ Plan is a program that allows first-time homeowners to borrow from their own RRSP, free of tax, to help fund the purchase or construction of their first home. The HBP allows eligible Canadians to withdraw up to $35,000 from their RRSP, or Registered Retirement Savings Plan, to buy or build a qualifying home. Also, it is essential to note that when purchasing a house with a partner who is also eligible, those funds could stack. Therefore, there is a potential to withdraw up to $70,000 combined.
Who is eligible?
Next, a few conditions must be met to participate in the HBP.
- The participant’s principal residence must be in Canada.
- The participant must be a first-time home buyer. This condition means one must not have owned a home in the past 4 years to be eligible. Therefore, you may still qualify if you previously owned a home but sold it more than 4 years ago.
- The participant must have a written agreement to buy or build a qualifying home.
- The participant must plan to live in the home as their primary residence within a year of possessing the property.
- The RRSP contributions must be in the account for at least 90 days.
Also, it is worth noting that you may qualify if you are buying or building a home for a disabled relative, regardless of whether you meet the first-time home buyer criteria. If you are a disabled person and want to buy or build a more accessible home, you can still qualify for the HBP. However, the house must better suit the needs of the person with the disability.
How much can you withdraw from the HBP?
The maximum amount an individual can withdraw is $35,000. However, as long as both are eligible, couples/partners can withdraw up to $70,000 with their combined funds. The funds must be withdrawn using the CRA Form T1036 and submitted to your RRSP provider to start the withdrawal process. You withdraw funds only after signing a written agreement to buy or build a home.
What types of homes qualify?
The main factor to qualify is that the property must be located in Canada and serve as your principal residence. Here is a list of qualifying homes for the HBP:
- Detached or semi-detached homes
- Mobile or modular homes
- Townhouses
- Condominiums
- Shares in co-op housing (as long as it gives you ownership rights).
It is worth noting that the purchase/construction of the home must be completed before October 1st of the following year after the withdrawal. If this deadline is not met, you may be disqualified, and your tax penalties may be triggered.
How do you apply for the Home Buyers’ Plan?
As mentioned before, to begin the process, the prospective first-time homeowner must submit Form T1036, the Home Buyers’ Plan Request, to withdraw Funds from an RRSP. Next, you must submit the form to your financial institution and wait for it to be processed. Finally, once approval is through, you will receive tax-free funds if all conditions are met.
Also, coordinate the HBP with other government incentives for first-time homeowners to make the most out of purchasing their first home. Layering these programs will help reduce your home’s upfront costs, improve financial flexibility, and lower your taxes throughout the process.
To start, one great combination is the First Home Savings Account (FHSA), which allows you to contribute and withdraw up to $40,000 tax-free to buy your first home. You can use these two together to help with a larger down payment.
Additionally, there is the First-Time Home Buyers’ Tax Credit, which offers a non-refundable $10,000 credit, which translates to up to $1,500 in tax savings.
What are the Home Buyers’ Plan repayment rules?
Repayment requirements come with participating in the Home Buyers’ Plan. To keep track of payments, you will receive an annual statement. The CRA will outline how much you have repaid and what remains. Here are the repayment rules for the HBP:
- The repayment process starts two years after the initial withdrawal.
- Each year, you must repay at least 1/15th of the amount borrowed. However, you can repay more than the minimum in any given year.
- You will have 15 years after the withdrawal to repay the amount.
- If you skip/miss any repayments, the unpaid portion of the HBP is ‘income’ and taxed accordingly. There will be no penalty to pay. However, you will have to pay income tax on that amount.
- There is no penalty for early repayment. The faster you repay, the sooner you can free up your RRSP contribution room.
The Canada Home Buyers’ Plan is a great asset for buying a first home. However, it is essential to remember that it is not free money. It is a loan to yourself. So, stay on top of the annual repayments to avoid unexpected taxes. If you are a first-time homeowner with questions about your home’s coverage, contact us today!
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