Home Buyers Plan: A Comprehensive Guide
Buying your first home, what an exciting time of life! No doubt you’re ecstatic and can barely wait to walk through the door.
But before you begin your new life, you’ve got to jump major hurdles. Mainly, the price tag to the tune of hundreds of thousands of dollars standing in your way. But this is where the Home Buyers’ Plan (HBP) comes into play. So, what is it?
Stick around for the answer to all your burning questions!
What Is The Home Buyers’ Plan?
The Home Buyers’ Plan Canada is a program from the Canada Revenue Agency (CRA) that allows home buyers to withdraw money from their Registered Retirement Savings Plan (RRSP) tax-free to put towards the purchase or building of their first home or the home for a related person with a disability.
Therefore, by withdrawing from their RRSP, a first-time home buyer can have his/her financial burden lessened significantly because the HBP can increase a buyer’s down payment by up to $35,000. Consequently, it’ll make it much easier for many Canadians to get a mortgage.
The Canada HBP gives you up to 15 years to repay the amount you’ve withdrawn from your RRSP. For couples, the home buyers’ amount can reach a total of $70,000.
The catch is that the funds must have been in your account for at least 90 days to be eligible for withdrawal, while all withdrawals must be made in one year. Moreover, you must withdraw your funds within 30 days after obtaining the title of your home, so make sure time doesn’t get away from you.
How To Participate in The Home Buyers’ Plan?
Sounds intriguing? Let’s see how you can participate.
Fortunately, the Home Buyers’ Plan eligibility requirements aren’t overwhelming. To qualify for the HBP, you must:
- Be considered a first-time home buyer
- Have written an agreement for buying or building a qualifying home (for yourself or a related person with a disability)
- Be a legal resident of Canada
- Have an RRSP with enough funds
- Have an intention to occupy a qualifying home as a principal residence within one year of buying or building it
To apply for the HBP, you’ll need to fill in the Home Buyers’ Plan form i.e. Form T1036. There, you will see all eligibility requirements on display and ensure you meet all the criteria before applying.
However, these general requirements are not the only ones you should know. In fact, the CRA has separate first-time home buyer qualifications. Namely, just because you’ve never bought a home previously doesn’t mean you’re a first-time home buyer.
Therefore, if you’re not a person with a disability or helping a related person with a disability, you must not have occupied a home that you or a spouse/common-law partner owned in the last 4 years to be eligible for the HBP.
But even if you don’t qualify as a first-time home buyer, you can still apply provided you have repaid all the money you’ve withdrawn from your RRSP for the Home Buyers’ Plan and meet all the other conditions.
Home Buyers Plan Repayment
Since the CRA isn’t giving you a house-warming gift, but sort of an interest-free loan, you’ll need to understand how HBP repayment works.
Firstly, to get a full picture of your account balance and know what’s in store, you can use the MyCRA mobile web app, by clicking My Account. Besides that, you can also obtain this information through the Represent a Client service.
Repaying Home Buyers’ Plan is a straightforward process best explained with an example. So, let’s say you make a Home Buyers’ Plan withdrawal of $20,000 for your new home. Since you must repay that amount within 15 years, you’ll need to make annual payments which equal the length of the repayment term divided by the withdrawn amount.
Therefore, by dividing $20,000 by 15 years, you get $1,333. This is the amount you’ll need to put back into your RRSP annually as contributions by designating them through the Schedule 7 Form. Although you’re obliged to begin repaying your loan 2 years after your first withdrawal, you can choose to start repayments earlier, which will reduce the amount owed for the first year.
Another thing you should note is to repay your HBP before the annual RRSP deadline. By doing so, the CRA will send you a Notice of Assessment along with a statement of account detailing:
- Be considered a first-time home buyer
- Have written an agreement for buying or building a qualifying home (for yourself or a related person with a disability)
- Be a legal resident of Canada
- Have an RRSP with enough funds
- Have an intention to occupy a qualifying home as a principal residence within one year of buying or building it
Moreover, it’s essential to note that HBP repayment doesn’t affect the deduction limits for your RRSP. Therefore, you can still contribute your HBP funds to your account, even if your limit is zero.
Can You Pay More or Less Than Your Repayment Amount?
Fortunately, you can pay back more than you owe annually. Consequently, you will reduce your overall yearly payments and have an easier time repaying the rest of your balance.
On the other hand, you can also contribute less than your required amount. However, in this case, the amount you haven’t repaid will be counted as RRSP income for that year and will be taxed accordingly.
Similarly, if you repay none of the required annual amount, you’ll have to include it as RRSP income.
Special Payment Situations
The CRA has also included some special repayment situations that apply to specific events in the participant’s life. Here’s what happens when:
A participant dies
If an HBP participant dies during the repayment period, their legal representative will be asked to include the HBP balance in the participant’s income for the year of death. However, if the deceased had a spouse or common-law partner, he/she can decide to make the repayments, thus waiving the income inclusion rule.
A participant reaches the age of 71
Since you cannot contribute to an RRSP after you turn 71, you won’t be able to make an HBP repayment from then on. Therefore, you can choose to:
- Repay all the remaining balance to your RRSP
- Make a partial repayment, so you’ll divide your balance by the number of years left in your repayment term, or
- Make no repayment, so you’ll pay income tax and benefit returns
Whatever you choose, ensure you’re thinking about the future and how much you’ll realistically be able to pay with your retirement income.
A participant becomes a non-resident
If you lose your Canadian residency after you’ve received your funds but before you’ve built or bought a home, you must either:
- Cancel your Home Buyers’ Plan participation or
- Repay a portion (or all) of the amount owed to your RRSP by December 31 of the year after withdrawing your funds and include the rest on your income tax and benefits return
If you lost your resident status before you filed for a return, you’ll have to pay your cancellation payments either by:
- December 31 of the year after the one you received your funds or
- The day you filed a return for the year you received your funds
Finally, if you become a non-resident after you’ve bought or built your home, you must either:
- Repay the remaining balance to your RRSP or
- Include the remaining balance as RRSP income for the year that you became a non-resident
Since all of this might be confusing, check out this detailed explanation from the Government of Canada, along with the required forms and publications.
Can You Cancel Participation in The Home Buyers’ Plan?
If you’ve decided you no longer want to participate in the Home Buyers’ Plan, I’ve got bad news for you. Namely, if you’ve met all HBP conditions and have already withdrawn funds from your RRSP, you cannot cancel your participation.
However, you still have a way out if you:
- Didn’t buy or build a qualifying home
- Became a non-resident before building or buying your qualifying home
Moreover, if you’re helping a related person with a disability and withdrawing funds for the same reason, you can cancel your participation if:
- The disabled person doesn’t buy or build a qualifying home
- You become a non-resident before the disabled person buys or builds their qualifying home
If you fulfill any of these requirements, you can freely cancel your participation and choose to repay the funds you’ve withdrawn thus far. That way, you won’t be taxed on your withdrawals.
Cancellation Due Date
If you’ve chosen to repay your Home Buyers’ amount, you must do so by December 31 of the year after the one in which you received the funds. So, if you received the money in 2021, you must pay it back by December 31, 2022.
How to Cancel Your Participation?
Unfortunately, cancelling your Home Buyers’ Plan participation can be a lengthy and confusing process. To ease your burdens, here’s a step-by-step guide on how to go about it:
- Make a cancellation payment to your RRSP
- Notify the CRA about the reason for your cancellation by writing a letter with a filled-out Form RC471, Home Buyers’ Plan (HBP) Cancellation no later than 60 days from December 31 of the year after the one in which you received your funds
- Attach the cancellation payment receipt to your letter or Form RC471
- Send both documents to the CRA’s physical address
Moreover, if you haven’t made an HBP repayment or a cancellation payment, you must include the funds you withdrew as income on your tax and benefit return.
For non-residents, it’s essential to note that cancelling your participation in the HBP is not possible. To discover what your next move should be, check out the special rules for non-residents above.
Pros and Cons of The Home Buyers’ Plan
General information aside, what will really help you make an informed decision on whether or not to participate in the HBP is a thorough pros and cons list, and we sure do love our lists!
Benefits of Applying for an HBP
Apart from the obvious financial advantage, what else is a shining beacon for the HBP? Let’s check it out:
- Two-year grace period that allows you to collect your money freely before making your first HBP repayment
- A pre-payment can be made at any time without penalties, which will result in a lower amount owed for the next years
- The Home Buyers’ Plan withdrawal isn’t considered a loan, so it won’t show up on your credit record nor will it incur any interest
- The HBP can increase your down payment significantly by providing you with funds of up to $35,000 (or $70,000 for couples), which will help you secure a better mortgage
Of course, depending on your situation, you may come across some other benefits that aren’t listed here. In that case, more power to you!
Drawbacks of Applying for an HBP
As the saying goes – every light has its shadow. Consequently, the HBP also has some negative aspects you should consider before applying, such as:
- Annual repayments are required starting from the second year, which depending on the amount you’ve withdrawn could lead to hefty yearly deposits
- The limited time frame to apply, since you must be a first-time home buyer and withdraw the money within the first year of purchasing your home
- Withdrawing funds from your RRSP can affect your retirement savings and investments, as you will need to repay all the funds you had taken out to avoid it being considered taxable income
As you can see, there are both pros and cons to participating in the Home Buyers’ Plan. Therefore, it’s important that you weigh all of your options before deciding if the program is right for you.
Finishing Thoughts
The Home Buyers’ Plan is a great way to help you save for your first home. However, it’s crucial that you understand all of the requirements before participating in the program to avoid any unnecessary financial burdens. In fact, I recommend speaking to a professional financial advisor to see whether this plan is right for you and how you can get the most out of it.
FAQ
Although you’re essentially removing funds from your retirement savings and forgoing any earned interest, the Home Buyers Plan in Canada reduced your mortgage payments and increases your down payment, which means you’ll be saving money.
The Home Buyers’ Plan is a program created by the Government of Canada that allows first-time homebuyers to withdraw up to $35,000 from their RRSPs to put towards purchasing or building their first home.
If you don’t repay the full amount for the year, it will be added to your income and taxed and your marginal tax rate, depending on your tax bracket.
Yes, you can use the HBP for a down payment on your first home, up to an amount of $35,000 from your RRSP savings.
ABOUT AUTHOR
When Angela combined her deep-seated love for linguistics with her growing interest for finance and money management, she struck a gold mine. She’s scoured the internet far and wide for all things related to money and finances, including payments, budgeting and investing. Now she’s eager to share her knowledge and skills with the world, determined to make it a better place. In her free time, she loves to read a good book.
