|Using RRSP to Purchase a Home|
First time home buyer? Don't forget about the RRSP Home Buyers' Plan. It can be all or part of your down payment. The rules have changed in recent years, so if you think you know them, double check here!
What is the Home Buyers' Plan?
The HBP is a federally instituted government program that allows you to withdraw up to $20,000 from your registered retirement savings plans (RRSPs) to buy or build a qualifying home. The home can be for yourself or it can be for a related disabled person if it is more accessible to that person than his or her current home, or is better suited to that person's needs.
You do not have to include eligible withdrawals in your income, and your RRSP issuer will not withhold tax on these amounts. You can withdraw a single amount or make a series of withdrawals throughout the same year, provided the total of your withdrawals is not more than $20,000. If you buy the qualifying home together with your spouse or common-law partner, or other individuals, each of you can withdraw up to $20,000.
You have to repay all withdrawals to your RRSPs within a period of no more than 15 years. Generally, you will have to repay an amount to your RRSPs each year until you have repaid all the amount you withdrew. If you do not repay the amount due for a year, it will be included in your income for that year.
Keep reading to learn more!! And remember, whether you have RRSP savings or no RRSP savings, the HBP can be applied to you!!
Benefits from using the Home Buyers' Plan.
The utilization of your RRSP's within the guidelines of the HBP results in benefits that are quantifiable immediately and extend over the long-term:
Who can participate in the HBP? And how many times?
You can participate in the HBP more than once in your lifetime if:
If you are disabled you may be able to participate in the Home Buyers' Plan to buy or build a more accessible home. You may also be able to participate in the HBP for someone else if:
How does it work? No penalties
Under the "HBP", Revenue Canada permits you to use your RRSP funds towards the
a. No penalty for withdrawal
b. Subject to restrictions
Summary of conditions for participating in the HBP.
A number of conditions have to be met to participate in the HBP. While some conditions have to be met before you can withdraw funds from your RRSPs, others apply when or after you receive the funds.
The following chart lists all the HBP conditions and who has to meet them in different situations.
Situation 1 -
Situation 2 -
Situation 3 -
Situation 4 -
You are not considered to be a first time homebuyer if, at any time during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal, you or your spouse owned a home that you occupied as your principal place of residence.
Establishing an RRSP with borrowed funds for a tax refund
The "HBP" permits an individual to establish an RRSP with borrowed funds, and then use the resultant tax refund for a down payment. In this scenario:
These funds re considered as an acceptable source of down payment provided that:
1. The tax refund is in the individual's hands at the time of closing.
Managing Tax Refunds
The government does not monitor the funds that are withdrawn from RRSP's for the purposes of the HBP. Therefore, providing that an individual has qualified as a buyer and has purchased a qualifying home, they may do whatever they desire with the money. Furthermore, the income tax refund received may be used in whatever manner decided, such as:
The more debt you are able to pay off, the less in monthly expense obligations you will have. This will ultimately put you in a much better financial position.
What else should you know?
The Home Buyers' Plan enables you to borrow money to top up your RRSP plan using accumulated RRSP eligibility limits. If your tax assessment notice indicates you are eligible for $18,000 in contributions in the current year, and you already have $4,000 in a self-directed plan, you are allowed to borrow subject to credit approval the $16,000 to buy the RRSP required to bring you up to the $20,000 Home Buyers' Plan limit.
Then you can claim the eligible deduction against your current year's income in order to get a large tax rebate. You can use the amount of tax you're paying each year is an important factor. If the $16,000 deduction in this example results in a $5,000 tax rebate, it can be used as you see fit. If, on the other hand two partners each earning $80,000 per year take their maximum RRSP of $20,000 each in the current year, they could net a total of $15,000 or more in a tax rebate.
You are then allowed to withdraw up to the $20,000 maximum from the RRSP 90 days after topping up or creating the plan, subject to the re-deposit requirements described above.
If you're planning to borrow the money for the maximum RRSP, you could end up disqualifying yourself for a mortgage because your monthly payments will be too high. Your "total debt servicing ratio" the proportion of your gross income required to service both the home related costs and other monthly obligations may exceed the usually acceptable monthly maximum of 42%. Another $600 per month could well make the difference in whether or not you'll qualify for a mortgage.