Get To Know the Canadian RRSP Home Buyers' Plan (HBP)

Canadian first-time homebuyers face some of the toughest challenges trying to enter the market as fixed and variable mortgage rates steadily climbed over the past year. Even though home prices have fallen from their peak, home ownership costs continue to prohibit many from seeking homeownership for the first time. If you’re a first-time homebuyer looking to optimize your savings toward a down payment, look no further than your Registered Retirement Savings Plan (RRSP). The Canadian government’s RRSP Home Buyers Plan (HBP) allows first-time buyers to borrow up to $60,000 from their RRSPs toward a down payment – completely tax-free. This Home Buyers Plan RRSP is a federal government program that allows Canadians to withdraw existing funds from a Registered Retirement Savings Plan (RRSP) to buy or build a home for themselves or a relative with a disability.

Key Takeaways

• First-time homebuyers can use the Home Buyers Plan (HBP) to withdraw tax-free up to $60,000 ($120,000 for couples) toward purchasing their first home.
• You have up to 15 years to repay the amount into your RRSPs, broken down into annual installments. 
• To withdraw funds under the Home Buyers Plan (HBP), you must hold the contributions in your RRSP for at least 90 days and complete form T1036 with the financial institution where your RRSP accounts are held.

Tell me: What does an RRSP Home Buyers’ Plan (HBP) entail?

The RRSP Home Buyers’ Plan (HBP) is a federal government program that enables first-time home buyers to take advantage of their Registered Retirement Savings Plan (RRSP) contributions. This plan allows a tax-free withdrawal to put toward the purchase of your first home. Under the HBP, you can withdraw up to $60,000 from your RRSPs tax-free to buy or build a qualifying home. If you plan to purchase with a spouse, you and your spouse can withdraw up to $60,000 each (up to $120,000 combined) under this plan. These funds can be used toward paying for anything related to the purchase, including your down payment, closing costs or home furnishings.

Typically, funds withdrawn from an RRSP would be subject to tax and considered taxable RRSP income at the time of withdrawal. However, with the RRSP first-time Home Buyers Plan, funds withdrawn are not considered income or taxed at withdrawal time. This money must be re-paid back into your RRSPs in minimum payment installments (1/15th of the total amount due each year) at tax time over 15 years. You also have the option to repay as a lump sum at any time as long as it exceeds the minimum repayment amount. If you don’t make your annual HBP minimum payment, this amount will be added to your taxable income for that year. There is a 2-year grace period where you do not need to make any repayments under this plan. 

To apply, complete Area 1 Part A of the T1036 “Home Buyers Plan (HBP) Request to Withdraw Funds from an RRSP” to determine eligibility. Your financial institution where your RRSP is held must then complete Area 2. After completion, the funds will be deposited into your bank account, and your financial institution will send you a T4RSP slip at the end of the year. This slip will confirm the amount withdrawn from your RRSP and act as the supporting document when you complete your tax return the following year. 

RRSP Eligibility 

To be eligible to use your RRSP funds under the Home Buyers’ Plan, you must meet the following conditions:

• You must be a Canadian resident when you withdraw the funds from your RRSP under the HBP and up to the time of a qualifying home is purchased or built.
• You must be considered a first-time home buyer.
• Funds must have been in your RRSP for at least 90 days before withdrawal for your homebuyer’s plan.
• You must have a written agreement to buy or build a qualifying home for yourself or a related person with a disability.
• You must intend to occupy the home as your principal residence within one year after purchasing or building. If the purchase or build is for a qualifying person with a disability, they must occupy the home as their principal residence.
• If you have participated in the HBP previously, you may be able to do so again if your HBP balance is 0 on January 1st of the year of withdrawal and you have met all other eligibility requirements.

You are considered a first-time buyer if you have not occupied a home you or your current spouse or common-law partner have owned in the past four years. This four-year period begins on January 1st of the fourth year before the year you withdraw funds and ends 31 days before the date you withdraw the funds. If you were to withdraw funds on February 28th, 2023, this four-year period would run from January 1st, 2019, to January 28th, 2023. The only exception to this consideration is if you have a disability or are helping a related person with a disability, you do not need to be considered a first-time buyer. However, the new home must be better suited for the needs of the disabled person than their current home. 

One major exception to these rules exists if you’re going through a separation and are living apart from your spouse. If you’re separated for at least 90 days in the calendar year of the withdrawal, then you can apply for a new RRSP withdrawal for a home purchase due to marital breakdown.

Here Are the Withdrawal Rules for First-time Home Buyers 

Under the Home Buyers Plan, you can withdraw up to $60,000 each (or $120,000 combined for couples):

• To put toward buying or building your first home or help a related person with a disability buy or build a home. 
• You can withdraw from any of your RRSPs as long as the total amount withdrawn doesn’t exceed the maximum. 
• Withdrawals must be made before buying or building your home or within 30 days of ownership.
• RRSP contributions must be held in your RRSP for at least 90 days before withdrawal under the HBP. 

What To Know When Repaying the RRSP Loan

When it comes time to make your first-time home buyer RRSP repayment, the amount withdrawn under the Home Buyers Plan Canada has a 2-year grace period (starting January 1st in the fiscal year the funds are withdrawn) during which you do not need to make any repayments. Once the grace period has ended, the funds must be paid back into your RRSP in installments over 15 years. 

Each year at minimum, 1/15th of the amount borrowed must be re-contributed until the HBP plan balance is 0. You can repay more than the minimum required to reduce the total HBP balance due in later years. To make a repayment, you must contribute to your RRSP in the year the repayment is due or in the first 60 days of the following year. Once a contribution is made, you can designate all or part of your contributions as a repayment. If you repay less than the minimum amount, the difference will be considered income and taxed at your marginal tax rate. 

Each year you will receive a statement of account from the CRA with your notice of assessment or notice of reassessment. This statement will include the amounts repaid so far, the remaining balance on your HBP, and the amount you have to contribute to your RRSP as the minimum repayment for the following year. Repayments under the HBP don’t affect your RRSP deduction limits.

What happens if you miss an RRSP Payment?

Failure to repay the required amount into your RRSP due for the year must be included in your income and taxed at your marginal tax rate. This means you may have to pay extra income tax at tax time. You would still be responsible for paying back the required amount to your RRSP under the HBP until the balance owed reaches 0.

Frequently Asked Questions

Below, we will review the top three most frequently asked questions first-time homebuyers may have when considering whether to use their RRSP for a down payment under the RRSP Home Buyers Plan (HBP). 

How do I benefit from the RRSP in Canada?

RRSP contributions in Canada are of great benefit as these contributions allow you to save a certain amount of money (based on 18% of your earned income in the previous year – noting that pension plans will reduce your RRSP limit) each year tax-free. Another benefit is that by contributing to an RRSP, you are reducing your current year’s income amount – and the income tax you must pay – all while saving for retirement. 

Is the RRSP or TFSA a better option?

RRSP and TFSA accounts are useful savings tools. The difference between the two is that RRSP accounts are used mainly for retirement savings – deferring your taxes until later years when your income is expected to be lower. RRSPs reduce your taxable income and are only taxed when funds are withdrawn. TFSA accounts can be used to save for any future uses, and while the savings do not reduce your taxable income, withdrawals are tax-free.

At what age can I withdraw from my RRSP?

There are no age limits to withdraw from your RRSP account as long as the funds are not part of a locked-in plan. However, the age to contribute to your RRSP depends on the eligible age to be employed in your province.

Wrapping it up 

The Home Buyer’s Plan is an excellent incentive for first-time home buyers looking to use already saved funds toward a down payment. The HBP in Canada can help you achieve a larger down payment faster than traditional savings, as there is the added benefit of tax savings on income when contributing to an RRSP. However, it’s essential to remember that this program works more like a loan from yourself with conditions attached in terms of repayment options. Knowing the plan’s benefits, eligibility rules, and limitations can help prepare you to be one step closer to your homeownership goals.