Some Canadians believe they will never be able to afford a home because they do not have a lot of money in a liquid savings account. If, however, you have a Registered Retirement Savings Plan (RRSP), you can tap into your retirement funds for a home purchase without sacrificing any tax advantages. On this, the best site for mortgage rates in Canada, we have put together this RRSP Home Buyers’ Plan guide to help you understand how to take advantage of this innovative plan for the RRSP first-time home buyer. Consult this guide, and consider using your RRSP to pay for part of your mortgage when you click on the interest rates elsewhere on this site and apply for a loan.
The RRSP Home Buyers’ Plan, also known as the HBP or Home Buyers’ Plan, is a program the Canadian government instituted to make it easier for people to buy a home in Canada. Under this plan, Canadians can borrow up to $25,000 from their individually owned RRSP to put toward a home purchase. To qualify for this program, you must meet some guidelines that are outlined in the next section.
In most cases, withdrawals from your RRSP plan must be counted as income, and you will be taxed accordingly. Qualified withdrawals under the HBP, however, are tax free, providing a cost effective way to access money for a new home. It should be noted, however, that the funds you withdraw need to have been in your RRSP for at least 90 days prior to the withdrawal. Otherwise, you will lose the normal tax deduction on your RRSP contributions.
Not every citizen of Canada qualifies for the RRSP Home Buyers’ Plan. In order to take advantage of the HBP, non-disabled persons must meet the following conditions:
• Have a written agreement to purchase or construct a home for your own use or for a disabled relative, or have a written agreement to help a disabled relative buy a home of his or her own.
• The home you purchase must become your principal place of residence or the principal place of residence for your disabled relative within one year of completing the home purchase or construction.
• Any existing HBP balance must be zero on January 1 in the year that you take the RRSP withdrawal. (You can take advantage of the HBP program more than once as long as you pay off your balance before accessing your RRSP funds again.)
• You must be a first-time home buyer. This means that neither you, your spouse nor your common-law partner can have owned a home as the principal place of residence within the four years that precede the home purchase for which you hope to qualify as an RRSP home buyer under HBP guidelines.
If you have a disability or are buying the home for a disabled relative, you or the relative do not have to be a first-time home buyer if the new home is more accessible to the disabled individual or a better fit for his or her needs.
In addition to meeting the above conditions, there are certain rules that must be followed to actually withdraw the money from your account:
• Your withdrawal amount, whether done at once or over several installments, cannot total more than $25,000.
• You must be a Canadian resident.
• You must complete Form T1036 for every withdrawal that is eligible under this plan.
• All withdrawals must be made within the same calendar year, so you cannot stretch out withdrawals over several years.
• You, your spouse, your common-law partner, or your disabled relative cannot have owned the home prior to 30 days before the date on which the withdrawal is made.
Your withdrawal from your RRSP to buy or build a home is not considered free money but rather a loan that you must be repaid entirely within 15 years of your withdrawal. Each year, you must pay at least 1/15 of the amount you withdrew from your RRSP, otherwise, you will have to include that portion of your withdrawal in the income section of your tax return (on line 129). This eliminates any tax deduction advantages you gained by choosing the RRSP Home Buyer option, so you should make the proper payment every year. The latest a payment will be counted for a calendar year is 60 days after the calendar year for which the payment has been designated.
You must begin repaying your RRSP withdrawal the second year after you take money out of your plan. Also, you must indicate how much you have paid back to your RRSP balance each year on Schedule 7 of your income tax return (on lines 245 and 246). This filing requirement must be met whether or not you are otherwise required to file an income tax return.
You can pay more than 1/15 of your RRSP withdrawal balance during any year in which you are repaying the loan. In such cases, the minimum amount you will be required to pay toward your loan in successive years will decrease. During the repayment period, the Canada Revenue Agency will send you a Home Buyer’s Plan (HBP) Statement of Account that indicates your current HBP balance, the amount you repaid in that year and how much you will have to repay to your RRSP in the following year.
According to RRSP first-time home buyer rules, if the HBP participant dies before all the money is repaid to the RRSP, the legal representative of the deceased person must count as income on the dead person’s tax form the amount that was not paid to the RRSP in the year he or she died. If the spouse or common-law partner makes the repayment in conjunction with the agreement of the deceased individual’s legal representative, this income rule does not apply.
If you become a nonresident of Canada during the HBP repayment period, you will have to either include the remaining balance in your income for the year you gave up residency or repay in full the balance before you file your tax return for that year or within 60 days after becoming a non-resident.
Since you cannot contribute to an RRSP once you turn 71, there are rules that apply if you reach that age during the repayment period. In the year you turn 71, you can either repay your balance in full; make a payment, divide the remaining balance by the number of years left in the term, and include the resulting amount as income in each of the remaining years of the term; or you can make no payment when you turn 71, divide the balance by the number of years remaining in your term, and count the resulting amount as income in each successive year.
One final option under the RRSP Home Buyers’ Plan is to hold your mortgage in your RRSP. Essentially, you are investing in yourself with this option. If you have enough money in your RRSP to cover your total home purchase, you basically lend the money to yourself and pay it back with interest over time. You will need to contact a lender who can set this up for you, but you can decide the interest rate you will pay, your amortization period and so on. Ultimately, you get a fixed rate of interest on the principal that you borrow from yourself because you are returning the money, with interest, that you borrowed from your RRSP. Instead of sending mortgage payments to the bank, you pay them to yourself.
The advantage of this option is that you are guaranteeing yourself a set rate of return on part or all of your RRSP funds. Another advantage is that rather than throwing money away on interest payments to your lender, you are paying it to yourself. Finally, by holding your mortgage in your RRSP, you are getting a low risk investment with a guaranteed return. After all, regardless of the down payment you can put together, you must get CMHC mortgage insurance that will cover any principal loss whenever you hold your mortgage in your RRSP.
Aside from the extra money you have to spend on mortgage insurance even if you have a 20 percent down payment when you hold your mortgage in your RRSP, there are several other disadvantages to this investment. Banks charge substantial fees of $1,000 or more to set up this investment vehicle. You are also locking a large part of your investable funds into a fixed-rate investment product, which may diminish your capital growth over time.
There are other advantages and disadvantages of holding your mortgage in your RRSP, but the key thing to remember is this: Make sure that you analyze the pros and cons of this option carefully before you sign on to it.
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