Home Buyers Plan – RRSP Withdrawal Benefit for First Time Home Buyers

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In this write up we will try to get clarity around one excellent instrument for First Time Home Buyers given by Canada Revenue Agency. And this often gets ignored due to poor planning around first home purchase. If you are a first time home buyer government provides RRSP withdrawal plan (Home Buyers Plan – HBP), this withdrawal can be used to contribute towards your down payment for your home.

Main Prerequisite:

• You must be a Canadian Resident at the time of withdrawal
• The money should have been deposited in the RRSP at least 89 days before withdrawal under HBP
• You or your spouse didn’t owned a home in last 4 years for e.g. if you sold your previous home in 2011, you would be eligible for HBP in 2016.
• Withdrawal from RRSP under this program should be done within 30 days of buying the home.
• If you have used HBP earlier, there should not be any balance left for repayment.
• Finally, you should have a written agreement to buy the home.

Benefit:

The money withdrawn for the down payment of your home is completely tax deductible for tax filing of that year. Essentially, this can be viewed as an interest free loan which you take from your RRSP funds.
There is also a withdrawal limit of up to 25,000 per person, so a couple can at a maximum withdraw 50,000 from their RRSP and contribute towards home purchase.
This benefit in withdrawing your own RRSP money comes in handy to ensure that you can accumulate your 20% down payment and avoid the mortgage default insurance premium while securing mortgage from financial institution.

Repayment: You have 15 years to pay back the money into your RRSP, it has to be repaid with minimum of 1/15th of the amount you withdrew annually and completed in 15 years. You can repay in full before 15 years if you so desire. The repayment starts second year after the year you withdrew the funds from your RRSP under this program.

Also, it would be pertinent to note that your RRSP deduction limit is not affected by HBP.

Repayment Example:

Suppose you withdrew 15,000 under HBP from your RRSP account for home purchase in Jan 2016, below chart will indicate how the payments per year will be scheduled and when they start, including scenario how future payments would be affected if you pay extra in a given year to make it clear.

Year2018201920202021
Annual Repayment Amount$1000$1000$1000$9000 / 12 = $750
Repayment Made in the Year$1000$1000$4000$750
Explanatory NotesRepayment starts 1 year after the withdrawal year (2016)Repayment amount is withdrawn amount divided by 15.Extra payment done; this will reduce annual amount of remaining payments. Due to extra amount repaid in 2020, the repayment amount reduced to (Rem Bal / Rem Years)

Application: Completion of form T1036 to withdraw funds from RRSP issuer.

References:

CRA – Home Buyers Plan

T1036 Form – HBP Request to Withdraw Funds from an RRSP