Affording a home can be challenging when are you are a first-time buyer. To lend people buying a home a helping hand, as of 2019, the federal government lets home buyers borrow up to a maximum of $35,000 from their RRSPs.
When borrowing money from your RRSP under the HBP, it is important to follow the repayment rules. Otherwise, the withdrawals are added back to your income. Start repaying the withdrawals in the second year after your initial withdrawal, but make sure you qualify before you actually withdraw anything from your RRSP; there are several conditions you must meet.
What Is the Home Buyers’ Plan?
The HBP is a program to assist first-time home buyers with financing the purchase of a property. Under the HBP, you can borrow a maximum of $35,000 from your RRSP in a single tax year.
To participate in the HBP, you must meet the following conditions:
- Be a first-time home buyer.
- Enter into a written agreement to purchase or construct a qualifying home for yourself or a person with a disability.
- Plan to designate the home as your principal residence no longer than a year after purchasing or constructing your home.
- Be a Canadian resident.
- Make all RRSP withdrawals in the same tax year.
You cannot withdraw funds from a locked-in RRSP (i.e., from your former employer’s pension plan). If you previously participated in the HBP, your previous balance must be at zero by Jan 1 in the year you plan to participate again.
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Repaying Home Buyers’ Plan Withdrawals
You have 15 years to repay withdrawals made from your RRSPs under the HBP starting two years after the withdrawal.In each tax year, repay one-fifteenth of the total amount borrowed until your full amount owed is paid back to your RRSPs. For the full withdrawal amount of $35,000, the yearly payment is $2,333.33.
Repayments for the HBP are made with contributions to your RRSP in the year of the repayment or 60 days in the following tax year. After you make your RRSP contribution, choose to count all or a portion towards repayment under the HBP.
You cannot use the contributions you made to a spousal RRSP account amount to pay for the HBP. This amount is considered the spouse’s fund. Similarly, you cannot use contributions made by your spouse to your spousal RRSP account. The only eligible contributions are the ones you made to your own RRSP account.
To designate your RRSP contributions as a repayment under the HBP, fill out lines 24500 Schedule 7 to report the RRSP you have contributed or unused from previous years. Then, fill line 24600 with the amount you wish to transfer to the HBP repayment. Make sure to designate the amount to the HBP in schedule 7, otherwise, your RRSP contributions do not count as a repayment; the HBP amount is added back as taxable income and you lose this RRSP room forever.
You can contribute extra every year to reduce future payments’ amounts. For example; if you withdraw the full $35,000 and paid $4,000 in the first year, the next 14 payments will be reduced to: ($35,000 – $4,000) / 14 = $2,214.29.
However, if you fail to make a contribution in any year, it doesn’t increase the future payments’ amounts. The missing payment will be added to line 12900 of your income tax return as an RRSP income. Then, future payments will not be changed.
Keeping Track of the Home Buyers’ Plan
The CRA sends you the Home Buyers’ Plan Statement of Account every tax year along with your Notice of Assessment. This statement displays your total withdrawals under the HBP, how much you have repaid, your outstanding balance, and how much you can contribute to your RRSPs to repay the next tax year.
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