RRSP 303: First-Time Homebuyer’s Toolbox: RRSP Home Buyers’ Plan (HBP)

Key Points:

1. The RRSP Home Buyers’ Plan (HBP) is a Canadian government tax program that allows first-time homebuyers to withdraw up to $35,000 from their RRSP for the purpose of buying a home.
2. To qualify for the HBP, individuals and their spouses or common-law partners cannot have owned a property in the past four years.
3. The withdrawn amount must be repaid into the RRSP account within the specified repayment period. Failure to repay on time results in the shortfall being treated as RRSP income for the year.

What is the RRSP Home Buyers’ Plan (HBP)?

The RRSP Home Buyers’ Plan (HBP) is a tax program offered by the Canadian government designed to assist first-time homebuyers in realizing their homeownership dreams. This plan permits eligible individuals to withdraw a specific amount from their Registered Retirement Savings Plan (RRSP) for the purpose of purchasing a property, with the option for this withdrawal to be tax-free under certain conditions. In this article, we will delve into the eligibility criteria, withdrawal limits, repayment terms, and provide tips on utilizing this plan to ensure you have a comprehensive understanding of its various facets.

Who Qualifies for the HBP Plan?

To be eligible for the HBP, you must meet the definition of a first-time homebuyer. As per the guidelines set by the Canada Revenue Agency, you and your spouse or common-law partner must not have owned a property in the past four years. The calculation for these four years starts from January 1 of the fourth year before the year in which you make the RRSP withdrawal for your home purchase, ending 31 days before the withdrawal. For instance, if you withdraw funds for a home purchase on July 31, 2022, the four-year period would be from January 1, 2018, to June 30, 2022.

Withdrawal Limits and Tax-Free Conditions

The RRSP HBP allows you to withdraw a maximum of $35,000 from your RRSP for the purchase of a qualifying property. This withdrawal will be tax-free if you can repay this amount into your RRSP account within the specified repayment period. If you and your spouse or common-law partner are purchasing a home together, you can collectively withdraw up to $70,000.

Strategy: 

If you can also meet the eligibility criteria for the First Home Savings Account (FHSA), the HBP and FHSA can be used simultaneously. This means that even if your FHSA generates no investment returns, you can combine up to $75,000 Canadian dollars for the purchase of a qualifying property (which includes $40,000 from the FHSA and $35,000 from the RRSP HBP). If you consider this jointly with your spouse, the maximum amount can even be $150,000.

Repayment Period for the HBP

You have up to 15 years to repay the amount withdrawn from your RRSP through the HBP. The repayment period begins in the second year after you initially withdraw funds from your RRSP for the HBP. For example, if you withdraw funds in 2023, your first-year repayment will commence in 2025.

Strategy:  

If you are not in a hurry to withdraw funds for a home purchase at year-end, you can consider waiting until the early following year to make the withdrawal, thus delaying repayment by one year.

What Happens If You Cannot Repay the HBP on Time?

If the amount you repay less than required for a year,  the shortfall will be considered as RRSP income for that year. You will need to report this income and pay the corresponding taxes. However, if you repay more than required for a year, the remaining HBP balance for the subsequent years will reduced.

All in all, the RRSP Home Buyers’ Plan (HBP) provides a beneficial tax opportunity for first-time homebuyers, making it easier for them to purchase a home. However, like any tax plan, understanding the rules, eligibility criteria, and repayment requirements of the HBP is crucial. Before using the HBP for a home purchase, it is strongly recommended to consult a tax professional to ensure you make informed decisions and comply with the plan’s regulations.

For detailed information about this plan, please visit the official website of the Canadian government: What is the Home Buyers’ Plan (HBP)?

For more RRSP-related articles, please visit our RRSP Registered Retirement Savings Plan Guide.

Published Date: October 24, 2023

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