Practical Relief For First Time Homebuyers
The Home Buyers Plan is a government sponsored program that gives opportunity for first time homebuyers to withdraw a maximum of $25,000 tax free to purchase their first home. The amount will be repaid for a period of 15 years. Since the tax refund have already been received when the funds were initially infused to the RRSP, no refund will be received once the amount is paid back.
You are entitled to draw from your RRSP up to a maximum amount of $20,000 under this Plan if you don’t own the home that you are currently in for the past 5 years. Your spouse is also entitled to the same amount provided that she meets the same requirements. This means that you and your spouse are entitled to borrow a maximum amount of $40,000.
You must fill out Form T1036 and submit the accomplished form to your financing company. It is essential that you use this form when withdrawing the fund under the Home Buyers Plan; otherwise the withdrawn amount will be subject to tax. You are given a year from the date of receipt of the funds to complete the home purchase and another year thereafter for you to move into your new home and make it as your main residence.
The withdrawn amount is a no-interest loan and you will be required to return within 15 years by paying annually 1/14 of the withdrawn amount starting on the second year from the date of release. If you are not able to make the purchase or make the home your primary residence within the prescribed period or fail to repay the amount you withdrew from your RRSP, then the amount will be considered as your increased income which is subject to tax.
Coupled with sufficient preparation, first time homebuyers will be able to use this fund to finance their home purchase. For most of these homebuyers, the Plan provides great opportunity to raise the needed funds to make the purchase of their first home while reducing the amount of debt that they have to pay. An ideal option to get the maximum benefit from this program is to infuse current savings into the RRSP and the use the tax refund to pay off existing credit.
For instance, with a $14,000 savings which you can infuse into your RRSP, you are entitled to a $4,500 tax refund. You can use the tax rebate to pay off existing debt and use the same amount as down payment once you decide to purchase your first home. You will then have to pay $934 annually for 15 years. You may also opt to pay more than the required amount each year and this will in turn reduce the amount that is available for tax rebates by an even amount of $1,000. This can then be credited to your annual repayments. On the other hand, if both your TFSA and RRSP contributions are maxed out but still have some savings left, then you can add to your current annual repayments of $1,000.
Viability of the Home Buyers Plan
This special privilege given to first time homebuyers to utilize their RRSP tax free to make the purchase of their dream home is probably the best option when you really want to buy your their dream home but don’t have enough equity. The only downside of this option is you are missing out on the earning opportunity that RRSP provides if your money remains intact. However, the appreciation in the value of your home over time is usually more than enough to offset the missed earning opportunity.
Learn how to sell your own house here: For Sale By Owner.
If you’re looking to buy a home from an FSBO listing check here: FSBO Listings.
Home Buyers Plan FAQ:
Question: Define “principal place of residence” in Canada to qualify for the Home Buyers Plan.?
I am a first time home buyer. I bought a house this year. I stayed there for 10 days and rented it out. Am I qualified as a first time home buyer based from the rule “principal place of residence”?
Answer: Your “Principal” place of residence is where you reside at least 9 months out of the year. It is not rented or occupied while you are not there. All utilities are in your name and you receive your mail at that address (exception made for PO Box).
Question: How does Home Buyers Plan affect my Tax Filing?
I purchased a home in July using the Canadian RRSP Home Buyers Plan. Lets say, for example purposes, I withdrew $10,000 from my RRSP to purchase my home. For the entire year I also made deposits to my RRSP bi-weekly $100 dollars, for a total of $2600. How will withdrawing the $10,000 from my RRSP affect my Tax Filing this year? Normally the $2600/year I deposit to my RRSP generates me a nice little tax credit. Will I see the same tax credit this year even though I withdrew from my RRSP, or will I not see any credit now that I’ve used the Home Buyers Plan?
Answer: The $10,000 that you withdrew is not taxable income, however you will receive a T4RSP slip from your financial institution showing an amount withdrawn for the Home Buyer’s Plan. This needs to be reported on Schedule 7 of your tax return.
If you withdrew in 2009, your first required repayment for the HBP will be in 2011, and the required amount will be 1/15th of the total amount withdrawn, or $666.66.
Let’s assume that you will continue to put $100 bi-weekly into your RRSP for the next few years. When it comes to the $2,600 you put it, you have a choice. You can take the deduction for the whole amount, or you can designate some of it as a repayment to the Home Buyer’s Plan if you wish to start paying it back early. For 2009 and 2010, this will be your choice. Starting in 2011, you will have to designate at least $666 as a repayment to the HBP, and the remaining $1,934 can be used as a deduction.
Question: If I buy RRSP today, when is the earliest time I can withdraw the fund for (first) Home Buyers Plan?
Answer: You can safely take the money (up to 25K) out of the RRSP via the HBP after 90 days if you make a contribution today.
Question: How to pay back withdrawals for home buyers plan?
Back in 2006 my wife and I both withdrew $20,000 each to purchase a house. We have made several rrsp payments but have never designated any payments back to the home buyers plan via the schedule 7. We just filed our return and thought the quicktax program would bring this up somehow but it didn’t. So we just filed. What’s going to happen next year? I’m assuming we will get dinged somehow for this. How will I see this and what will I owe? And next year how can I use quicktax to designate part of the rrsp’s towards home buyers plan.
Answer: Go to your bank and have them take out whatever you can afford monthly to repay the RRSP. Make sure the money goes into the Home Buyers account so that it shows up at income tax time next year. You would be best suited to speak with your bank about this.
Question: Home Buyers Plan (Canada)?
Are there restrictions on what you can spend the RRSP withdrawn amount on? (ie. down payment, renovations, furniture, things unrelated to home)
Answer: There are conditions attached to the Home Buyers Plan. For details on what the conditions are you should read the CRA website. It does not state that funds can be used other than to buy or build a qualifying home. You may want to contact CRA to clarify.
Question: Can I use the RRSP Home Buyers Plan (HBP) if I intended to buy a home and then rent it out?
Answer: You are required to move in and occupy the home under the HBP, however you will have to check with CRA if there is a minimum amount of time that you need to occupy the home.
You can only withdraw up to $25,000 from your RRSPs, but you are not required to use any of it for a down payment. If they determine you have not met the qualifications, they will assume the cashed RRSPs as income, and you will need to pay tax against it.
Question: RRSP Home Buyers Plan Help?
I had a wife and took out RRSP loan to buy a house but we recently got divorced. I have messed up my finances for 10 years but not in hock. I don’t know how to pay back the RRSP loan. Bank holds RRSP portfolio, not large but could pay off loan. I soon will have severance pay that I will be able to roll over to RRSP. Could I get another RRSP Loan and buy a tiny house for just me and kids (no wife)?
Answer: When you take out an RRSP under the Home Buyer’s Plan, you start paying it back after two years. When you get your notice of assessment after filing your taxes, it will show you how much you are required to pay back each year. You then designate a portion of your RRSP contributions to pay that amount back (when you file your taxes). It gets added to your income.
You will not be able to take out another HBP loan since it is for first time home buyers only. If you withdraw that amount from your RRSP’s you will be taxed on it as income.
Question: Can I buy a rental property using my RRSP (under the 1st time buyers plan)?
I’m looking to purchase a fourplex or sixplex. Is a rental property eligible real estate under the first time home buyers plan?
Answer: Yes, as long as you will be living in the rental property (your primary residence).