Home Buyers’ Plan (HBP) in Canada: RRSP to Home Ownership

The RRSP Home Buyers’ Plan (HBP) allows eligible Canadian first-time homebuyers to access additional funds that can be used for a down payment, helping to improve home affordability.

In this guide, we will cover everything you need to know about the RRSP Home Buyers’ Plan to help you determine if tapping your RRSP is the right strategy as you embark on your home-buying journey.

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

The RRSP Home Buyers’ Plan (HBP) is a Canadian government program that allows first-time homebuyers to withdraw funds from their Registered Retirement Savings Plan (RRSP) to purchase or build a qualifying home. The HBP enables individuals to borrow up to $60,000 tax-free from their RRSP, which can be used towards the down payment or other expenses related to buying a home.

As of April 16, 2024, the HBP withdrawal limit has increased from $35,000 to $60,000 per individual, providing additional support for first-time homebuyers in Canada. This increase aims to address the rising costs of homeownership and help more Canadians achieve their dream of owning a home

Who Qualifies for the Home Buyers’ Plan?

To participate in the Home Buyers’ Plan, you must meet the following eligibility criteria:

First-Time Homebuyer Status

To qualify for the HBP, you must be considered a first-time homebuyer, meaning neither you nor your spouse or common-law partner have owned a home you occupied as a principal residence in the last 4 years.

The HBP is intended to help first-time buyers who have not previously owned a home. If you have owned it before, but it has been over 4 years, you may still qualify.

Canadian Residency Status

You must be a resident of Canada at the time funds are withdrawn from your RRSP under the HBP as well as when you buy or build your qualifying home.

Written agreement

You must have a written agreement to buy or build a qualifying home for yourself or a related person with a disability.

The type of home can include detached, semi-detached, townhomes, condos and apartments. Cooperative housing arrangements may also qualify with some exceptions. Secondary homes like cottages do not qualify under the HBP rules.

Disability exceptions

If you or your spouse or common-law partner are eligible for the disability tax credit, you may be exempt from the first-time home buyer requirements.

Additionally, suppose you are purchasing a home for a related person with a disability. In that case, you and other eligible relatives can access the HBP even if you do not qualify as a first-time buyer.

How much can you withdraw with the HBP?

Under the updated HBP rules 2024, eligible individuals can withdraw up to $60,000 from their RRSP tax-free to purchase or build a qualifying home. For couples, each individual can withdraw up to $60,000, allowing for a combined total of up to $120,000 towards purchasing a home.

To be eligible for withdrawal, the funds must have been in your RRSP for at least 90 days before the withdrawal date. This rule, known as the “90-day rule,” ensures that the funds are part of your retirement savings and not simply deposited for immediate withdrawal under the HBP. [Source]

HBP Withdrawal Limits	Before April 16, 2024	As of April 16, 2024
Individual	$35,000	$60,000
Couple (combined)	$70,000	$120,000

What are the repayment rules for the HBP?

When you withdraw funds under the Home Buyers’ Plan, you essentially borrow from your retirement savings. As such, you must repay the full amount into your RRSP within 15 years, following specific repayment rules:

1. Repayment period: Your repayment period begins the second year after the year you made your first HBP withdrawal. For example, if you withdrew funds in 2024, your repayment period would begin in 2026.
2. Annual repayment minimum: Each year, you must repay a minimum of 1/15th of the total amount you withdrew. For example, if you withdrew $60,000, your annual repayment would be at least $4,000 ($60,000 ÷ 15).
3. Repayment schedule: You must make your repayments by the annual deadline, typically 60 days after the end of the calendar year. Repayments are made by contributing to your RRSP and designating the contribution as an HBP repayment on your tax return.
4. Tax implications of missed repayments: If you do not make the minimum repayment in a given year, that amount will be added to your taxable income for that year. This means you must pay income tax on the amount not repaid based on your marginal tax rate.
5. Lump-sum repayments: You can repay more than the annual minimum, which will reduce your outstanding HBP balance and lower your future annual repayment amounts.
6. Delayed repayment start date: For HBP withdrawals made between January 1, 2022, and December 31, 2025, the repayment period start date has been delayed by an additional three years. This means you will have five years before you need to begin making repayments on these withdrawals.

HBP Repayment Example	Amount
Total HBP withdrawal	$60,000
Annual repayment (1/15th)	$4,000
Repayment period	15 years

Understanding and following the HBP repayment rules is crucial to avoid adverse tax consequences. By repaying your HBP withdrawals on time, you can restore your retirement savings and continue to benefit from the tax-deferred growth within your RRSP.

What are the pros and cons of using the HBP?

Before deciding to use the Home Buyers’ Plan, it’s essential to consider both the advantages and disadvantages of the program.

Pros of the Home Buyers’ Plan

There are 3 main benefits of the HBP

1. Increased affordability: By allowing you to access up to $60,000 tax-free from your RRSP, the HBP can significantly increase your down payment, making homeownership more affordable.
2. Tax-free loan: The HBP essentially functions as an interest-free loan from your own retirement savings. As long as you follow the repayment rules, you can use these funds to purchase your home without incurring any tax penalties.
3. Flexibility: You can withdraw funds from multiple RRSP accounts and make multiple withdrawals within the same calendar year, providing flexibility in how you access your savings.

Cons of the Home Buyers’ Plan

There are also 4 drawbacks of using the HBP that homebuyers need to consider

1. RRSP savings requirement: To take full advantage of the HBP, you need to have sufficient funds in your RRSP. If you have not been contributing regularly to your RRSP, you may not have enough saved to significantly impact your down payment.
2. Impact on retirement savings: By withdrawing funds from your RRSP, you are reducing the amount of money that can grow tax-deferred for your retirement. This may impact your long-term retirement savings goals, especially if you cannot repay the funds as required.
3. Strict repayment rules: The HBP has specific repayment requirements, which must be followed to avoid tax penalties. If you are unable to make the required repayments, the amount not repaid will be added to your taxable income for that year.
4. Eligibility restrictions: The HBP is only available to first-time homebuyers or those who have not owned a home in the previous four years. If you do not meet these eligibility requirements, you cannot participate in the program.

Ultimately, the decision to use the HBP depends on your financial situation, retirement savings goals, and homeownership aspirations. It’s essential to carefully consider the pros and cons and consult with a financial advisor to determine if the HBP is the right choice for you.

Can you combine the HBP with other homebuyer incentives?

Yes, the Home Buyers’ Plan can be combined with other Canadian homebuyer incentives to further support your home purchase. Some popular programs that can be used in conjunction with the HBP include:

1. First-Time Home Buyers’ Tax Credit (HBTC): The HBTC is a non-refundable tax credit that provides first-time homebuyers up to $1,500 in tax relief.
2. GST/HST New Housing Rebate: If you are purchasing a newly constructed home, substantially renovating an existing home, or rebuilding a home destroyed by fire, you may be eligible for a rebate of some of the GST or HST paid on the purchase price or renovation costs.
3. First Home Savings Account (FHSA): The FHSA is a new tax-advantaged savings account designed specifically for first-time homebuyers. Contributions to an FHSA are tax-deductible, and withdrawals for a qualifying home purchase are tax-free. You can contribute up to $8,000 per year to an FHSA, with a lifetime contribution limit of $40,000.

Combining the Home Buyers’ Plan with one or more incentives can reduce upfront costs, lower monthly mortgage payments, and make homeownership more attainable. Research each program thoroughly and consult with a financial advisor or mortgage professional to determine which combination of incentives best suits your needs.

What happens if you don’t meet HBP conditions?

If you participate in the Home Buyers’ Plan but fail to meet certain conditions, you may be required to cancel your participation and face tax consequences. Some situations that may lead to HBP cancellation include:

1. Failure to purchase or build a qualifying home: If you do not purchase or build a qualifying home by October 1st of the year following your HBP withdrawal, you may be required to cancel your participation.
2. Becoming a non-resident of Canada: If you become a non-resident of Canada after making an HBP withdrawal but before purchasing or building your qualifying home, you may need to cancel your participation.
3. Using HBP funds for other purposes: If you use your HBP funds for purposes other than buying or building a qualifying home, you may be required to cancel your participation.

If you need to cancel your HBP participation, you must:

1. Complete Form RC471, “Home Buyers’ Plan (HBP) Cancellation,” and submit it to the Canada Revenue Agency (CRA).
2. Repay the full amount withdrawn under the HBP to your RRSP.
3. Report the withdrawn amount as income on your tax return for the year you made the withdrawal. This means you will be subject to income tax on the withdrawn funds.

In some cases, if you have fully repaid the prior withdrawal, you may be able to re-use the HBP, purchase a new qualifying home, and meet other eligibility criteria.

To avoid HBP cancellation and potential tax consequences, make sure you meet all the conditions and deadlines associated with the program.

How to decide if the HBP is right for you?

When considering whether to use the Home Buyers’ Plan, evaluating your personal financial situation and homeownership goals is essential. Here are 5 factors to consider:

• Review your RRSP savings. If you have been consistently contributing to your RRSP and have a significant balance, the HBP may be a viable option for you.
• Ensure that you meet the HBP’s definition of a first-time homebuyer, which requires that you have not owned a home you occupied as your principal residence within the previous four years.
• Assess your ability to repay the HBP withdrawal within the required 15-year period. Consider your current and future income, job stability, and other financial obligations to ensure you can make the minimum annual repayments without undue financial strain.
• Evaluate how withdrawing funds from your RRSP may impact your long-term retirement savings goals. Consider whether you will be able to rebuild your RRSP balance over time and whether the short-term benefit of using the HBP outweighs any potential long-term impact on your retirement savings.
• Other homebuyer incentives and savings plans to determine if they may better suit your needs or if they can be used in combination with the HBP.

Consult with a mortgage professional at Best Mortgage Online to discuss your situation and get personalized advice on whether the HBP is the right choice.

FAQs

Article Sources

1. How Does the Home Buyers’ Plan Work? – nbc.ca