Putting aside enough money for a down payment is one of the most significant challenges associated with buying a home. Many people have RRSPs (Registered Retirement Savings Plans), even if they don’t have a lot of money in their bank accounts. The Home Buyers’ Plan can be a good option for you if you are considering purchasing a home for the first time and need some financial support with the down payment. 

The Home Buyers’ Plan

The Home Buyers’ Plan (HBP) is a program offered by the Canada Revenue Agency (CRA) that enables individuals to make a tax-free withdrawal of up to $35,000 from their Registered Retirement Savings Plan (RRSP) to apply that money toward the down payment on the purchase of their first home. While you are putting money away for a down payment on your first home, you may want to consider RRSP contributions. You will be able to make a tax-free withdrawal of the money and use it toward the purchase of a home.

Who is Qualified to Participate in the Home Buyers’ Plan?

To be eligible to take part in the Home Buyers’ Plan, you need to meet the following prerequisites:

1. You must be a Canadian resident.
2. This is your first time purchasing a home.
3. You have to make the home your primary residence within one year of either building it or buying it.
4. Even if this is not your first time, you may still be eligible for the program if you intend to buy a home for a family member who has a disability.
5. Eligible homes can only be found in Canada. Eligible homes include single-family, semi-detached, townhouse, and mobile homes, in addition to mobile home parks, condo and apartment units, and other types of housing. 

Note that even if you have once engaged in the Home Buyers’ Plan, you may still be able to apply for it again provided that you have refunded the money you withdrew before and you meet all of the other eligibility rules for the HBP.

The HBP Process Analyzed

The Home Buyers’ Plan can be split down into three distinct sections, which are as follows:

Application Process

To take part, you must be certain that you are making regular contributions to an RRSP. After you have established that the funds are present in your RRSP, you will need to complete Form T1036: the HBP Request to Withdraw Funds. Section 1 must be completed by you, and then the form must be given to the bank or other financial institution that manages your RRSP so that Section 2 can be completed by them.

Withdrawal Process

You have thirty days from the time the home title is transferred into your name to complete your withdrawal. Withdrawals made more than 30 days after obtaining ownership of the home will not be covered by the HBP and will be subject to taxation. As part of the Home Buyers’ Plan, you will get a T4RSP form in the mail from your financial institution. This form will verify the amount of money that you received from your RRSP. You are required to make a reference to this form in the income tax return that you submit for the year in which the withdrawal was made.

The Repayments

In the end, you’ll be expected to pay back the money you borrowed for the next 15 years, starting 2 years after the purchase date. You will get a Notice of Assessment from the CRA, which will provide you with information regarding the outstanding balance as well as the mandatory minimum payment amount. To get started on the repayment process for the loan, you are required to make a contribution to your RRSP either in the year that the repayment is due or within the first sixty days of the year that follows.

You could be thinking, from a tactical point of view, that it would be a good idea to increase the amount that you contribute before when you apply for the Home Buyers’ Plan, but sadly, this is not the case. Home Buyers’ Plan withdrawals cannot be processed on contributions made within the preceding ninety days of the withdrawal date. 

How to Pay Back the Money from the Home Buyers’ Plan

Those who take part in the Home Buyers’ Plan are required to reimburse the amount they took from their RRSPs within 15 years of taking out the loan. The minimum annual payment required is calculated by dividing the total amount you borrowed by the number of years you have left to repay the loan (15 years).

If you were to withdraw the maximum permissible amount of $35,000, your minimum repayments would equal $2,333 ($35,000 divided by 15). After making your initial withdrawal from the account, your first annual repayment will be due two years later.

Participants in the Home Buyers’ Plan will get a Home Buyers’ Plan account statement from the Canada Revenue Agency along with their notice of assessment. On the HBP statement, the total amount that you have already repaid will be deducted from the total amount that you still owe.

You are permitted to pay back an amount that is greater than what you owe, which will result in a reduction in your annual payments overall. 

What Are the Consequences of Missing a Payment?

If you do not make your minimum payment for any of the years, you will be required to include the amount that you did not pay as RRSP income on your taxes. This, in turn, negates the advantage of taking out the tax-free loan in the first place. This means that by the time you repay, you will be required to pay tax on it. So, you should try as much as possible to always pay as and when due.

Final Thoughts

Each year, thousands of people living in Canada fail to contribute to their RRSP. There are thousands more who are unable to pay in full. The RRSP season begins after Christmas, a time of year when many households are struggling financially due to holiday spending. And a lot of people will start running around at the last minute to contribute.

The Home Buyer’s Plan can be a blessing, but it’s left to applicants to let it remain so. You don’t have to wait till the last minute before you seek help. Contact our debt experts for a free consultation. At EmpireOne Credit, we offer guidance on how to manage your debts and become debt-free.