Last Updated on January 29, 2021 by Yetty Akindele
To shift from a rental to one’s house is a goal for many. People work hard to save money in order to be able to buy their own house. However, buying a house is not an easy task in today’s world. It sometimes gets really hard to arrange the money needed for tax payment and monthly installments. This is why people are turning to use the homebuyers plan (HBP) under the RRSP to finance buying a house.
Simply defined, a Registered Retirement Savings Plan (RRSP) is a tax-advantaged savings account. Tax-advantaged means that this account gives you tax-free period breaks. You don’t have to pay tax for the money you deposit into this type of account until you decide to withdraw from them. This reduces your overall annual tax. The Canadian government through the CRA created this account type to encourage citizens to save money for their future. You can read my article on understanding RRSP here.
Interestingly, first-time homebuyers can take advantage of the RRSP scheme too. Under the Home Buyers Plan, you can buy a house with your RRSP contributions. Read below to know more about this and how you, as a first-time homebuyer, can benefit from it.
The Home Buyers Plan (HBP)
The Home Buyers Plan is one of the most welcomed initiatives of the Canadian government. This plan is meant to help first time home buyers by providing them with financial assistance. Potential buyers can take up to $35,000 (for withdrawals following March 2019) from their RRSP contribution to pay their house’s down payment. The amount taken out is free of any tax deduction and has to be paid back in 15 years under a strict payback plan.
To benefit from this plan, you have to prove that you and your spouse are buying a house for the first time. You’ll have to sign a contract stating that the money you’ve taken is for your house. You also have to move to your new house no later than a year after buying it.
The Home Buyers Plan provides people with an easy and budget-friendly way to make their home-ownership related dreams come true. However, there are a lot of conditions and a few risks associated with this scheme. These factors might not make HBP an ideal option for low-income groups and for people who aren’t able to manage their budget and savings easily.
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Who Is Eligible?
Under the HBP plan, you can withdraw home building or buying funds from a RRSP account for yourself or for a relative with serious physical or mental disability. You can withdraw funds from as many RRSP accounts as you want, as long as they’re all under your name. You also won’t be required to pay any tax if you withdraw a sum equal to or less than $35,000. However, there is a fixed criterion that decides whether or not you’re eligible for the HBP scheme.
To be eligible for the HBP scheme,
- You and your spouse must be buying or building a house for the first time. If your spouse already owns a home, you won’t be able to withdraw funds to make a down payment.
- You must agree to sign a contract proving that the house you’ll buy or build is for you or for a disabled relative.
- You should be a Canadian resident at the time of the withdrawal. You cannot give up your citizenship while the house is being purchased or built.
- You must shift to your new home within a year after it has been built or brought.
- If you’re withdrawing money for a disabled relative, you must ensure that they occupy it themselves.
- The disabled person must also use that new home as their main residing place, and not a secondary residence. The same rule goes for you.
- You must abide by the repayment plan and must deposit your annual payments in your RRSP account. Otherwise, you’ll lose your tax-exempt status.
- If you want to re-apply for the HBP scheme, you must have cleared all your repayable installments. In other words, your repayable balance must be zero for you to qualify for the scheme again.
How To Withdraw From Your RRSP
Withdrawing funds from your RRSP contribution under the HBP plan is an easy task. Here is a step by step break down on how to do so:
- Go to the Government of Canada’s website.
- Head to the revenue agency forms. You’ll find a form titled “T1036 Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP”.
- Download this form.
- Save a clean copy of this form because you’ll have to fill it out for each withdrawal separately.
- Fill out the form’s Area 1 only.
- Submit it to your RRSP issuers who must fill out Area 2 of the same form.
After the form is filled and the RRSP issuers confirm your plans, you’re eligible to withdraw funds. You can either withdraw the whole amount required at once or do it in a series of withdrawals. In the latter case, you’ll have to make all the withdrawals in the same year.
Repayment of RRSP
Repaying your RRSP funds under the HBP scheme is a huge responsibility. Those who fail to repay on time will have to face serious consequences later. Your repayment time starts two years after you first withdraw the funds from your RRSP.
You can either repay the full amount together or can pay in installments. The repayment can be made to your RRSP, SPP, or PRPP accounts whenever you want within the 15-year window.
You’ll get an annual HBP statement of your account by CRA. This statement will have various details including the amount you have already repaid, the remaining repayment amount, and the amount that you need to pay that year specifically. You can pay more than the required amount too if you want.
To make a repayment, you have to deposit an amount into your RRSP account. This deposit must happen within 12 months before the repayment date. Once done, you can designate how much of the deposit you would want to be counted as your HBP repayment.
Pros and Cons of using RRSP under HBP
The HBP plan will most probably work well for you if you have a healthy financial habit. As with every scheme, there are some pros and cons of using your RRSP contributions under the HBP. These pros and cons are given as follows;
Additional financial support
The new Canadian rules require a buyer to pay at least a 5% down payment to purchase a house. The HBP makes it easier for buyers to pay this down payment by allowing access to extra funds.
If you’re buying a home with your spouse’s contribution, both of you can benefit from this plan. This means both of you can withdraw your RRSP contributions and will have more money to easily buy or build your first house.
Taking out money from your RRSP account means that you also receive a tax benefit. This is because you won’t get charged any tax for your down payments at the time of the deposit.
Some people worry about using money saved up for retirement to buy a house. However, even when you’re taking money out from your retirement savings, you’re converting it into something equally worthy. Your house will become an asset to you.
Overall no loss in your RRSP savings
The HBP scheme requires people to pay back all they’ve taken out from their RRSP funds for the house. This means that within a few years, you’ll have sufficient funds in your RRSP account and real estate in your name.
Taking out funds from your RRSP contributions puts you under great pressure. You’re solely responsible to pay back every penny. If the repayment isn’t done, you are under a great risk of having very low savings for your life after retirement.
Hard tax-exempt status maintenance: Maintaining your tax exemption throughout is a huge responsibility too. If you don’t make your annual repayments to your RRSP account in time, you’ll have to pay tax on all the amount you used under the HBP plan.
No Help Under Bankruptcy: Once used, you’re required to repay the HBP payments even if you’re going bankrupt. No support is provided in such a scenario and matters can get worse if you don’t pay it back.
The cons of using the HBP under the RRSP primarily highlight a poor financial situation if you fail to repay. However, these won’t affect you if you make smart money-saving habits and have good control over your finances. Anyone can easily own a home under HBP by repaying to RRSP in time and keeping their expenditure in control.
HBP is a great scheme that allows anyone to buy or build their first home without any extreme financial pressure. It assists people in buying houses without compromising on their RRSP fund in the long run. All you have to do is to show a little bit of responsibility in making your repayments in time and following other such rules. This will allow you to own your own home without any financial difficulty.
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