The Home Buyer’s Plan (HBP)
One of the government programs helping you to purchase real estate is the Home Buyer’s Plan. In order to analyze your specific situation, to understand, how beneficial is the RRSP and consequently Home Buyer’s Plan (HBP), it is best to consult with a Financial Advisor and of course our office can assist you with that.
Using HBP allows to increase your small down payment by 20-30%.
The HBP is just an RRSP (Registered Retirement Savings Plan). Normally, withdrawing funds from RRSP is followed by tax payable at the end of the year. If however the funds are withdrawn to buy first property, such withdrawal does not trigger a tax. The process of withdrawing funds from pension without paying tax during purchase of first property is the Home Buyer’s Plan (HBP). Often, this program is referred to as First Home Buyer’s Plan, because you are only able to use it once. Maximum withdrawal for down payment from RRSP is $25,000 for each spouse on the purchase of first property, the funds must stay in the RRSP program for a minimum of 90 days.
Let me show you how advantageous RRSP is for you if you are trying to save some fund for your first down payment. For an example you want to save $20,000 during 2 years. If you do that with a bank you will get the sum you saved only. If you do that with your RRSP, by the moment of buying a property you will have $20,000 plus $6,200 as your tax return – so in total you will save $26,200 ($20,000 x 0.3100 = $6,200. In the case your income is $40,970 – $81,941).
If you have some questions regarding participating in the program – either about how to put money into the Home Buyer’s Plan, how to buy a property, or how to return the amount of money withdrawn – read the text below. You will find the answers on most frequently asked questions related to a procedure of opening such a plan and a procedure of repaying the sum withdrawn.
OPENING, SAVING AND WITHDRAWING MONEY WITHIN RRSP PROGRAM LIMITS (HBP)
Can my spouse withdraw $25,000 from her/his RRSP under the HBP too?
If you buy the qualifying home together with your spouse or other individuals, each individual can withdraw up to $25,000 from your RRSPs.
What if I can pay more than $25,000, however my wife is not eligible to open an RRSP?
You can contribute $25,000 to your RRSP and the rest amount of money to your spousal RRSP. Your wife will be allowed to withdraw that portion under the HBP in addition to your $25,000, however all that sum will be deducted from your income.
Is this program only available for the purchase of first home?
No, this plan can be used on the purchase of second and third home. It is necessary to meet the following conditions: prior to purchasing the property, you have been renting for at least 4 years, meaning, not own any property. If you plan to move in in the year 2013, you have to have no ownership since January 1st of 2009, the previous property must have been sold in 2008.
Can I withdraw $25,000 by portions if my future home is planned to be under construction for a long period of time?
Yes, but you have to do that during one calendar year. The dead line is January of the year following the year of withdrawal. If you do that during two or more years the entire amount withdrawn after January 31 of the next year will be added to your income for the previous year, and consequently it will become taxable.
We are going to buy a brand new house that will be finished built next year. Can we withdraw some money for a down payment under the HBP this current year?
Yes, you can. However, the house/condo is supposed to be finished no later than on October 1 of the year following the year of withdrawal. At least the official date of moving in should be set before October 1.
The intention to move in a new house/condo on a particular day happens very often to fail due to the fact that the house/condo simply hasn’t finished built yet. What can we do in a situation like that regarding the date of October 1-st?
Even if in reality you moved in with a delay, but the official date of moving in was set on October 1 of a year following the year in which you made your withdrawal, there shouldn’t be a problem.
What if we had taken money from RRSP for one house, but later, down the road, for some reason we changed our plans and decided to buy another house, which will be finished built in the end of November of the year following the year of withdrawal?
You are still considered a participant in the HBP who met all the conditions if you spent the money withdrawn from your RRSP for either paying a construction company or buying some building materials.
What if we figured out about the HBP after we had already bought the house, and we are supposed to move in there in 70 days? What if everything happened so quickly that we, while buying a house, just forgot about the condition, under which the money have to stay in our account during no less than 90 days?
You can still meet all the conditions under the HBP if you do the following:
- If you are moving in a new house/condo in 70 days, you can contribute the necessary amount of money to your RRSP and you can withdraw that money back under the HBP in 90 days. Thus, you will be able to get that money tax free in the current year. The rules are that money should be withdrawn from the HBP after 90 days but not more than 30 days after the purchase of your home.
- If you need the money you contributed to the HBP by the moment when you move in, you can put aside some money for 10-15 days, receive the money from your RRSP and return your debt then.
REPAYING YOUR WITHDRAWALS TO THE HBP (RRSP)
You have to repay the money withdrawn from your RRSP under the HBP within 15 years. Starting from the second year after your withdrawal and during the following 15 years, you will have to contribute 1/15 from your HBP balance annually.
What is the HBP balance?
This is the sum that you have to return to your RRSP at the time. From a year to a year your HBP balance will be decreasing.
How to make the repayments?
To make a repayment under the HBP, you have to make contributions either to any existent RRSP of yours or to a new one. To designate your repayment, complete Schedule 7, RRSP Unused Contributions, Transfers, and HBP or LLP Activities (in your tax package), and file it with your return.
When do we have to start making our repayments if we bought a house in 2011 and if we withdrew the amount of $10,000 in the same year?
You will have to repay 1/15 of 10,000 in 2013. It comes to $667. The due date is the 60-th day after the New Year. To make a repayment under the HBP, you have to make contributions to your RRSP’s in the year the repayment is due or in the first 60 days of the following year.
What happens if we don’t make the repayment under the HBP in the current year?
The amount of money that your were supposed to contribute as your repayment will be added to your income and will become taxable.
What happens if we repay less than the amount we have to repay?
The difference between the amount contributed and the amount you were supposed to contribute will be added to your income and will become taxable.
What happens if you choose to begin your repayments earlier?
Any repayments made before you are required to start your repayments will reduce the actual amount you have to repay in the first year of your repayment period.
What if we don’t have to file a return for the year, however we made our repayment to the HBP?
You still have to complete Schedule 7, RRSP Unused Contributions, Transfers, and HBP or LLP Activities as well as to send it to REVENU CANADA.
Can a bankruptcy get me free from my obligation to make the repayments under the HBP?
No, you still have to compensate the amount withdrawn from your RRSP under the HBP.
Are there any situations where the repayments under the HBP have to be made in less than 15 years?
Yes, there are. Additional repayments rules apply if an HBP participant:
- becomes a non-resident; or
- is 70 years of age or over.