The Home Buyer’s Plan (HBP)
One of government programs that helps you 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 you 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, you are withdrawing funds from RRSP during purchase of your first property, the withdrawal amount is not taxable in that year. The process of withdrawing money from RRSP during purchase of your first property without immediate tax payable is essentially what Home Buyer’s Plan is. 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 $35,000 for each spouse on the purchase of first property – the funds must stay in the RRSP program for a minimum of 90 days.
Up to 2019 the maximum allowable withdrawal amount was $25,000.
Let me show you how advantageous RRSP can be for you if you are trying to save some funds for your first down payment. For example, you want to save $20,000 for your down payment over the next two years. If you do that with a bank you will only have the sum that you saved. If you do that with your RRSP by the time you are buying a property you will have $20,000 plus $6,000 as your tax return – so in total you will save $26,000 (with approximate income of $50,000-$75,000 ~~ $20,000 x 0.30 = $6,000. I think $6,000 dollars extra can really help during a purchase.
While you have not yet paid taxes on the amount contributed to RRSP to buy a property, you are able to withdraw that money for the down payment. The government is not completely comfortable with this situation so there are conditions: you get two years, after which, for the next 15 years, you can either contribute the funds used for the purchase back into your RRSP (with no interest), or pay taxes on the amount taken from RRSP (also with no interest and through the following 15 years).
Every year you will receive a notice reminding you to pay back certain amount into an RRSP program. An annual response to your tax filing (Notice of Assessment) will show a balance on the Home Buyer’s Plan program and the amount that can be paid in the following year. You have a choice to repay the balance or not to. If you do not repay the amount indicated on the Notice of Assessment, it will be added to your income for the next year for the purpose of paying taxes.
While processing this program there may be questions on contributions into Home Buyer’s Plan, on withdrawing the money during the purchase and on giving back the amount withdrawn and used for the purchase.
Below are some of the conditions of the HBP program in the form of “Questions and Answers” that we often receive in our office when people open and repay such a plan.
OPENING, SAVING AND WITHDRAWING MONEY WITHIN RRSP PROGRAM LIMITS (HBP)
Can my spouse withdraw $35,000 from her/his RRSP under the HBP as well?
If you buy the qualifying home together with your spouse or other individuals, each individual can withdraw up to $35,000 from your RRSPs.
What if I can pay more than $35,000, however my wife is not eligible to open an RRSP?
You can contribute $35,000 to your RRSP and the remaining amount to your spousal RRSP. Your wife will be allowed to withdraw that portion under the HBP in addition to your $35,000, however the whole amount 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 the year 2019, you must have no ownership or reside in owned property since January 1st of 2015, the previous property must have been sold in 2014.
If a person already owns a property (for example, helped relatives buy a property some time ago, acted as a guarantor), can this person use this program if the person is purchasing now?
In reality this is a very common scenario. The person will be allowed to use the First Home Buyer’s Plan, as this is the time the property is being purchased for residence.
For example, a child helped parents purchase a property but lives separately. After some time the child decides to buy own property and use the HBP. This meets the required criteria – purchasing a property for own residence.
If the child has helped the parents with his/her income and resides with them, the ability to use HBP has been used.
If a person already owns a property that is rented and lives in another rental, can that person use HBP?
Yes, as long as the person has not lived in the property owned. So, a person bought a property for rent and sometime later decided to buy a property for himself where the person plans to live.
Or another scenario: a person already owns a few properties. Lives in one property and rents the other. If the person sells property of residence (owner occupied), decides to rent without any changes to other properties, in 4 years that person can use HBP again.
Can I withdraw $35,000 in portions if my future home is planned to be under construction for a long period of time?
Yes, but it has to be done within one calendar year. The deadline is January of the year following the year of withdrawal. If you do that for 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 will consequently 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.
Often, completion of construction of a new property is postponed more than once. What to do in such situation with regards to October 1 deadline, the move in will be significantly later?
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 only be completed at 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 material.
What if we found out about the HBP after we had already bought the house, and we are supposed to move 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 RRSP 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 to 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 in RRSP account 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 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. So the government allows us to repay the balance over the next 15 years, with no interest or inflation.
It is important to understand that returning the money is not a mandatory condition. If a person decides not to return the money back, the sum that would have to be returned (1/15 of withdrawal amount) will be added to the income and taxed. If we consider that the person’s income has not changed much with just a minor increase accounting for inflation, the tax rate should be same which means the government is allowing postponing tax repayment for 17 years.
Imagine if the tax brackets actually decreased in the future. Somebody was a full time employee and now works for himself or is on a contract, the benefits increase.
The are many nuances and I think the best thing to do is to get an advice from a specialist on how to return money into HBP.
What is the HBP balance?
This is the sum that you have to return to your RRSP at the time. Your HBP balance will decrease annually.
How can I find out the repayment amount for the current year?
When you file your taxes (T-1 General) and send it to the CRA for assessment (CRA – Canada Revenue Agency), you receive a response that is titled Notice of Assessment (NOA). First page will show your taxable income for the previous year, the second page will show how much you can contribute to the RRSP program and the third page will indicate how much has to be repaid into HBP.
When do I have to start returning money into this program?
If a property was purchased in 2019 and the money were used the same year – $10,000, when to begin repaying the money? In 2021 you would have to return 1/15 of the $10,000, which is $667.00. Due date to make the repayment – 60 days of the following year or March 1st, 2022. This is a normal period – first 60 days in the following year for those that have not yet made contributions into their RRSP during the year.
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.
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 pay?
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 pay 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 old or over.