What is the Home Buyers' Plan (HBP)
The Home Buyers’ Plan (HBP) is a program that allows all eligible first-time homebuyers to withdraw up to $35,000 tax-free ($70,000 for a couple) from a Registered Retirement Savings Plan (RRSP). The withdrawn funds must be used as a down payment on either the purchase of a resale home or new home construction.
How the Home Buyers' Plan Works
Understanding the Home Buyer’s Plan starts with understanding your RRSP. When you contribute to your RRSP, you get a tax deduction. The contributed funds benefit from tax-deferred growth, since any contribution to your RRSP can grow without triggering taxation.
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That said, if you remove funds from the account before retirement, the withdrawal is added to your taxable income, plus you pay withholding fees. However, if you withdraw funds through the HBP, you pay no tax and you have 15 years to repay the withdrawn sum.
Why the HBP is such a powerful tool
It can be difficult for savers and aspiring homeowners to decide between competing financial goals. For example, should you save for retirement? Put away money for a home purchase? Or focus on reducing the taxes you pay? To make it easier, answer the following three questions:
- Are you at least three months or more away from finalizing the purchase of a home?
- Would you benefit from a tax rebate or reducing the overall taxes paid in the current calendar year?
- Is saving for retirement a critical financial goal?
If you answered "yes" to any of the above questions, your best bet is to contribute to your RRSP. By prioritizing your RRSP contribution, you save on taxes and build your nest egg. These funds can then be withdrawn interest-free and used as a down payment on a home when you're ready.
Who is eligible for the HBP?
To be eligible for the HBP, you must first meet the federal government's definition of a first-time buyer. The criteria are as follows:
- You haven't owned a home in the past four years or lived in a property owned by your common-law partner or spouse over the last four years;
- The home you intend to purchase or construct must be your primary residence (and you must move in within one year of purchase);
- You are a Canadian resident.
Remember that you cannot access your RRSP funds if you still have a balance owing on a previous HBP withdrawal.
When to use the first-time Home Buyers' Plan
You should consider using the HBP if:
- The withdrawn funds will help boost your down payment and, ultimately, make it possible to purchase a property;
- The funds withdrawn were in your RRSP account for 90 days or longer;
- You expect to earn more — and contribute more to your RRSP — in future years;
- You have a plan to repay the funds within the required 15-year term (to avoid fees or penalties).
There are two other critical moments when using the first-time Home Buyers' Plan makes sense:
- You are recently separated or divorced and looking for an opportunity to get back into the property market;
- Four or more years have passed since you first owned any property, and you'd like to get back into the property market.
What to do at tax time
If you end up using the Home Buyers' Plan, expect to receive a T4RSP form from your financial institution. Use this form when filing your taxes. Each year, you report on the progress of your repayments to your RRSP using Schedule 7.
Keep the HBP in mind
Given the astronomical cost of housing in Canada, knowing when and how to use RRSP contributions as part of your home buying strategy can be a powerful tool for aspiring homeowners.
