Guest Post By: Penelope Graham, Zoocasa
For home buyers looking to enter the real estate market for the first time, amassing a large enough nest egg to put toward a down payment is often the biggest challenge, especially in the nation’s most expensive cities.
Priced-out buyers in such markets do have a few alternate avenues to make their home ownership dreams a reality. For example, a cash-strapped buyer in the Greater Toronto Area could look instead to the more affordable Ottawa real estate market, or peruse townhouses for sale in Toronto rather than detached options. However, there is another option for those who’ve long been dedicated savers – dipping into the tax-protected funds set aside in their RRSPs.
Called the Home Buyers’ Plan, this initiative is run by the federal government and allows individual borrowers to access up to $35,000 tax-free (as of the most recent Federal Budget in March 2019), and up to $70,000 for couples purchasing a home together.
However, the funds don’t come scot-free; the borrower has 15 years to make their RRSP whole again and must make a minimum 1/15th payment each year. Failure to do so will revoke the tax-free status of that portion, require that they be claimed as income, and fully taxed.
Who Qualifies for the HBP?
To qualify for the Home Buyers’ Plan, a borrower must:
- Be a Canadian citizen or resident.
- Be considered a “first-time home buyer”. The HBP defines this as having not owned any residential property within the past four years. If the borrower is purchasing with a spouse who has owned property within that time frame, they can still use the HBP for their individual amount, as long as they did not dwell in their spouse’s home.
- Have sheltered the funds in an RRSP account for a minimum of three months before it can be withdrawn tax-free.
The Process of Using the HBP
Only those purchasing a home can access their RRSP funds – you must have signed an Agreement of Purchase and Sale before starting the process of withdrawing the money. Once an offer has been accepted by the seller and that document is in hand, the borrower then fills out the first portion of Form T1036, and presents it to the financial institution that houses their RRSP. The lender then processes the withdrawal and once the funds are out, gives the borrower a T4RSP form with confirmation of the withdrawal and the amount. It’s important to hang on to this form, as it’ll be needed for reference in the following year’s income tax return.
The Pros and Cons of the HBP
Pro – Access to more cash: An obvious benefit of the HBP is the ability to tap into savings that aren’t typically accessible, without facing any tax consequences. This can be the difference for some buyers between coming up with a down payment or being priced out of the market. However, while the HBP can be a big help for those who’ve focused on their retirement savings, it’s not much use for those who have been too cash-strapped to save – you need to have saved the money first before you can use it!
Pro – Those savings become equity: Assuming the borrower successfully makes their RRSP whole again without being taxed, they’ll have their full retirement savings amount plus the equity built from being in the real estate market over a 15-year timeline.
Con – It’s an extra household debt obligation: In the excitement of purchasing their first home, borrowers can lose sight of the fact that the HBP needs to be paid back in yearly installments, which must be budgeted for, right alongside mortgage payments. It’s important to do the legwork to ensure the funds are being set aside, either in installments throughout the year, or as a lump sum contribution before the tax deadline.
Con – There’s an opportunity cost: By pulling funds out of an RRSP, a borrower will miss out on years’ worth of earning potential, as opposed to leaving them intact and exposing them to the market over a long-term horizon. For this reason, it’s important to discuss with a financial or retirement advisor whether taking these funds out of commission is the best approach, rather than fund a home down payment another way.
Penelope Graham is the Managing Editor of Zoocasa.com, a real estate company that combines online search tools and a full-service brokerage to let Canadians purchase or sell their homes faster, easier and more successfully. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.