Home Buyers' Plan: RRSP Withdrawal for First Time Home Buyers 2022
The Home Buyers' Plan or HBP is an interest and tax-free way to borrow up to $35,000 from your RRSP savings to buy or build a home for yourself or a related person with a disability. It is one of the first-time home buyers’ plans in Canada. You have up to 17 years to repay your loan starting from the year you take out the money. After repaying your HBP, you can also use the HBP again multiple times as long as you continue to meet its eligibility criteria. You can’t combine the HBP with the newly proposed First Home Savings Account (FHSA), meaning homebuyers will need to choose between the two programs.
Home Buyers' Plan Savings Calculator
If you borrow $35,000 using a Home Buyers' Plan, you could save $26,069 over a 25-year mortgage at 5% interest with monthly payments. You could save up to an additional 4% of your mortgage amount upfront if your HBP withdrawal allows you to waive your CMHC Insurance.
Pros and Cons of Using the Home Buyers' Plan
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Before choosing to use the Home Buyers' Plan, you should consider if using contributions from a Tax-Free Savings Account (TFSA) would be more ideal. You can withdraw any amount at any time from your TFSA and are free to re-contribute your withdrawals at any time.
Find More First-Time Home Buyer SavingsHome Buyers' Plan Eligibility Criteria
In order to be eligible for the Home Buyers' Plan, you must meet the following criteria:
- You must be considered a first-time home buyer which means you have not lived in a home owned by you or your current spouse or common-law partner in the last four years.
- You must have a written agreement to buy or build a qualifying home for yourself.
- You must be a resident of Canada when you participate in the HBP up until the home is bought or built.
- You must intend to occupy the home as your principal place of residence within one year after buying or building it.
- You don't have any outstanding balance from a previous Home Buyer’s Plan withdrawal.
Most Canadians looking to buy their first home will fulfill all the requirements of the HBP.
First-time home buyers
You are considered to be a first-time home buyer if you did not occupy a home that you or your current spouse or common-law partner owned in the past four years. This four year period begins on January 1st of the first year and ends 31 days before you withdraw the funds.
Double-check Your Eligibility
If you make an RRSP withdrawal under the Home Buyers' Plan but later find out that you don't meet the conditions, your RRSP withdrawal will be treated as income and you will not be able to re-contribute the withdrawn amount back into your RRSP. Make sure to verify you meet the conditions of the Home Buyers' Plan and the definition of a first-time home buyer.
How to Use the Home Buyers' Plan
To use the Home Buyers' Plan, first make sure you meet all the eligibility criteria. This includes ensuring you are a first-time home buyer, a Canadian resident, and have a written agreement to buy or build a home.
Withdrawing funds
The Home Buyers' Plan allows you to withdraw funds from your RRSP. To withdraw funds from an RRSP under the Home Buyers' Plan, you need to fill out Form T1036, Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP for each withdrawal you make. You will fill out Area 1 of Form T1036 and your RRSP issuer will fill out Area 2. You can make multiple withdrawals within the same calendar year.
You will not have to pay any taxes or penalties on any RRSP withdrawals under a HBP. However, any withdrawals over the limit of $35,000 will be subject to withholding taxes and will be recorded as RRSP income and taxed accordingly.
RRSP contributions and RRSP withdrawals under the HBP
If you withdraw from your RRSP using the HBP within 89 days of making a contribution, your contribution amount has to remain in the RRSP. For example, if you have an RRSP of $10,000 and contribute an additional $5,000, you can only withdraw $10,000 within 89 days of your contribution. If you withdraw after 89 days, you can withdraw the entire $15,000.
If you withdraw from your contribution, you will not be able to deduct part or all of the contribution from your taxes. If your RRSP has less than the amount contributed, you can only deduct the remaining contribution and cannot deduct the amount that you withdrew.
Time Duration for Utilisation of Withdrawn Funds
You have until October 1st of the year following your withdrawal to buy or build your home. If you don't, your RRSP withdrawals will be treated as RRSP income and taxed accordingly. You will also lose your RRSP contribution room.
Generally, it is unusual to go beyond your HBP deadline. When registering for the HBP, you will have a written agreement to buy or build a property within the deadline. However, your agreement may be cancelled.
In that case, you will still meet the deadline if you have a written agreement to buy a replacement property on October 1st of the year after you withdraw the funds. You must buy the home before the October 1st of the second year after you withdraw the funds.
You can also still meet the deadline if you are building a home and have paid an amount equal to or greater than the withdrawals under the HBP towards the construction of your home.
John withdrew from his RRSP using his Home Buyers' Plan on August 20th, 2019. He has a written agreement to buy a home. In February, 2020, he cancels his written agreement. He can choose either to cancel his HBP or find another qualifying property.
If he finds another home and gets a written agreement to buy the home by October 1st, 2020, he can extend the final deadline for the HBP to October 1st, 2021. By October 1st, 2021, he has to close on the new home. If the agreement is cancelled instead, he can choose to cancel his HBP and repay his withdrawals back into his RRSP. He cannot find a third home to apply to the HBP. However, he can restart his HBP application and withdraw again the year after he returns his withdrawal.
Cancelling your HBP
HBP cancellations are rare. Remember that in order to get your HBP in the first place, you need a written agreement to buy or build a property. However, things happen and your agreement may be cancelled or you may choose to immigrate.
If you don't buy a qualifying property or become a non-resident, you can cancel your HBP participation. This allows you to return your withdrawn amount back to your RRSP with no tax consequences or loss of contribution room. However, you will have to make the repayment by December 31st of the year after you received the funds.
John withdrew from his RRSP using his Home Buyers' Plan on August 20th, 2019. He has a written agreement to buy a home. In February, 2020, he changes his mind and cancels his purchase. As a result, he can cancel his HBP. He pays back his withdrawal into his RRSP on November 20th, 2020.
John will not face any penalties for cancelling his HBP. Although he cancelled his purchase agreement, his purchase agreement was valid when he withdrew from his RRSP using the HBP. He paid back his withdrawal by December 31st, 2020 (the year after his withdrawal).
Participating in the HBP for a related person with a disability
HBP allows for withdrawal of funds from an RRSP to build or buy a home for yourself or a related disabled person. You can withdraw the funds when:
- You are a person with a disability
- You are building or buying a home for a person related to you who has a disability
- You are helping a person related to you to buy or build a house
However, all the conditions of HBP are required to be met for the withdrawal to qualify as an HBP withdrawal.
RRSP Basics
A Registered Retirement Savings Plan, or RRSP, is a special tax-deferred savings account that lets you invest pre-tax income and defer any taxes on any growth until withdrawal. The "tax-deferred" and "pre-tax income" features of the account mean that you can deduct your contributions from your taxable income. For the average Canadian, this can mean getting 20% to 30% of your contributions back in saved taxes. For high-income earners, these savings can rise up to more than 40% of contributions.
RRSPs are a great way to save for retirement because any growth, including capital gains, dividends, and interest, is not taxed. You will only be taxed on withdrawal, where it will count as income and be taxed accordingly. While you can withdraw at anytime, most withdrawals before you turn 71 will be subject to withholding taxes and permanent loss of RRSP room.
The Home Buyers' Plan is an exception that allows you to withdraw or "borrow" from your RRSP without any penalties or the loss of contribution room. This lets you save pre-tax income (which can be over 40% more than your income after taxes) for your home down payment. When used properly, you can get a larger down payment more quickly and also save on interest on your mortgage.
Home Buyers' Plan Repayment
You have up to 15 years to repay your Home Buyers' Plan withdrawal. This period of 15 years starts the second year after you first withdraw funds. For example, if you withdrew funds in 2019, the first year of repayment will be in 2021 and your last year of repayment will be in 2035.
Every year, the Canadian Revenue Agency (CRA) will send you a HBP statement of account with your notice of assessment. It will include any amounts you have repaid so far, your HBP balance, and your minimum payment for the following year.
Practically speaking, you have up to 17 years to repay your HBP withdrawal from the time you withdraw. However, any payments made before the first official payment period (the second year after you first withdraw funds) will count as pre-payments.
Pre-payments to the HBP
Any payments made before the first official payment period (the second year after you first withdraw funds) will count as pre-payments. Pre-payments will go towards your first official payment and decrease your remaining balance. However, you will still have to pay your minimum payments for later years even if you pre-pay multiple years worth of payments.
John withdrew $30,000 using his HBP in 2019 for a home down payment. His first minimum repayment of $2,000 ($30,000 divided by 15 years) is scheduled for 2021. He then makes a $5,000 payment towards his HBP in 2020.
As a result:
- His remaining HBP balance in 2020 is $25,000
- His pre-payment counts towards his first minimum payment of $2,000 in 2021. Since he paid more than $2,000, he no longer needs to pay his first minimum payment.
- His next required minimum payment starts in 2022. Because he reduced his HBP balance, he only needs to pay approximately $1,786 in 2022 (remaining balance of $25,000 divided by the remaining time of 14 years).
Home Buyers' Plan Minimum Payment - Don't Forget!
If you borrow using a Home Buyers' Plan, you are required to make minimum payments towards your HBP balance every year. This is true even if you repaid more than the required amount in a previous year. If you contributed to your RRSP during the year, you will still have to designate your contributions as payments towards your HBP in order for them to count.
If you do not make a payment, you will have to include the amount you should have paid as RRSP income and treat it as an RRSP withdrawal. You will have to pay income tax on the amount and will lose RRSP contribution room equal to that amount.
Jane is a new home buyer in B.C. that earns a $90,000 annual salary. She borrowed $15,000 from her HBP for her down payment but forgot to make her first minimum payment of $1,000.
As a result, Jane will have to add $1,000 to her RRSP income and pay $310 in additional income taxes at a marginal tax rate of 31%. In addition, she will no longer be able to return the $1,000 to her RRSP. However, her HBP balance will also go down by $1,000 and she will not be required to repay the $1,000 again.
Don't forget to make your minimum payments and designate them as Home Buyers' Plan repayments to avoid any consequences.
Home Buyers' Plan Repayment Calculator
If you borrow $35,000 using a Home Buyers' Plan, your minimum annual repayment will be $2,333 per year for 15 years. You can also pre-pay any amount at anytime.
How to make a HBP payment
Home Buyers' Plan payments are made as contributions to a new or existing RRSP. The Home Buyers' Plan is like an interest-free loan from your RRSP, and repaying the loan involves putting money back into your RRSP. You have to designate your contribution as a payment towards your HBP using Schedule 7 of your tax return. Your contributions will not automatically be designated as repayments.
You can make the contribution to your RRSP at anytime during the year the payment is due or in the first 60 days of the year after. For example, if a payment is due in 2019, you have up to March 2020 to make a contribution. You can also designate all or part of your contribution as a HBP repayment.
You cannot designate a contribution to your spouse's or common-law partner's RRSP as an HBP payment. You also cannot designate a transfer from another RRSP as a HBP payment.
Aside from your RRSP, you can also repay using contributions to a pooled registered pension plan (PRPP) or specified pension plan (SPP).
Tax treatment of RRSP contributions for HBP repayments
Contributions that are designated as repayments towards a HBP will not deduct from your available contribution room. For example, if you have $10,000 in RRSP contribution room and make a $2,000 RRSP contribution that you then designate as a repayment to your HBP, you would still have $10,000 in RRSP contribution room that you can use.
However, you will not receive any income deductions for RRSP contributions designated as repayments towards a HBP. Since your HBP comes from your RRSP, you would have already claimed the tax deductions from the initial contributions to your RRSP and cannot claim them again when returning the contributions back to your RRSP.
Penalties for failing to repay
If you do not repay your HBP, you will face penalties including the loss of contribution room and income taxes on the minimum payment required for that year. You will have to designate your missing payments as RRSP income in your tax return.
Make sure to record your contributions as repayments to your HBP. If you do not, you will have to face penalties including the loss of contribution room and income taxes on the minimum payment required for that year.
Reporting repayments on Income Tax and Benefit Return
You need to fill out and send an income tax and benefit return to the Canada Revenue Agency (CRA) every year, starting with the year you make your first prepayment. This must be done regardless of not owing any tax or declaring bankruptcy.
You must fill out the Schedule 7 - RRSP, PRPP, and SPP Unused Contributions, Transfers, and HBP or LLP Activities, and attach it to your income tax and benefit return. For the year of the withdrawal you need to fill out Part E and in the subsequent years you need to fill out Part B of the Schedule 7. This is essential for keeping track of your repayments.
Taking Advantage of Your HBP To Accelerate Your Down Payment
The Home Buyers' Plan allows you to save up pre-tax income in your RRSP towards your home down payment. It can help you achieve a larger down payment faster than traditional savings as you can also save the taxes you would have had to pay on your income. For the average Canadian, RRSP savings can be 20% to 30% more than after-tax savings; for higher-income earners, this figure could rise past 40%.
Saving $5,000 Annually Over 4 Years: RRSP vs Traditional Savings
If you save $5,000 a year for four years for your home down payment, you will have a $20K down payment at the end. At a 30% marginal tax rate, you could instead save $6,500 a year, leaving you with $26K at the end of 4 years - $6K more than your original down payment - without affecting the rest of your budget.
RRSP vs. Traditional Savings at $5K After-Tax Income Equivalent and 30% Marginal Tax Rate
Frequently Asked Questions
How long does it take to withdraw from my RRSP account for the Home Buyers’ Plan?
This will depend on how fast your RRSP Issuer can liquidate and process the money in your RRSP account. Typically, it will take around 5 to 7 business days.
Is there any penalty for withdrawing from RRSP for the HBP?
As long as you meet the requirements of the HBP and don't withdraw more than $35,000, you do not have to worry about any penalties. If you do not meet the conditions or exceed the limit, the ineligible amount will be treated as RRSP income on your tax return and taxed according to your tax bracket. You may also be subject to withholding taxes.
How do I get the most out of the RRSP Home Buyers' Plan?
In order to fully utilize your RRSP Home Buyers' Plan, you need to make sure you have enough money saved in your RRSP for the full withdrawal of $35,000. By contributing regularly to your RRSP, you can save before-tax income, which, depending on your marginal tax rate, can be significantly higher than after-tax income. For example, if you have a 35% marginal tax rate, your before-tax income would be 35% higher than your after-tax income and you could potentially save 35% more in your RRSP for your home down payment or new construction.
Can me and my spouse/common-law partner both use the Home Buyers' Plan?
Yes, each individual can use the Home Buyers' Plan and take out up to $35,000 from their own RRSP as long as they meet the eligibility conditions of the HBP. These include being a first-time home buyer and a resident of Canada.
Can you use Home Buyers’ Plan withdrawal for closing costs?
Yes, you can use Home Buyers’ Plan withdrawals to cover closing costs or even to buy furniture. It is up to you how you choose to use it.
Can I use Home Buyers' Plan more than once?
Yes, you can use the home buyers’ plan more than once, as long as you or your current spouse has not owned a house for the last 4 years and you have no outstanding balance from a previous HBP withdrawal on January 1st of the year of the new HBP withdrawal.
Can I use the Home Buyers’ Plan for a 2nd home?
You can if you qualify as a first-time home buyer. You will be considered as a first-time home buyer as long as you have not occupied a home owned by you or your spouse during the four year period which lasts from January 1st four years prior to 31 days before the day you withdraw the fund. For example, if you sold your home in 2014 and have not resided in a home that you or your spouse owned for the next few years, you can participate in the HBP again in 2019.
RRSP Questions and Answers
Can I use my RRSP to pay off my mortgage?
You can, but this is not necessarily a good strategy. Your withdrawal will be taxed as RRSP income at your marginal tax rate and you will not be able to re-contribute your withdrawal to your RRSP.
If you're buying a home, you can withdraw from your RRSP through the Home Buyers' Plan and use the money towards your down payment. This will effectively reduce your mortgage borrowing and will not come with the penalties of an RRSP withdrawal.
How much tax would I have to pay if I withdraw money from my RRSP?
Except for money that is withdrawn for the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP) under eligible circumstances, all other money withdrawn from your RRSP early will be subject to taxation. The taxation is split into two parts: a withholding tax and an income tax.
Withholding taxes are taxed immediately on withdrawal and are set at:
- 10% on amounts under $5,000 (or 5% in Quebec)
- 20% on amounts between $5,000 and $15,000 (or 10% in Quebec)
- 30% on amounts over $15,000 (or 15% in Quebec)
You will also have to pay an income tax on the amount you withdrew. If your marginal tax rate is higher than the withholding tax rate, you will have to pay the additional income tax at the end of the year. However, if your marginal tax rate is lower than the withholding tax (which is very unlikely unless you have no other income), you may get part or all of your withholding tax refunded.
When does it make sense to withdraw from RRSP for reasons outside the Home Buyers’ Plan?
Any withdrawals from an RRSP not under the Home Buyers' Plan or Lifelong Learning Plan will be subject to income tax. Subsequently, it is best to withdraw when you have little income as your marginal tax rate will be low. If you think that your income is currently lower than it will be during retirement, you can withdraw early to minimize your income tax.