What is the Home Buyers’ Plan (HBP)?

Posted on by Tax Partners
31
Dec

Introduction

The federal government's Home Buyers' Plan (HBP) is a program designed to assist first-time homebuyers in Canada. Through this plan, individuals can withdraw funds from their Registered Retirement Savings Plans (RRSPs) to buy or build a home for themselves or a family member with a disability. The HBP offers a tax-advantaged way to leverage existing savings toward homeownership.

Key Features of the Home Buyers' Plan

The HBP allows first-time homebuyers to withdraw a portion of their RRSP savings to use as a down payment on a home. Here are some important points:

  1. Higher Withdrawal Limit:
    • As of 2024, the withdrawal limit increased to $60,000 per individual (from $35,000).
    • Couples can now withdraw up to $120,000 combined, provided both have RRSP accounts.
  2. Repayment Terms:
    • Withdrawals must be repaid to the RRSP within 15 years.
    • Recent changes extend the start of repayment to five years (for withdrawals made between January 1, 2022, and December 31, 2025).
  3. Tax Advantage:
    • Withdrawals meeting HBP conditions are not considered taxable income.
    • However, failing to make the required annual repayment will result in the outstanding amount being added to your taxable income.

Eligibility for the Home Buyers' Plan

To qualify, applicants must meet these criteria:

  • Residency: Be a Canadian resident during the application process and when purchasing the home.
  • First-Time Buyer Status: You qualify as a first-time homebuyer if you have not lived in a home you or your spouse/common-law partner owned during the current or preceding four calendar years.
  • Written Agreement: Have a written agreement to buy or build a qualifying home.
  • Principal Residence: The purchased property must become your principal residence within one year.
  • Eligible Purchases: The program can be used to buy or build a home for a family member with a disability.

Exceptions for Previously Owned Homes:
Even if you or your spouse owned a home in the past, you may still qualify as a first-time homebuyer if the four-year rule applies.

For more detailed eligibility criteria, visit the Canada Revenue Agency (CRA) website.

How to Participate in the Home Buyers' Plan

  1. Apply Using Form T1036:
    • Complete and submit the Home Buyers’ Plan request form to withdraw funds from your RRSP.
  2. Timing Matters:
    • Withdrawals must be made in the same calendar year.
    • The withdrawal can occur up to 30 days after the home’s closing date.
  3. RRSP Contributions:
    • Funds must have been in the RRSP for at least 90 days to qualify for withdrawal.

Repaying Withdrawals

  • Repayment Period: At least 1/15th of the withdrawn amount must be repaid annually.
  • Tax Consequences of Non-Repayment: Any unpaid amount for the year is added to your taxable income.
  • Flexibility: You can repay more than the required amount in any given year.

Example:
If you withdraw $60,000, you need to repay at least $4,000 annually for 15 years. Any shortfall will be taxed at your marginal tax rate.

Pros and Cons of the HBP

Pros:

  1. Leverage your RRSP savings to make homeownership more attainable.
  2. Benefit from an interest-free loan structure.
  3. Flexible repayment options with no penalty for early repayment.
  4. Extended repayment start date for withdrawals made between 2022 and 2025.

Cons:

  1. Strict eligibility criteria.
  2. Withdrawn funds stop accumulating RRSP investment growth until repaid.
  3. Annual repayment is mandatory to avoid tax consequences.

HBP and Other First-Time Homebuyer Programs

In addition to the HBP, here are some other programs to explore:

  1. First Home Savings Account (FHSA):
    • Combine RRSP-like tax deductions with TFSA-like tax-free withdrawals.
    • Contribute up to $8,000 annually, with a lifetime limit of $40,000.
  2. First-Time Home Buyers’ Tax Credit (HBTC):
    • A non-refundable tax credit of up to $1,500.
  3. GST/HST New Housing Rebate:
    • A rebate on GST/HST for new homes or substantial renovations.

Is the HBP Right for You?

The HBP is an excellent tool for first-time homebuyers looking to use existing RRSP savings for a down payment. However, consider these factors:

  • Your ability to repay the withdrawn amount over 15 years.
  • The impact of reduced RRSP growth on your long-term retirement savings.
  • Other first-time homebuyer programs that might complement the HBP.

Final Thoughts

The Home Buyers' Plan offers significant advantages for eligible Canadians, but it’s essential to weigh the pros and cons carefully. Working with a financial advisor or tax consultant can help you make the most informed decisions about your home purchase and ensure compliance with HBP requirements.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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