How to take advantage of new increased limit to Home Buyers’ Plan

For years, the Home Buyers’ Plan was the only game in town for the many Canadians who dreamed of saving enough money for a down payment towards a first home or condo. The HBP allows first-time home buyers to withdraw funds from an RRSP to purchase or build a home without having to pay tax on the withdrawal. Amounts withdrawn under the HBP must be repaid to your RRSP over a 15-year period.

Then, in 2009, along came the Tax Free Savings Account, giving prospective homeowners a new way to save towards that down payment since funds inside a TFSA can be accumulated, tax-free and then withdrawn, at any time, to be used for any purpose. Today, a decade after the TFSA’s launch, with the cumulative TFSA dollar limit standing at $63,500, someone who has been able to save regularly in a TFSA can now tap into those savings to help fund a down payment. And, unlike the HBP, there is no obligation to repay the TFSA over a given period of time. Yet, any amounts withdrawn from your TFSA, including income, growth and your original contributions, can be recontributed to your TFSA at any time following the calendar year of withdrawal.

Earlier this month, the HBP got a new lease on life when the federal budget announced that the amount that first-time home buyers can withdraw tax-free from their RRSP to buy a first home will be increased immediately to $35,000 from $25,000. (The limit had not been adjusted for 10 years.) First-time home buyers purchasing a home jointly with a spouse or partner can now each withdraw up to $35,000 from their own RRSP under the HBP, for a total down payment of $70,000. As the budget stated, the increased limit is meant “to provide first-time home buyers with greater access to their RRSPs to purchase or build a home” and applies to HBP withdrawals made after March 19, 2019.

With this sudden, renewed interest in the HBP, here’s a quick refresher on how the plan works and how it might be used instead of, or in conjunction with, a TFSA to buy your first home.

The main benefit of an HBP withdrawal, of course, is the ability to withdraw up to $35,000 from your RRSP without having to pay tax on that withdrawal. This is different from regular RRSP withdrawals, which appear on a T4RSP slip and must be added to your income — and taxed at your marginal rate — in the year of withdrawal. Instead, the HBP withdrawals must be repaid over a 15-year period. Any amounts not repaid on time are included in your income and taxed at your marginal tax rate in the year of non-repayment.

To qualify for the HBP in 2019, you must be a first-time home buyer, meaning you did not occupy a home that you (or your spouse or common-law partner) owned from Jan. 1, 2015 and up to 31 days before you withdraw the HBP funds. Starting in 2020, a new rule proposed in this year’s federal budget will allow you to participate in the HBP even if you are not a first-time home buyer, provided you were living separate and apart from your spouse or common-law partner for at least 90 days as a result of a breakdown in your marriage or partnership in the current year or any time in the prior four years. According to the budget,

this rule change was introduced “to help Canadians who separate or divorce maintain home ownership after the breakdown of their relationship.”

Assuming you qualify as a firsttime home buyer, to withdraw funds from your RRSP without tax, you must first complete Canada Revenue Agency Form T1036 (HBP Request to Withdraw Funds from an RRSP) and submit it to your RRSP issuer. In addition, you must have entered into a written agreement to buy or build a qualified home. A qualifying home cannot be owned more than 30 days before you withdraw the funds.

In most cases, you must intend to occupy the qualifying home as your principal residence no later than one year after you buy or build it. There are exceptions, however, such as if you end up buying a different home then you originally intended, or construction of your new home is delayed.

The general rule is that you must repay the amount you withdrew in equal annual instalments over 15 years. The first instalment is due the second calendar year following the year in which you withdrew the money but can be made up to 60 days after that year-end. Repayments are not tax-deductible as an RRSP contribution nor do they affect your RRSP room.

For example, let’s say a couple each withdraws $15,000 under the HBP in 2019 to buy their first home. The first repayment will be due within 60 days of the end of 2021 or by March 1, 2022. The minimum annual repayment for each spouse is 1/15 of $15,000, or $1,000. The RRSPs, therefore, must be fully repaid by March 1, 2037, which is 60 days after the 15th year.

You’re always allowed to repay more than the minimum annual amount. By doing so, the minimum requirement for future annual repayments will be reduced. To calculate the new minimum, simply divide the balance by the number of years remaining in the repayment schedule. On the other hand, if you repay too little to your RRSP, you must add the difference between the required HBP repayment and the amount you actually repaid to your income for tax purposes in the year it was due.

If you sell your home before the funds are completely repaid, you don’t have to pay off the balance but rather you can simply continue with the regular payment schedule.

So, HBP, TFSA (or both) to fund that down payment?

For most first-time home buyers, it will come down to the classic TFSA vs. RRSP dilemma and where you’ve been saving your money prior to buying that first home. Lower income earners, particularly those in the lowest tax brackets, are generally better off saving via the TFSA as you pay tax on your earnings at relatively low tax rates today and never pay tax again on the contributions, earnings and growth in the TFSA when withdrawn. Higher income earners are generally advised to maximize your RRSP contributions before putting funds in a TFSA so that when you take the money out in a future year, that withdrawal may be taxed at a lower rate.

Jamie.Golombek@cibc.com Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.