Should you use the Home Buyers’ Plan?
If you need money from your RRSP because you are buying a home, the Home Buyers' Plan (HBP) is the alternative to an out-and-out withdrawal. A tax-free withdrawal of up to S25,000 can be made under the HBP. Basically, the withdrawal is designed to apply only if you and your spouse, if married legally or common-law, are “first-time” home buyers. At first glance, it sounds like easy money. But there are some traps and pitfalls to be aware of. Here’s how it works.
The withdrawal must be repaid in equal installments over 15 years to the extent that a minimum repayment for a year is not made, the shortfall is taxed in your income. The 15-year repayment period commences in the second calendar year following the calendar year of the RRSP withdrawal. Payments made in the first 60 days of a year count as repayments for preceding year. For example, if you make a withdrawal in 2018, you must commence making RRSP repayments under the Home Buyers’ Plan by March 1, 2021.
There’s no specific restriction on “doubling up” on the withdrawal, e.g., where a home is held in co-tenancy. For example, a husband and wife may together withdraw up to $50,000 (i.e., up to $25,000 from each spouse’s plan).
You’re generally eligible for the plan provided that you meet the following conditions:
- You’ve never participated in the program before.
- You’ve signed an agreement to build or purchase a qualifying home.
- The home (or a replacement property) is bought or built by October 1 of the year following the year in which you’ve received the funds from the RRSP (extensions are available in some instances).
- You intend to occupy the home as your principal place of residence within one year of buying or building the home.
A “look-back” rule blocks the HBP if you or your spouse (including a “common law” spouse) have owned an owner-occupied home for a period of four years or so.
Is an HBP withdrawal a good idea?
The big problem with the Home Buyers’ Plan is that you could be caught in a cash-flow crunch that could lead to tax penalties down the road.
First, the cash-flow drain due to repayments to the plan may impinge on your ability to make your regular tax-deductible RRSP contributions in the future. So without that annual RRSP contribution writeoff, your tax bill could go up. Worse still, if the required Home Buyers’ Plan repayment, which is not deductible, is not made on a timely basis, then you’ll suffer a further taxable benefit. Even harsher rules may apply if you pass away or cease to be a Canadian resident. (Note: Restrictions apply to deductions for ordinary RRSP contributions if made less than 90 days before the withdrawal.)
If you or your spouse are about to drop into a low tax bracket (e.g., you have plans to retire from the workforce), the Home Buyers’ Plan may make more sense. For example, the taxable benefit resulting from nonrepayment may result in little or no adverse tax consequences under these circumstances.
Having said this, participating in a Home Buyers’ plan is usually a better bet than an outright withdrawal from your plan, which is a straight add-on to your taxable income in the year of withdrawal. The only problem is whether $25,000 would be enough to achieve anything in this real estate market!
Previously published in The Fund Library on November 28, 2018 by tax and estate planning lawyer, Samantha Prasad. Portions of this article first appeared in The TaxLetter, © 2018 by MPL Communications Ltd. Used with permission.