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HOW TO USE THE HOME BUYER’S PLAN TO TOP UP DOWN PAYMENTS
4/19/2018 5:33:28 PM
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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Friday, March 16, 2018




Q – My husband and I are looking to add to the down payment for a new home we’re shopping for this spring. We both have funds in our RRSPs, and I’ve heard that some of that can be used to buy a home. Could you tell us how this works? – Ivy S., Oakville, Ontario

A – Yes, if you have a good chunk of money sitting in your Registered Retirement Savings Plan (RRSP), you may be eligible to use some of it towards the purchase of a home under a federal government plan called the Home Buyer’s Plan (HPB). Naturally, there’s a long list of rules and regulations, but if you’re a young couple, it could mean as much as an extra $50,000 to tack on to a down payment.

Essentially, the HPB allows first-time home buyers who meet certain conditions to withdraw up to $25,000 from their RRSPs in a calendar year to buy or build a qualifying home. Even better, that amount will not be included in your income and tax will not be withheld on the withdrawal.

The downside of the HBP is that you’re taking money out of your RRSP, so it will no longer be growing and compounding within the plan on a tax-deferred basis. However, because you’re putting the funds towards the purchase of residential real estate, you may still come out ahead. That’s because any realized gain in the value of your property when you sell is covered by the Principal Residence Exemption, so you won’t pay tax on any capital gain on your home when you sell. In addition, you have to repay the HBP withdrawal back into your RRSP on a regular basis over a maximum of 15 years, so you’ll still be rebuilding your RRSP over time.

In Canada residential real estate, especially in larger urban markets, has historically been a good investment, at least keeping pace with the rate of inflation, and often exceeding it by a wide margin. So if you choose the right home in the right location, anything you give up in your RRSP in terms of growth you’re likely to make up in the increase in value of your real estate. But this is always something of a crapshoot. Consider your HBP withdrawal as a source of funds for a place to live, not as a speculative real estate venture!

Rules for HBP withdrawals

First of all, you have to have a Registered Retirement Savings Plan. There’s no minimum amount, but it usually doesn’t make sense to withdraw funds for a down payment unless you already have a good-size chunk socked away in the RRSP. The maximum you can withdraw under the HBP is $25,000. And then only if you meet the following conditions:

* You are a Canadian resident and have entered into a written agreement to buy or build a qualifying home. A “qualifying home” is just about any type of housing unit located in Canada.

* You are using the home as your principal residence within a year of buying or building it. However, according to the Canada Revenue Agency, even if you do not buy or build the qualifying home before Oct. 1 of the year after the year you withdrew the funds, you will still be eligible for the HBP withdrawal if either of the following situations applies:

1) You had a written agreement, in effect on Oct. 1 of the year after the year you withdrew the funds, to buy a qualifying home or replacement property, and you buy the property before Oct. 1 of the second year after the year of the withdrawal. And you were a Canadian resident up to the time of purchase.

2) For a home being built, you had paid your arm’s-length contractors an amount for materials after the date of the first withdrawal and before Oct. 1 of the year after the year you withdrew the funds that was at least equal to the total of all withdrawals under the HBP.

* You are a first-time home buyer. Generally, if you or your spouse or partner owned a principal residence within four years before your HBP withdrawal, you won’t qualify. However, if you are eligible now because you’re still inside the four-year limit, you may still be considered a first-time home buyer later, once the four-year period has passed.

* You repay the amounts you’ve withdrawn back into your RRSP over a maximum 15-year period. The minimum annual repayment is 1/15 of the total initial withdrawal. You may, of course, pay back more and faster if you wish or are able to do so – which makes sense, given that you want your funds working for you in your RRSP.

To make an RRSP withdrawal under the HBP, you have to complete and file CRA Form T1036-17e. The Home Buyer’s Plan can be complicated, so getting advice from a qualified financial planner ahead of time is a good idea.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. She is also listed as a MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

© 2018 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
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