The HBP: A Nifty Tool
Article revised on 23 December 2019
Buying your first home is likely to be the biggest investment you will ever make. Making a full down payment can therefore seem very challenging. Did you know that you can add several thousand dollars to this payment – at no extra cost?
The Home Buyers’ Plan (HBP), which was introduced in February 1992, has helped millions of Canadians save enough toward the purchase of their first home¹. The idea is simple: you can make a tax-free withdrawal from your RRSP to make a down payment on your first home. You then have 15 years to pay the amount of the withdrawal back in your RRSP. You must start paying back no later than 60 days after the second calendar year following the withdrawal and payments must be equal to at least 1/15 of the total withdrawal.
What you need to know
- Each legal or common-law spouse can withdraw up to $35,000 from his or her RRSP, for a total of $50,000 per couple.
- In order to make the withdrawal, the money must have been invested in the RRSP for at least 90 days.
- To receive the money tax-free, you must have a signed agreement for the purchase or construction of a qualifying home and intend to use the home as your principal residence within one year following the purchase or the construction of the home.
- In the event of divorce or if you stop living with your common-law spouse for at least 90 days, you can make another withdrawal provided the amounts withdrawn under the previous HBP were paid back in full, and that you were not a homeowner in the last five years preceding the divorce or the end of the conjugal relationship.
Let’s suppose you currently intend to make a $15,000 down payment toward the purchase of your home. You use this amount to make a $15,000² contribution toward your RRSP which you can withdraw, tax-free, 90 days later. You will get a tax return of $6,000 (using a tax rate of 40%). Your down payment goes from $15,000 to $21,000 without costing you a single penny more. This strategy can help you save on mortgage credit insurance (e.g. CHMC), which is required by the financial institution, in the event of non-payment.
If you don’t have the cash required to contribute to your RRSP, you can take out a loan from a financial institution. But tread carefully with this option. If you do not have the means to own a home from the get-go, the HBP will not make that happen for you on its own.
Regardless of your strategy, if you are looking to buy a home for the first time and intend to use it as your principal residence, it’s important to meet with your financial security advisor to analyze how you can work the HBP into your plans while taking your personal situation and goals into account.
Note: This article is intended for information purposes only and should not be construed as legal, financial, tax or other advice. The circumstances or elements may vary depending on your individual situation. We encourage you to consult a professional before taking action. La Capitale shall not be held liable for any consequences arising from any decision taken based on the content presented in this article.
¹ The Canada Revenue Agency (CRA) has established guidelines to determine a “qualifying home.”
² Assuming there is sufficient RRSP contribution room to allow for this investment.
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