The Home Buyers’ Plan allows individuals and their spouses to “borrow’ up to $20,000 each from their RRSPs to use towards the purchase of a home. These withdrawals when they are taken out are generally not taxable though there are very specific criteria and rules that you need to understand before taking any money out of your RRSP to purchase a home.
 
One of the most critical criteria you have to meet is the condition of being a first-time homebuyer under the definition of Canada Revenue Agency. You are not considered a first-time home buyer if, at any time during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before withdrawal, you or your spouse owned a home that you occupied as your principal residence. In simpler terms, to participate in 2008, you and your spouse must not have owned your principal residence between January 1, 2004 and 31 days before your withdrawal to qualify as a first-time home buyer.
 
You can withdraw money from your RRSP under the HBP if you or your spouse has not owned the qualifying home that you intend to use for your personal residence more than 30 days before the date of withdrawal. In other words, if you purchased a qualifying house on November 1, 2007 you could withdraw funds from your RRSP no later than 30 days after the closing date or December 1, 2007. After that date it would not be considered eligible and would be included as income for 2007.
 
There are exceptions to the first-time homebuyer requirement if you are disabled or if you are withdrawing funds to purchase a home for or give the funds to a disabled person, related to you, to purchase a home.
 
If you qualify as a first-time home buyer, and are a resident of Canada, you can withdraw up to $20,000 from your RRSP as long as you haven’t made a contribution to your RRSP within 89 days of the withdrawal. Therefore, it is important to wait 89 days from the date you made a contribution before making a withdrawal under the HBP.
 
If you make withdrawals under the HBP you have to pay the money back to your RRSP and you don’t get a deduction for these repayments. At minimum the repayment must be made in equal annual installments over 15 year period and the first repayment must be made in the second calendar year after the year of your withdrawal. Therefore if you withdrew $20,000 in 2007, the first installment of $1,333 must be made within the normal RRSP deadline or the first 60 days of 2010. If you miss a payment or the minimum required that deficiency is added to your income for that year. As the repayment under the HBP is not a deductible RRSP contribution, it has no impact on your contribution limits.
 
If you become a non-resident after you withdraw funds from your RRSP for the HBP you must repay the entire outstanding amount or it will be added to your income on your final Canadian tax return.
 
Each year, you will receive, from CRA, a Home Buyers’ Plan Statement along with your Notice of Assessment. The statement will indicate the payment required in the following year, if you make more than the minimum payment required it will reduce the outstanding balance in future years. The required minimum payment will then be adjusted on the average of the outstanding balance over the number of years left on the original repayment plan.
 
Saving through your RRSP for a down payment can be one way to save for the purchase of your dream home. Be sure, though, to talk to your financial advisor to make certain you meet all the criteria and follow all the rules to ensure your withdrawals are tax free.
 
March 12, 2008