The facts about using RRSPs for your new home
There are specific rules about the use of Registered Retirement Savings Plan (RRSP) funds for first-time home buyers. You must be a first-time home buyer or you (or your spouse or common-law spouse) must not have owned a home that you occupied in the last five years. The funds you withdraw from the RRSP must be used for a principal residence and you must have a written agreement to purchase a home in order to withdraw the funds.
The funds can be applied to the down payment, land transfer tax, legal fees and disbursements, improvements to the home, and even furniture and appliances.
The Home Buyers’ Plan
According to the Canada Revenue Agency, the Home Buyers’ Plan (HBP) allows you and your spouse to each withdraw up to $25,000 from your RRSP to buy a new or existing home. Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible at all.
Once you make a withdrawal, you will get a T4RSP form – a Statement of Registered Retirement Savings Plan Income – showing the transaction. You will have to file an income tax return starting the year you make your first HBP withdrawal and for each year until you have repaid all HBP withdrawals.
Generally, you have to repay all withdrawals to your RRSP within a period of no more than 15 years. You have to repay an amount to your RRSP each year until your HBP balance is zero. If you do not repay the amount due for a particular year, it will be included in your income for that year, and subject to tax.
We will examine the specific rules about repaying your RRSP loan in an upcoming blog.
This is an excellent option for new buyers and yet another reason to encourage young adults to start saving in an RSP as soon as they start working. The program works equally well for older ‘first time’ home buyers.
A number of my clients have used or currently use this program. It is simple to implement and manage from year to year.
Another good saving option is the Tax Free Savings Account (TFSA), which the government introduced three years ago and although the features and benefits are somewhat different to RRSP’s it has significant flexibility that may be better suited, particularly for younger adults, see http://www.cra-arc.gc.ca/tx/rgstrd/tfsa-celi/bt-eng.html
Regardless of approach the key is to start ‘paying yourself first’ and build your savings.
- Anton
Before the downturn we purchased a lake front Condo. using 40,000 from RRSP to get beloww the CMHC insurance threshold. The Condo has appreciated a huge amount compared to my mutual funds. Thanks to a savy investment advisor.
rod