Buying a home can be an expensive proposition, especially when it’s your first one. However, utilizing Canada Revenue Agency’s Home Buyer’s Plan may help you come up with extra funds that could make the difference.
If you have an RRSP, CRA allows you to borrow funds from it to purchase a new home.
Chris Bodnar, CPA, CA and tax partner with Crawford, Smith and Swallow in Niagara Falls, says “Borrowing from your RRSP has its advantages over borrowing from a bank.” But before you proceed, he cautions, be aware of how it affects your overall financial situation.
If you choose to use the HBP, one of the main criteria is that you be a first-time homebuyer. Bodnar explains, “If both spouses qualify as first-time buyers, they can each borrow $25,000.00 from their RRSP. The RRSP can be an individual plan or a spousal one. This gives them up to $50,000.00 for their home.”
To be considered a first-time buyer, you must meet the following criteria set forth by CRA:
- You cannot have occupied, as a principal place of residence, a home from January 1 of the fourth year from the year of your withdrawal ending 31 days prior to the withdrawal of your RRSP funds; or
- Your spouse cannot have owned a home where you resided together during the same period described above;
- You must be a resident of Canada
CRA allows you to participate in the program again if your HBP balance is at $0, and you have completely repaid the borrowed RRSP amount.
Exceptions to the Rule
There are exceptions to the first-time homebuyer criteria. If you, or a person related to you by blood, marriage, adoption or common-law, have a disability, you can qualify to use funds from your RRSP under the HBP to build or buy a home that is more accessible for the person with the disability.
You also can withdraw the funds from your RRSP to give to a person related to you by blood, marriage, adoption or common-law to buy or build a home that is better suited to their disability.
Buy or Build
To withdraw funds from your RRSP, you are required to enter into a written agreement to purchase or build a house, such as an accepted real estate purchase agreement. If the money is not intended for your personal use, but for a relation with a disability, that person must sign the agreement.
CRA cautions that a preapproved mortgage does not qualify. Your intentions must be to move into the property no less than one year after you have purchased the home or building is complete. There is no time limit as to how long you are required to live there.
Paying It Back
CRA allows 15 years to repay your borrowed RRSP money.
Bodnar explains, “You must pay back 1/15 of the loan each year. The payments can be monthly or once a year, as long as 1/15 is put back into the RRSP account. You can pay more if you like.” He also gives as an example, “If you received the loan in 2016, you do not have to begin the payment schedule until the second year after you took the loan.”
In other words, the payments for the money you borrow in 2016 must begin no later than the end of February 2019, which is the last date you can contribute to a RRSP fund for the previous year.
References & Resources
- Chris Bodnar, CPA, CA; Crawford, Smith and Swallow; Niagara Falls, Ontario
- Canada Revenue Agency: Home Buyers’ Plan (HBP)