Using Your RRSP

First Time Home Buyer? Don't forget about the RRSP Home Buyers' Plan. It can be all or part of your down payment. The rules have changed in recent years, so if you think you know them, double check here!

What is the Home Buyers' Plan?

The HBP is a federally instituted government program that allows you to withdraw up to $25,000 from your registered retirement savings plans (RRSPs) to buy or build a qualifying home. The home can be for yourself or it can be for a related disabled person if it is more accessible to that person than his or her current home, or is better suited to that person's needs.

You do not have to include eligible withdrawals in your income, and your RRSP issuer will not withhold tax on these amounts. You can withdraw a single amount or make a series of withdrawals throughout the same year, provided the total of your withdrawals is not more than $25,000. If you buy the qualifying home together with your spouse or common-law partner, or other individuals, each of you can withdraw up to $25,000.

You have to repay all withdrawals to your RRSPs within a period of no more than 15 years. Generally, you will have to repay an amount to your RRSPs each year until you have repaid all the amount you withdrew. If you do not repay the amount due for a year, it will be included in your income for that year.

Keep reading to learn more! And remember, whether you have RRSP savings or no RRSP savings, the HBP can be applied to you!

Benefits from using the Home Buyers' Plan.

The utilization of your RRSP's within the guidelines of the HBP results in benefits that are quantifiable immediately and extend over the long-term:

• Increased down payment
  
  
• Decreased principal owing
  
  
• Avoidance of substantial interest costs over that accrue over long periods
  
  

Who can participate in the HBP? And how many times?

You can participate in the HBP more than once in your lifetime if:

• your HBP balance for your previous participation is fully repaid at the beginning of the year you want your participation in the HBP to occur; and
  
  
• you met all the other HBP conditions that apply to your situation.
  
  

If you are disabled you may be able to participate in the Home Buyers' Plan to buy or build a more accessible home. You may also be able to participate in the HBP for someone else if:

• you acquire a home under the HBP for a related disabled person that is more accessible to or better suited to the needs of that person; or
  
  
• you withdraw funds from your RRSP under the HBP and provide those funds to a related disabled person that is more accessible to or better suited to the needs of that person.
  
  

How does it work? — No penalties

Under the "HBP", Revenue Canada permits you to use your RRSP funds towards the purchase of a new home. The default insurance companies support this program (when your down payment is less than 20%) in allotting the RRSP funds as a source of down payment.

• a. No penalty for withdrawal
  There are no negative effects from removing funds from the RRSP —in short, individuals are able to withdraw monies from their fund without penalty:
  • No tax is owed on the monies withdrawn
  • No interest is paid on the monies while it is outside of your RRSP
  • There is no monitoring of the monies while outside your Plan (see Tax Management below)
• b. Subject to restrictions
  Regardless of no penalties for withdrawing funds, there are certain guidelines that must be followed in order to remain protected under the HBP' umbrella:
  • There is a maximum of $25,000 that can be withdrawn from one individual's RRSP.
  • There can be a maximum of two first-time buyers in the purchase of a new home, and each individual can withdraw up to $25,000 for a total of $50,000.
  • The purchased home must be owner occupied.
    The RRSP must be repaid within 15 years with minimum annual payments of 1/15th of the withdrawn amount — failure to do so will result in 1/15th of the
  • RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.
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Summary of conditions for participating in the HBP.

A number of conditions have to be met to participate in the HBP. While some conditions have to be met before you can withdraw funds from your RRSPs, others apply when or after you receive the funds.

The following chart lists all the HBP conditions and who has to meet them in different situations.

Situation 1 -
You buy or build a qualifying home for yourself.
Situation 2 -
You, a disabled person, buy or build a qualifying home for yourself.
Situation 3 -
You buy or build a qualifying home for yourself for a related disabled person.
Situation 4 -
You help a related disabled person buy or build a qualifying home.

Situation	1	2	3		4
Person responsible for meeting conditions	Y	Y	Y	RDP	Y	RDP
Conditions to meet before applying to withdraw funds
Enter into agreement to buy or build qualifying home	Y	Y	Y	N/A	N/A	Y
Intend to occupy qualifying home as principal place of residence	Y	Y	N/A	Y	N/A	Y
Be considered a first-time buyer**	Y	N/A	N/A	N/A	N/A	N/A
HBP balance on Jan. 1 of year of withdrawal is $0
Conditions to meet when a withdrawal is made
You or your spouse can't have owned the qualifying home more than 30 days before withdrawal is made	Y	Y	Y	N/A	N/A	Y
Resident of Canada	Y	Y	Y	N/A	Y	N/A
Completion of Form T1036	Y	Y	Y	N/A	Y	N/A
Receipt of all withdrawals in same year	Y	Y	Y	N/A	Y	N/A
You cannot withdraw more than $25,000	Y	Y	Y	N/A	Y	N/A
Conditions to meet after your withdrawals have been made
Buy or build the qualifying home before Oct. 1 of the year after the year of withdrawal	Y	Y	Y	N/A	N/A	Y

** NB.
You are not considered to be a first time homebuyer if, at any time during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal, you or your spouse owned a home that you occupied as your principal place of residence.

Establishing an RRSP with borrowed funds for a tax refund.

The "HBP" permits an individual to establish an RRSP with borrowed funds, and then use the resultant tax refund for a down payment. In this scenario:

1. The individual borrows funds that are contributed to an RRSP.
   
   
2. After a 90-day period, the RRSP is collapsed to repay the loan.
   
   
3. The client receives a tax refund that can be applied to the purchase of a home.
   
   

These funds re considered as an acceptable source of down payment provided that:

1. The tax refund is in the individual's hands at the time of closing.
   
   
2. The lender can verify that the borrower has proven liquidable assets equal to a minimum equity of 5% of the purchase price.
   
   

An Invis Mortgage Consultant will:

1. set up a meeting to determine each client's approximate refund amount
   
   
2. arrange the RRSP loan
   
   
3. provide a mortgage pre-approval based on the information provided
   
   

The client must supply their most recent Notice of Assessment and their last pay stub for the previous year showing year-to-date earnings and taxes paid.

Managing Tax Refunds

The government does not monitor the funds that are withdrawn from RRSP's for the purposes of the HBP. Therefore, providing that an individual has qualified as a buyer and has purchased a qualifying home, they may do whatever they desire with the money. Furthermore, the income tax refund received may be used in whatever manner decided, such as:

• Clearing the balance on credit cards
  
  
• Reducing, or retiring, personal loans
  
  
• Making lump sum payments on a mortgage
  
  
• Purchasing household necessities — appliances, furniture, accessories etc.
  
  
• Increasing the down payment to reduce/avoid default insurance premiums
  
  
• Paying for legal fees and or tax adjustments
  
  

The more debt you are able to pay off, the less in monthly expense obligations you will have. This will ultimately put you in a much better financial position.

What else should you know?

The Home Buyers' Plan enables you to borrow money to top up your RRSP plan using accumulated RRSP eligibility limits. If your tax assessment notice indicates you are eligible for $18,000 in contributions in the current year, and you already have $4,000 in a self-directed plan, you are allowed to borrow — subject to credit approval — the $16,000 to buy the RRSP required to bring you up to the $25,000 Home Buyers' Plan limit.

Then you can claim the eligible deduction against your current year's income in order to get a large tax rebate. You can use the rebate to pay down the loan or apply it to the cost of buying the home. Here, of course, the amount of tax you're paying each year is an important factor. If the $16,000 deduction in this example results in a $5,000 tax rebate, it can be used as you see fit. If, on the other hand two partners each earning $80,000 per year take their maximum RRSP of $25,000 each in the current year, they could net a total of $15,000 or more in a tax rebate.

You are then allowed to withdraw up to the $25,000 maximum from the RRSP 90 days after topping up or creating the plan, subject to the re-deposit requirements described above.

Be Careful — If you're planning to borrow the money for the maximum RRSP, you could end up disqualifying yourself for a mortgage because your monthly payments will be too high. Your "total debt servicing ratio" — the proportion of your gross income required to service both the home related costs and other monthly obligations — may exceed the usually acceptable monthly maximum of 42%. Another $600 per month could well make the difference in whether or not you'll qualify for a mortgage. Your Invis Mortgage Consultant is the best person to advise you on this process.