≡ Menu

How the RRSP Home Buyers Plan (HBP) Works

When I bought my first home when I graduated in 2003, I was fortunate enough to have some cash saved for a down payment. Most young people, however, don’t have this luxury but they have some money in an RRSP. In this particular situation, using the RRSP First Time Home Buyers Plan (HBP) can be of great benefit.

What is the HBP?

The RRSP Home Buyers plan is a program that allows first time home buyers to withdraw up to $20,000 $25,000 (as of 2009 federal budget) from their RRSP towards their first home TAX FREE.

How does it work?

As mentioned above, if you are a first time home buyer, you can withdraw up to $25,000 out of your RRSP tax free! If you are purchasing the home with a spouse, you can both withdraw $25k EACH from your accounts. In terms of repayment, you have up to 15 years to pay back your RRSP starting the second year after the year of withdrawal (from govt website). At this time 1/15 of your borrowed amount must be paid back / year.

What’s the catch?

  • In terms of penalties, if you don’t repay 1/15 of the borrowed amount / year, you’ll have to add the amount as income.
  • You MUST be a first time home buyer and a resident of Canada at the time of withdrawal.
  • You MUST purchase/build the home before Oct 1 after the year of withdrawal.
  • RRSP contributions of up to 90 days before the withdrawal date can be used towards the HBP.

Why would I do this?

This is one of the only ways to withdraw from your RRSP tax free and a great way to get yourself into the real estate market. Some may argue that you’re missing out on growth in your RRSP while the money is borrowed. However, I think that if you get a good price for your first home relative to others in the neighborhood, the appreciation of the home will hopefully make up for this.

On top of that, aggressive RRSP contributions after purchasing the home should be part of the plan. Here is the government site that explains the HBP program in detail: Home Buyers’ Plan (HBP)

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

Share and Enjoy

  • Facebook
  • Twitter
  • Delicious
  • LinkedIn
  • StumbleUpon
  • Add to favorites
  • Email
  • RSS

FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 24 comments… add one }

  • Brian Eckhardt September 12, 2012, 10:00 pm

    Jayboard:

    For each calendar year you do not repay your HBP required pymt, the 1/15th is considered a regular RRSP withdrawal and you will report that AMT as income. After the 15 yrs in which you need to pay it back, whether you physically nake the deposit or not the HBP will be repaid.

    Hope that helps!

  • Brian Eckhardt September 12, 2012, 10:06 pm

    Sare,

    You need to complete the required HBP withdrawal request form and process it with the institution’s where the RRSP is held. Speak with a rep from the two banks you have an RRSP with to ensure conditions of participation are met and they can guide you the rest of the way!

    Happy home buying…

  • Ed Rempel September 14, 2012, 2:22 am

    Hi Peter,

    The HBP withdrawal needs to be made in the year you take ownership of the condo. When you buy a new construction condo, you make take possession when construction is complete, but then pay rent until you actually take possession perhaps a year later.

    The key date is when you take ownership, not possession. You may be able to qualify for the HBP, but you have to make all the deposits and then take possession and pay rent all from your own resources.

    Your RRSP and the HBP can only help you when you actually take ownership.

    Ed

  • Ed Rempel September 14, 2012, 2:33 am

    Hi Chris,

    The Home Buyer’s Plan and the Smith Manoeuvre are completely separate plans, but they can sometimes be used in combination.

    For example, if you qualify for the HBP but already have the 20% down payment, you could also:

    1. Withdraw $25,000 from your RRSP under the HBP.
    2. Pay this $25,000 onto your mortgage.
    3. Reborrow the $25,000 to reinvest with the Smith Manoeuvre.

    The results of this are:

    1. You can still have the $25,000 invested similarly.
    2. The $25,000 no longer compounds tax-free (but you can defer the capital gain many years with a tax-efficient investment).
    3. You have reduced your mortgage by $25,000 and reborrowed with tax deductible interest (at a higher interest rate though) that will remain tax deductible for many years.

    This may or may not be a smart strategy, depending on your tax bracket in the next few years and how little taxable income your investments will produce.

    I’m sure there are other possibilities for combining the Home Buyer’s Plan and Smith Manoeuvre strategies.

    Ed

  • Gogernator December 4, 2012, 11:47 am

    Hi I have a quick question about the HBP. If I have all my RRSP is invested in stocks, can I put in my maximum amount of RRSP contribution this year (say 25K) then withdraw the cash for a deposit on a house, there is about 100K in the RRSP invested right now. I know that the money has to be liquid and in for 90 days, but does the cash component itself have to be in for 90 days? We are looking at putting an offer on a house this week, but i would prefer to put in a full RRSP contribution for this year, getting the tax return, and then withdraw the money for the deposit, without having to liquidate shares in the RRSP portofolio.

    Thanks in advance,

    ..C

  • Brian Eckhardt December 4, 2012, 12:59 pm

    ..C,

    …As long as if you qualify as a first time home buyer:

    The requirement is for the funds to be INSIDE the RRSP. It doesn’t matter if it’s invested in stocks, bonds, mutual funds, cash etc. As long as the funds have been in for 90 days. No need to sell shares if you’re holding cash.

    Brian Eckhardt

  • Gogernator December 6, 2012, 1:33 pm

    Hi Brian,

    Thanks for your answer!! One other quick question, I have recently moved back to Canada from Europe (away for 10+ yrs). If I still own a property over there, would I be considered a first time buyer in Canada as I have never had a property here?

    Once again thanks to everyone who responds on these boards, it’s very helpful.

    Cheers,

    ..C

  • Brian Eckhardt December 6, 2012, 4:06 pm

    …C,

    My tax and legal sources have confirmed for me that no, you would not be considered a “first-time home buyer” if you had an “owner-occupied home” during the prohibited period (4 years prior to purchasing your home); even if that home was not located in Canada.

    Hope that helps,
    Brian

  • Income Tax Man January 5, 2013, 4:27 am

    First time home buyers receive some interesting benefits in Canada. When I bought my first home I was allowed to write off $5000 from my income tax for that year and I got the most money back on my tax return ever. I hope when I do my taxes in 2012 it works out well but i know i wont make a lot of money back this year.

  • Phala January 5, 2013, 10:08 am

    This is the plan i just used to buya home at 400k with only 5% down.

    I live tenants that pay my mortgage off and i need your help for many questions.
    Should i use the extra money to pay my mortgage or build another down payment for another property since i want to invest in real estate?
    I also heard about using RRSP for real estate investing without withdrawing it, is it true?

    What should i do about taxes, i just moved in november 2012 and my tenants paid me cash.

    Thanks a lot

  • Ed Rempel January 5, 2013, 10:44 pm

    Hi Gogernator,

    I assume you were living in the property you owned in Europe? If you never lived in the property you own, then you could still be a first time home owner, for example if it was a rental property.

    Ed

  • Rebecca April 12, 2013, 6:14 pm

    Can anyone tell me when the rule changed for eligibility of being a first time home buyer changed from three years to five years?

  • art April 22, 2013, 2:19 am

    Hi Everyone, I’m happy this forum is still alive. I have a cloudy scenario and wanted you opinions.

    I have bought a house with the family Dec 2009 ( owned by 3 members of my family) and non have made ever made any contributions to RRSP or utilized it.

    I planning to move out this year, and I was wondering if it’s too late to contribute and take advantage of the HBP, solely for myself.

    Any feed back will be much appreciated. Thanks!

  • armaan September 16, 2013, 2:16 pm

    Hello,

    I withdraw 10K from my RRSP And 5K from my spouse RRSP under HBP plan.

    Now its time to repayment. I have my own RRSP Account and i will deposit my due for this year.

    For my spouse, can i open spousal RRSP and deposit money in my spouse account so that it can be consider has her repayment for the loan.

    I am asking this question here, because i went to TD and they informed to me that my spouse need to repayment loan by herself.

  • Dan September 16, 2013, 8:55 pm

    @art I believe you need to be considered a first time buyer 5 years prior, so since it has been less than 5 yrs you likely cant take advantage of the HBP

    @armaan the money needs to be repaid to the account it was taken from. Since the money was taken from your spouses RRSP it needs to be paid back there, but you could always give him/her the cash and get them to do the repayment

  • Henry October 18, 2013, 12:45 am

    Hello,

    I have a question regarding the use of RRSP for the first time HBP.
    I have 13k in my RRSP account under my name and I am qualified as the first time home buyer. I understand I can withdraw up to 25k but unfortunately I haven’t saved enough. So I still have 12k to use for the first time HBP, my question is can I withdraw this 12k later year by year as the first time HBP?

    For example: I buy the house in Dec 01 2013 and withdraw 13k from my RRSP as first time HBP.

    And then I contribute 5k to my RRSP in the 2013 tax year and can I withdraw this 5k amount 3 months later as the first time HBP?

    And in the 2014 tax year, I will contribute another 7k to my RRSP and can I withdraw this 7k amount 3 months later as the first time HBP?

    All your answers are much appreciated.
    Many thanks,
    Henry

  • Lanette October 18, 2013, 11:33 am

    The HBP is a one-time withdrawal up to a $25K maximum, meant to assist with a downpayment, so you would not be able to draw on the remaining room after your initial purchase.

  • Diane February 1, 2014, 10:41 pm

    My understanding is that at age 71, a HBP participant has three choices – one of which is to have the annual repayment amount considered to be income on his or her tax return and obviously, pay the required tax on that. One question that comes to mind is: Would that “income” amount have an impact on GIS? (i.e, would or could it be considered part of the $3500 exemption amount).

  • Dave June 17, 2014, 2:56 am

    I took out 5000$ to put down on a house which looks like it will fall through due to house inspection. Because I transferred this out of my RRSP already does that mean I can’t do it again? Or because I did not use it to purchase a home can I retry at a later date? Thanks!

  • Jenny February 27, 2015, 6:47 pm

    Hi There,

    I took out the full 25K for my first time HBP. I have lived in the property for 3 years and am now planing to travel for 1 year. Can I claim the entire value of my HBP as my income for my year of travel?

    Thanks,

  • karmen June 4, 2015, 3:35 pm

    Do I have to purchase a home in Canada?

  • Ian December 25, 2015, 1:23 pm

    Two questions.

    We sold our home in Aug 2012. Does this mean that we can use the program to buy a home from Jan 1, 2016 onwards…ie does this meet the 4 year period

    We are 64 and 62 years old respectively. Will the 15 year payback period extend to 79 and 77 respectively and how does it mesh with RSP drawdown rules?

    thank you

  • Ed Rempel December 29, 2015, 1:56 am

    Hi Ian,

    You can get your first time home buyers qualification back (unlike virginity!). However, the 4-year period takes you one more year until January 1 , 2017.

    If you buy a home in 2017, you will only have 4 years of repaymnet up till age 71. If you still have a home buyers plan balance left after December 31 of the year you turn 71, the remaining amount is added to your income divided over the remaining 11 years.

    This is actually a cool way to defer tax, since 1/15 of your withdrawal in 2017 is taxable each year.

    The downside is if your taxable income is low and you get GIS. If so, then the 1/15 added to your income is essentially taxed at 70% – a 50% reduction in your GIS plus 20% tax.

    If your income is too high to get GIS, using HBP now can work very well for you.

    Ed

  • Sharon January 6, 2016, 2:26 pm

    I have a question: My employer matches up to 3% of my income when I contribute 3% (or more), does their contribution count towards my HBP pay back?

Leave a Comment

Pinterest
Email
Print