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First-Time Home Buyers Plan - A Real Benefit

05/06/2012


With the increasing number of properties available for sale, the real estate market in Canada has once again switched to a buyer’s market. In addition, the Bank of Canada has maintained interest rates at all-time low levels making mortgages very attractive for first-time home buyers. Combined with these low-interest rates, first-time home buyers also have the Home Buyers’ Plan (“HBP”) available to them which was introduced in the 1992 Federal Budget.

The Home Buyers’ Plan allows an individual to withdraw up to $25,000 from their Registered Retirement Savings Plan (“RRSP”) to be used towards the purchase of a home in Canada. This withdrawal is completed on a tax-free basis with no immediate tax consequences. The initial contribution to your RRSP allows for a tax deduction that can be applied against the taxpayer’s income (i.e. employment income).

Scenario 1:
No RRSP Contribution Scenario 2:
RRSP Contribution Employment Income $50,000 $50,000 RRSP Contribution - (25,000) Taxable Income 50,000 25,000 Taxes Payable 8,905 2,062
Conditions for Participating in the HBP

The government has provided certain restrictions that must be adhered to in order to qualify under this program.

  • Qualification Period - Neither the taxpayer nor their spouse or common-law partner can own the qualifying home more than 30 days before the withdrawal is made. In addition, neither taxpayer can have occupied a principal place of residence for a period of 5 years before this withdrawal;
  • Resident of Canada - The taxpayer must be a resident of Canada for tax purposes;
  • Form T1036 – The Form T1036 must be completed by the taxpayer for each eligible withdrawal and submitted to the Canada Revenue Agency (“CRA”);
  • Withdrawals – the taxpayer has to receive all their withdrawals in the same calendar year;
  • Maximum Withdrawal – as indicated above, a maximum of $25,000 is allowed to be withdrawn per taxpayer; and
  • Home – the taxpayers have to buy or build the qualifying home before October 1 of the year after the RRSP funds were withdrawn. The home must be located in Canada and includes single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes or apartment buildings.
Time Period for RRSP Contributions

The taxpayer’s RRSP contributions must remain in the RRSP plan for a minimum of 90 days prior to being withdrawn. If the taxpayer withdraws prior to the 90 days lapsing, the deduction as noted in the example above would be denied.

Repayment Period

The taxpayer is required to repay the full amount withdrawn from the RRSP account within a period of 15 years. This repayment starts in the second year following the year you made your withdrawal. CRA will provide the taxpayer with a Home Buyers’ Plan (HBP) Statement of Account each year on the annual Notice of Assessment which will provide the amount that has been repaid to date and the minimum required payment for the following taxation year.

An example which demonstrates the repayment:

Total Withdrawals (2001) $25,000 Minus: Total repayments – (25,000/15) x 9 years (15,000) Repayable balance remaining $10,000 2012 minimum required repayment – (10,000 / 6 years) $1,667

Therefore, the taxpayer would be required to repay $1,667 per year if he/she withdrew the full $25,000 from an RRSP account. In addition, the taxpayer would be required to file a completed Schedule 7 with his/her income tax return to designate the amount re-contributed to their RRSP as an HBP repayment. If the taxpayer does not make the required repayment in the year, the taxpayer is required to include that amount as income on line 129 of their personal tax return.

The First-Time Home Buyers Plan is a great plan that provides the opportunity for individuals to contribute to their RRSPs and withdraw the funds, on a tax-free basis, to use towards to the purchase of a first-time home property. The repayment period of 15 years also provides an extended period for the taxpayer to repay the amount withdrawn.

With interest rates being attractively low, it is generally a good idea for individuals to consider home ownership. The HBP provides an additional benefit that should be utilized.

To learn more about how MNP can assist you in participating in the First-Time Home Buyers Plan, contact your local MNP Tax advisor.