Understanding the Home Buyers' Plan: A Comprehensive Guide

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Introduction

Buying your first home can feel overwhelming, especially when it comes to saving for a down payment. The Home Buyers’ Plan (HBP) is a federal program designed to make that first step easier by letting you use your own Registered Retirement Savings Plan (RRSP) funds to buy or build a home, without paying tax upfront.

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When used correctly, the HBP can significantly reduce the cash you need out of pocket and help you get into the housing market sooner.

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How the Home Buyers' Plan Works

Under the HBP, a first-time home buyer can withdraw up to $40,000 from their RRSP tax-free to purchase or build a qualifying home.

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If you’re buying with a spouse or common-law partner, each person can withdraw up to $40,000, allowing a combined total of up to $80,000 toward the purchase.

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Important rule: RRSP contributions must have been in your account for at least 90 days before they can be withdrawn under the HBP.

Eligibility Criteria

To qualify for the HBP, you must meet certain criteria:

• You must be a first-time home buyer, which means you have not owned a home in the last four years.
• The home you are purchasing must be located in Canada and must be intended for you to live in as your principal residence.
• You must have a written agreement to buy or build a qualifying home.

Repayment Period

Once you withdraw funds under the HBP, you are required to repay the amount to your RRSP over a period of 15 years. Each year, you must repay at least 1/15th of the total amount withdrawn. If you fail to make the required repayment in a given year, the amount will be added to your taxable income for that year, which could result in a tax liability.

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How Much Do You Have to Repay Each Year?

Each year, you must repay at least 1/15 of the total amount withdrawn.

Example:

• You withdraw $30,000
• Annual minimum repayment = $2,000
• If you repay less than $2,000 in a year, the unpaid portion is added to your taxable income

You can:

• Repay more than the minimum
• Repay early
• Repay the full amount at any time

There is no penalty for early repayment.

Couple Example: Using the HBP Together

• You and your spouse each withdraw $40,000
• Total funds used toward the home: $80,000
• You purchase an $800,000 home
• Repayments begin five years later
• Each of you repays about $2,667 per year over 15 years

This allows you to:

• Reduce the size of your mortgage
• Avoid immediate tax on withdrawals
• Spread repayment over many years at your own pace

What Happens If You Miss a Repayment?

If you don’t make the required repayment in a given year:

• The missed amount is added to your taxable income
• It is taxed at your marginal tax rate
• You permanently lose that RRSP room

This is why planning cash flow around repayments is important.

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Conclusion

The Home Buyers' Plan is a valuable resource for first-time home buyers looking to make their dream of homeownership a reality. By understanding the eligibility requirements, withdrawal limits, and repayment obligations, you can effectively utilize this program to ease the financial challenges of purchasing your first home. For more information, consult the Canada Revenue Agency's website or speak with a financial advisor.