Canada First Time Home Buyer's Plan

The First time home buyer’s plan is a program that allows Toronto Real Estate first time home buyers to withdraw up to $25,000 in a calendar year from your registered retirement savings plans (RRSPs) tax free to buy or build a qualifying home or condo. A married couple with an RRSP account each can hypothetically withdraw $50,000 ($25,000 per RRSP) without tax consequences (i.e. without having to include the withdrawal in their income). The same goes for situations where you purchase the home with other parties (each can take $25,000 from their individual RRSPs).

A home buyer must be considered a first time home buyer in order to be able to participate, and must have a written agreement to purchase a qualifying home. Also, you must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it. So the funds cannot be withdrawn from the RRSP account to purchase a rental or investment property.

What Is A First Time Home Buyer

You are considered a first-time home buyer if, in the four year period, you did not occupy a home that you or your current spouse or common-law partner owned. There are specific criteria in place to determine how to calculate the four year period. Even if you are not considered one now, once the time criteria and conditions are met, you will be eligible again.

Other Requirements

The person withdrawing must be a Canadian resident at the time of withdrawal.

The funds must have been in the RRSP for at least 90 days. This means that if a purchaser wants to benefit from this program and does not have RRSP funds, they should open an account and make the contribution at least 90 days prior to the purchase of a house or condo. They will receive a tax deduction for the contribution when they file their next tax return for the year, but will have no tax consequences for the withdrawal. If the funds are in the account for less than 90 days, they are not eligible for a deduction.

What's The Catch?

There is a catch, and it’s a big one. Any withdrawals from an RRSP for a qualifying home purchase must be repaid within a certain time frame. That timeframe is 15 years, with a minimum of 1/15 of the total withdrawn amount repaid each year. The minimum payments must begin in the 2nd year following the original withdrawal. If such minimum payments are not made, then they are automatically included in your income for the year and you will have to pay tax on the amount. So in essence, the withdrawal is like a zero interest loan.

If you make a RRSP withdrawal under the HBP and a condition is not met (e.g. if you withdrew the funds to purchase a rental property) then your RRSP withdrawal(s) will not be considered eligible. You will have to include part or all of the withdrawal(s) as income on your income tax return for the year you received the funds

Ram's Take

One of the biggest advantages as mentioned above, assuming that you already have RRSP funds, is that you can access them for your down payment with no tax consequences.

Even if you don’t currently have RRSP funds, you can make a deposit into your RRSP account, wait 90 days and then withdraw it, again with no tax consequences. Moreover, in this 2nd case, you will also receive a tax deduction (at your net marginal tax rate) for the RRSP contribution when you file your return. So it’s a double win. I recommend taking advantage of this program if you can.

Do keep in mind also that there are some proposed changes to the plan currently under consideration by the new Liberal Govt, which may allow withdrawals for those who are not first time home buyers under the following conditions:

• if you have to relocated for work
• if your spouse passes away
• if you divorce your spouse
• to provide care for an elderly relative

Unfortunately, there has been no proposal to increase the withdrawal limit, despite the increased cost of real estate in the City of Toronto. The previous Conservative Government had indicated it was going to increase the limit to $35,000.

Ram Rajendram is a Toronto Real Estate Broker with Century 21 Harvest Realty Ltd., Brokerage. He sells condos & houses throughout the GTA & assists home & condo buyers with their purchasing needs. He is also a Canadian Chartered Accountant (CA) & holds a Bachelors Degree in Economics from the London School of Economics (LSE)