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A house can be one of the most expensive purchases in an average person’s life. Certain questions regarding budget, funding, and future mortgage payments can make the thought all the more daunting. Fortunately, the Canadian government understands this well and promotes the use of plans like the Home Buyers’ Plan (HBP) to provide some financial assistance in purchasing a home.
Owing to the frequent questions received by AG Tax professionals regarding the HBP, our analysts have prepared a brief overview. However, as every individual’s situation varies, it is advisable that one should further discuss any major purchase goal(s) with their personal tax accountant or financial advisors.
The ‘Home Buyers’ Plan’ (HBP) Initiative
HBP allows individuals to make tax-free withdrawals of funds up to $25,000 from their Registered Retirement Savings Plan (RRSP) to purchase or build a home for themselves or for any relative with disability, which needs to be paid off in installments within 15 years (from the year following the withdrawal year) in order to remain tax-free. Married Couples/Common-Law Partners can benefit up to $50,000 ($25,000 each) to purchase their first home together.
Who is considered a ‘First-Time Home Buyer’?
An individual is generally considered a first-time homebuyer if:
– None of the spouses or common-law partners have owned another home in the year of withdrawal, or in any of the past four years.
– The house is being purchased because of its suitability for a person with qualifying disability (i.e. someone receiving or qualifying for Disability Tax Credit).
Additional Requirements of Eligibility for Home Buyers’ Plan:
– The individual(s) must be Canadian resident(s).
– He/She must be the actual/direct owner of the RRSP(s).
– The RRSP account must have been opened a minimum of 90 days to qualify for a tax-free withdrawal.
– There should be a written agreement to buy or build a house for oneself or a disabled relative.
– The gap between the ownership of the purchased house and withdrawal of the funds from the RRSP should be less than 90 days.
– The individual/couple must have intentions to occupy the house as principal residence within a year after the RRSP withdrawal is made.
– If an old HBP exists, no outstanding balance should remain while applying for a new HBP.
Advantages of an HBP to Purchase a House
There is no denial that the HBP can be one of the best ways to fund the down payment of a house. Firstly, because the upper annual savings limits for an RRSP ($24,270 for 2014) helps build the asset faster than other saving plans, such as a Tax Free Saving Plan (TFSA), and therefore it can easily provide 20% of the down payment required to avoid paying default insurance premiums.
Secondly, the RRSP contributions are done from pre-tax dollars and as a qualified plan, HBP withdrawals are also non-taxable, making it much more effective and profitable tax-wise (provided it is paid off in time).
Additional Points to keep in Mind
Individuals/Couples considering the HBP to purchase/construct a house should consult financial or tax advisors before taking any action for the right guidance and advice based on the person’s financial situation that can only be provided by a professional.
It is encouraged that any individual involved in a HBP should try to pay off the loan within the expected timeline of 15 years. If not paid off in the allotted time, the government could consider it as a part of the individual’s taxable income for the particular year.
Couples looking forward to make additional payments towards their HBP in order to pay it off sooner are recommended to consider making these additional payments towards the RRSP loan of the spouse who falls in the higher income tax bracket.
To avoid missing HBP payments, setup a systematic payment program with the bank so that the payable amount is automatically deducted from the HBP participants’ accounts and transferred to the respective RRSP accounts.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
