USING YOUR RRSP TO BUY


The Home Buyers' Plan ("HBP") is a program founded by the federal government, designed to assist "qualified" buyers in the purchase of a new home. Until 1999, the program was only available once and you had to buy or build the qualifying home for yourself. Now, however, the rules have changed. In order to qualify you have to complete Form T1036 which is available at your tax services office.


Benefits from using the Home Buyers' Plan

The utilization of your RRSP's within the guidelines of the HBP results in benefits that are quantifiable immediately and extend over the long-term.


How does it work? - No penalties

Under the "HBP", Revenue Canada permits you to use your RRSP funds towards the purchase of a new home. The default insurance companies support this program (when your down payment is less than 25%) in allotting the RRSP funds as a source of down payment.


No penalty for withdrawal

There are no negative effects from removing funds from the RRSP - in short, individuals are able to withdraw monies from their fund without penalty:


  • No tax is owed on the money withdrawn
  • No interest is paid on the money while outside of your RRSP
  • There is no monitoring of the money while outside your Plan (see Tax Management below)

Subject to restrictions

  • Regardless of no penalties for withdrawing funds, there are certain guidelines that must be followed in order to remain protected under the HBP' umbrella:
  • There is a maximum of $20,000 that can be withdrawn from one individual's RRSP.
  • There can be a maximum of two first-time buyers in the purchase of a new home, and each individual can withdraw up to $20,000 for a total of $40,000.
  • The purchased home must be owner occupied.
  • The RRSP must be repaid within 15 years with minimum annual payments of 1/15th of the withdrawn amount - failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.
  • Establishing an RRSP with borrowed funds for a tax refund.


The "HBP" permits an individual to establish an RRSP with borrowed funds, and then use the resultant tax refund for a down payment. In this scenario:


  • The individual borrows funds that are contributed to an RRSP.
  • After a 90-day period, the RRSP is collapsed to repay the loan.
  • The client receives a tax refund that can be applied to the purchase of a home.
  • These funds reconsidered as an acceptable source of down payment provided that:
    • The tax refund is in the individual's hands at the time of closing.
    • The lender can verify that the borrower has proven liquidable assets equal to a minimum equity of 5% of the purchase price.


Researched from: Canadian Mortgages

  • Increased down payment
  • Decreased principal owing
  • Avoidance of substantial interest costs over that accrue over long periods
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