Borrowing from your RRSP to buy a home

How to use the Home Buyers’ Plan

Borrowing these days can be pretty painful. Gone are the low interest rates and that variable rate you got a couple of years ago. Either one of these can cause heartburn. So it’s no wonder that I keep thinking about an article I wrote a while back about the ability to borrow from your RRSP. In fact, I received a call out of the blue from someone who had read my article asking about how that could work. So I thought it would be worthwhile to dust off my article and do a 2023 version it.

The golden rule we all know is: Don’t withdraw from your RRSP before it is time to do so. Otherwise you can be hit with a hefty tax penalty (this is because you could actually lower your tax bill when contributing to an RRSP). But as with every rule, there are always exceptions. In this case, there are three of them. Essentially, you can access your RRSP funds prematurely without triggering a penalty by using the Home Buyers’ Plan (HBP), the Lifelong Learning Plan, or the RRSP mortgage strategy.

The Home Buyers’ Plan

If you need money from your RRSP because you are buying a home, this plan is the alternative to an out-and-out withdrawal. A tax-free withdrawal of up to $35,000 can be made under the “Home Buyers’ Plan.” Prior to March 2019, this amount was capped at $25,000. Basically, the withdrawal is designed to apply only if you or your spouse – if married legally or commonlaw – are “first time” home buyers (a four-year look-back rule applies – see below).

The withdrawal must be repaid in equal installments over 15 years. To the extent that a minimum repayment for a year is not made, the shortfall is taxed in your income. The 15-year repayment period commences in the second calendar year following the calendar year of the RRSP withdrawal. Payments made in the first 60 days of a year count as repayments for the preceding year. For example, if you make a withdrawal in 2023, you must start making RRSP repayments under the Home Buyers Plan by March 1, 2024.

There’s no specific restriction on “doubling up” on the withdrawal e.g., where a home is held in co-tenancy. For example, a husband and wife may together withdraw up to $70,000 (i.e., up to $35,000 from each spouse’s plan).

You’re generally eligible for the plan provided that all the following conditions apply:

You’ve never participated in the program before.
You’ve signed an agreement to build or purchase a qualifying home.
The home (or a replacement property) is bought or built by October 1 of the year following the year in which you received the funds from the RRSP or (extensions are available in some instances).
You intend to occupy the home as your principal place of residence within one year of buying or building the home.

A “look-back” rule prohibits ownership of an owner-occupied home by you or your spouse (including a “common law” spouse) for a period of four years or so. If you are not considered a first-time buyer now, you may be considered a first-time home buyer later, once the four-year period has passed. For example, if in 2017 you sold the home you lived in before, you may be able to participate in 2023, or if you sold the home in 2018, you may be able to participate in 2024.

Should you use the HBP?

Is a Home Buyers’ Plan withdrawal a good idea? The big problem is that you could be caught in a cash-flow crunch that could lead to tax penalties down the road. Firstly, the cash-flow drain due to repayments to the plan may impinge on your ability to make your regular, tax-deductible-RRSP contributions in the future. So, without the RRSP writeoff, your tax bill could go up. Worse still, if the required repayment, which is not deductible, is not made on a timely basis, you’ll then suffer a further taxable benefit. Even harsher rules may apply if you pass away or cease to be a Canadian resident. (Note: Restrictions apply to deductions for ordinary RRSP contributions if made less than 90 days before the withdrawal.)

If you or your spouse are about to drop into a low tax bracket (e.g., you plan to retire from the workforce), the Home Buyers’ Plan may make more sense. For example, the taxable benefit resulting from nonrepayment may result in little or no adverse tax consequences under these circumstances.

Participating in a Home Buyers’ Plan loan is usually a better bet than an outright withdrawal from your plan, which is a straight add-on to your taxable income in the year of withdrawal.

Next time: How to use your RRSP for the Lifelong Learning Plan and the RRSP mortgage strategy.

Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate, estate, and international tax planning. She writes frequently on tax issues, and is the co-author of Tax and Family Business Succession Planning, 3^rd Edition. She is also co-editor of various Wolters Kluwer Ltd. tax publications. A version of this article first appeared in The TaxLetter, © 2022 by MPL Communications Ltd. Used with permission.

Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.