RRSP First Time Home Buyer Plan: Questions & Answers
What is the RRSP First Time Home Buyer Plan? In a nutshell, the plan allows qualified purchasers of residential real estate to borrow up to $25,000 from their RRSP portfolio in order to apply towards the purchase price of the residence.
Couples are eligible to borrow up to $50,000, i.e., $25,000 each qualifying purchaser.
Are there any catches?
Like any incentive program, of course there’s a catch! Essentially the borrowing is tax free for a fifteen (15) year period. Eligible purchasers will be required to reconstitute their RRSP account in order to repay the amount withdrawn through annual contributions until the negative balance is brought to zero.
As this article is meant to provide a cursory overview of the plan, it is recommended that eligible purchasers contact their banking institution and the Canada Revenue Agency for further information respecting the rules surrounding the repayment of the borrowed RRSP savings.
What are the Qualifications?
To qualify for the RRSP Home Buyer Plan a purchaser must:
1. Be a resident of Canada (not to be confused with a citizen of Canada);
2. Be a first time buyer defined (for this program *see below*) as an individual who has not owned a home occupied as that individual’s residence in the last five (5) years. An individual will, in addition, fail to qualify as a first time buyer under this program if that individual’s spouse or common law partner owned a home occupied as the individual’s residence in the last five (5) years;
3. Have a written Agreement of Purchase and Sale respecting the eligible property which includes a new build or a resale residential property;
4. Occupy the eligible property as a principal residence in Canada within one year of closing;
5. Have had the borrowed savings in an RRSP account for a minimum of ninety (90) days prior to the date of withdrawal;
6. Withdraw the RRSP savings for use in the First Time Home Buyer Plan no later than thirty (30) days from the date of closing; and
7. Not, at the time of withdrawal, owe funds to an existing RRSP from a prior Home Buyer Plan withdrawal.
**N.B. please note that the above definition of a first time buyer should not be confused with the definition of “first time buyer” under the Ontario Land Transfer Tax Act and the City of Toronto Municipal Land Transfer Tax By-Law.
Are there Restrictions on Use of the Borrowed Funds?
Provided the above criteria are satisfied, the funds can be used towards:
- The downpayment or deposit provided at time of signing the Agreement;
- Any further deposits owing towards the purchase price under the terms of the Agreement;
- The balance of the purchase price due on closing;
- The land transfer tax owing with respect to the purchase of the eligible property;
- The lawyer’s account for fees and disbursements charged in connection with the closing of the eligible property;
- Renovation expenses incurred in order to improve the property after closing; and
- Household fixtures and chattels including but not limited to furnishings, light fixtures, and appliances.
What are the rules respecting repayment of Borrowed RRSPs?
As aforementioned, the funds are available to the qualifying borrower on a tax free basis over the course of a fifteen (15) year period provided they are repaid in accordance with the rules of repayment requiring that equal 1/15 payments of the withdrawn amount are repaid to the RRSP account each calendar year.
The annual repayment can be made at anytime within the calendar year but cannot be made outside of any calendar year. In other words, equal 1/15 payments must be made each year failing which any missed payments will be imputed income during the particular year in which the repayment was not made and therefore taxed to the borrower.
Finally, repayment of the equal 1/15 installments commences on the second anniversary following the year in which the withdrawal was made which provides the borrower with a bit of a reprieve prior to commencement of the financial obligation of rebuilding the RRSP savings portfolio.
Are there any exceptions to the rules?
The one notable exception with respect to the rules governing the first time home buyer plan concerns the requirement that the borrower satisfy the criteria of being a first time buyer. Specifically, the requirement of being a first time buyer is exempted provided any of the following circumstances apply:
1. the borrower is disabled and the RRSP is withdrawn in order to acquire a more accessible, more accommodating residence;
2. the borrower withdraws the RRSP in order to acquire a home for a disabled person related to the borrower by blood, marriage, common-law partnership, or adoption and the home is more accessible or better suited to the needs of that person; or
3. the borrower withdraws the RRSP and gives the funds to a disabled person related to the borrower by blood, marriage, common-law partnership, or adoption and those funds are used by the so related disabled person to acquire a more accessible, better suited home.
Notwithstanding the foregoing exception to the first time buyer provisions of the plan, the remaining governing rules apply and, as stated, readers are urged to seek further advice from their bank and the Canada Revenue Agency.