Blog: The Home Buyers’ Plan: Tax Relief For the Purchase of a First HomeNovember 21st, 2015
For most individuals, the purchase of a first home will be the largest purchase that they will make in their lifetime. Down payments usually take years of diligent saving, which can be difficult for individuals who need to balance saving while also having to pay “mortgage-sized” rent amongst other everyday living expenses.
What if you could afford your first home sooner by having additional cash now for your down payment? Or have you considered those other unexpected first time home buyer bills such as legal fees, property tax and inspection services? Having had your savings completely depleted to pay for your down payment, these other bills can be stressful to have to bear and can lead to the painful feeling of being “house poor”.
The Home Buyer’s Plan (HBP) is a program that has been made available by the CRA to provide some tax relief for individuals who are purchasing their first home. This program allows individuals to withdraw up to a maximum of $25,000 from their RRSP for the purchase of a first home without the usual tax implications of withdrawing these funds.
Contributions to RRSP’s result in tax savings and the subsequent withdrawal of RRSP’s result in taxable income, however, the HBP allows the withdrawal of these funds from an RRSP for the specified purpose of purchasing a first home with no tax on the withdrawal. This means extra cash in your pocket now that would have otherwise been paid in taxes.
Let’s say, for illustrative purposes, that an individual contributes $25,000 to their RRSP and has an average tax rate of 30%. This will provide the individual with savings of roughly $7,500 of tax in the year that they contribute.
Using the scenario above where an individual has contributed $25,000 to their RRSP and has received tax savings of $7,500, under the HBP, the individual could then withdraw up to the maximum $25,000 from their RRSP without repaying the $7,500 of tax. This results in total available funds of $32,500 to use as a down payment. Had this individual not first contributed the $25,000 to their RRSP, then they would have $25,000 for a down payment; a full $7,500 less!
By utilizing the HBP, an individual can leverage against their own equity in their RRSP to receive the benefit of immediate tax savings in the year of their home purchase. The HBP allows for the deferral of tax which would have generally been paid on funds saved for a down payment.
Any amounts withdrawn from your RRSP under the HBP will subsequently have to be repaid to your RRSP, however, these amounts are only required to be repaid, at a minimum, in equal installments over a 15 year period starting the second year after withdrawal.
Again, using the same example of an individual withdrawing $25,000 from their RRSP under the HBP, the minimum yearly RRSP repayment is $1,667 ($25,000 * 1 / 15 years) over the 15 year repayment period. These repayments would not result in the typical tax savings on RRSP contributions as they are classified as a repayment rather than a contribution. For the required yearly RRSP repayment of $1,667 from the example above, $500 of estimated tax savings at a 30% average tax rate would be foregone, thus, deferring a total of $7,500 of tax over the 15 year period.
There are eligibility conditions which are laid out by the CRA that must be met in order to qualify for the HBP and certain conditions which must be met prior to the RRSP withdrawal. Each individual’s circumstances will differ so it is recommended to meet with your trusted advisor to ensure that your home purchase will qualify under the HBP conditions and to ensure that you have a clear understanding of the withdrawal and repayment requirements in order to avoid penalties and taxes prior to withdrawing any funds.
Potential Future Revision to the HBP: As a result of the newly elected Liberal government in Canada, there are some potential upcoming revisions to the program. The Liberals are proposing to change the rules to allow Canadians to withdraw from their RRSP’s more than just once, for the purpose of investing in their home in the event of any unforeseen change in life circumstance. Changes in life circumstance that would qualify may include: the requirement to move for work, the death of a spouse, taking in a senior relative or a divorce.
Until legislated, the HBP rules will remain as discussed in this article and any tax legislation changes that would affect the HBP rules will be discussed in Crowe MacKay’s quarterly Video Tax News updates.
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