The Home Buyers Plan is a government sponsored program that gives opportunity for first time homebuyers to withdraw a maximum of $25,000 tax free to purchase their first home. The amount will be repaid for a period of 15 years. Since the tax refund have already been received when the funds were initially infused to the RRSP, no refund will be received once the amount is paid back.
You are entitled to draw from your RRSP up to a maximum amount of $20,000 under this Plan if you don’t own the home that you are currently in for the past 5 years. Your spouse is also entitled to the same amount provided that she meets the same requirements. This means that you and your spouse are entitled to borrow a maximum amount of $40,000.
You must fill out Form T1036 and submit the accomplished form to your financing company. It is essential that you use this form when withdrawing the fund under the Home Buyers Plan; otherwise the withdrawn amount will be subject to tax. You are given a year from the date of receipt of the funds to complete the home purchase and another year thereafter for you to move into your new home and make it as your main residence.
The withdrawn amount is a no-interest loan and you will be required to return within 15 years by paying annually 1/14 of the withdrawn amount starting on the second year from the date of release. If you are not able to make the purchase or make the home your primary residence within the prescribed period or fail to repay the amount you withdrew from your RRSP, then the amount will be considered as your increased income which is subject to tax.
Coupled with sufficient preparation, first time homebuyers will be able to use this fund to finance their home purchase. For most of these homebuyers, the Plan provides great opportunity to raise the needed funds to make the purchase of their first home while reducing the amount of debt that they have to pay. An ideal option to get the maximum benefit from this program is to infuse current savings into the RRSP and the use the tax refund to pay off existing credit.
For instance, with a $14,000 savings which you can infuse into your RRSP, you are entitled to a $4,500 tax refund. You can use the tax rebate to pay off existing debt and use the same amount as down payment once you decide to purchase your first home. You will then have to pay $934 annually for 15 years. You may also opt to pay more than the required amount each year and this will in turn reduce the amount that is available for tax rebates by an even amount of $1,000. This can then be credited to your annual repayments. On the other hand, if both your TFSA and RRSP contributions are maxed out but still have some savings left, then you can add to your current annual repayments of $1,000.
Viability of the Home Buyers Plan
This special privilege given to first time homebuyers to utilize their RRSP tax free to make the purchase of their dream home is probably the best option when you really want to buy your their dream home but don’t have enough equity. The only downside of this option is you are missing out on the earning opportunity that RRSP provides if your money remains intact. However, the appreciation in the value of your home over time is usually more than enough to offset the missed earning opportunity.