Under the Home Buyers’ Plan funds can be withdrawn from Registered Retirement Savings Plans (RRSP) to buy or build a qualifying home without incurring immediate tax penalties or liabilities. The First Home Savings Account (FHSA) can also be utilized to purchase the same home.
The federal government’s 2024 budget increased the limit for RRSP withdrawals for the Home Buyers’ Plan from $35,000 to $60,000. Withdrawals up to the $60,000 limit can be treated as loans, are not subject to immediate income tax withholding, but must be repaid.
Maximum contributions of $8,000 per year can be made to a FHSA, unused room is carried forward, with a lifetime limit of $40,000.
Each member of a married or common-law couple is eligible for the RRSP and FHSA withdrawals, $200,000 or more could be utilized to facilitate a home purchase.
To utilize the Home Buyers’ Plan and First Home Savings Plan to purchase a home and avoid or defer taxes the individual(s) and the home must also qualify for the programs.
What you need to know
The basics for the Home Buyers’ Plan and First Home Savings Account are summarized as:
- RRSPs withdrawals can be used to purchase a home without any immediate tax withholding when used properly inside a Home Buyers’ Plan
- A T1036 HBP Request to Withdraw Funds from an RRSP form must be completed
- Withdrawals from RRSPs are treated as a loan to yourself and must be repaid. The 2024 budget extended the grace period from three to five years before repayments begin, and fifteen years to repay the entire withdrawn amount
- FHSAs receive deposits, grow tax-free, and are not subject to taxation when withdrawals are used to purchase a qualifying home
- FHSAs can receive direct transfers from RRSPs as contributions
- Additional conditions for the home buyer and home are required
One strategy to maximize the tax exempt and tax deferred funds for the purchase of a home using these programs, could include five annual transfers of $8,000 from an RRSP to an FHSA for a total of $40,000, or $80,000 for a couple. The first $80,000 of downpayment would not be subject to taxation or repayment, because it is originating from a FHSA, not an RRSP. An additional $120,000 could be withdrawn ($60,000 for each person) from RRSPs, repayment would be required.
The Bottom Line
To maximize your benefits from both programs complicated rules and paperwork can seem daunting, but a structured plan and disciplined process will reduce uncertainty.
Assessing your current financial situation, and your housing needs and desires is the beginning. Afterwards, the best course of action can be charted to use the Home Buyers’ Plan, your RRSPs and a FHSA. The first step is to open a First Home Savings Account.
Additional Details
To participate in the Home Buyers’ Plan the conditions, summarized below, must be met:
- You must be considered a first-time home buyer, or a specified disabled person
- you did not, at any time in the current calendar year before the withdrawal (except the 30 days immediately before the withdrawal) or at any time in the preceding four calendar years, live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that either you owned or jointly-owned, or your current spouse or common-law partner (at the time of the withdrawal) owned or jointly-owned.
- an individual, is a person who is the individual or who is related to the individual, where the person either:
- is entitled to the disability amount (line 31600 of their income tax and benefit return) at the time of the HBP withdrawal, OR
- would have been entitled to the disability amount if they had not claimed costs for an attendant or for care in a nursing home as medical expenses, OR
- was not entitled to the disability amount for any year before the HBP withdrawal, but a Form T2201, Disability Tax Credit Certificate, certified by a medical practitioner, is filed for the person for the year of the HBP withdrawal, the person will be treated as if they are entitled to the disability amount.
- If Form T2201 is not approved, your withdrawals will not be considered eligible withdrawals under the HBP, and will have to be included in your income for the year you receive them
- You must have a dated, written agreement including address and closing date to buy or build a qualifying home for yourself or for a specified disabled person
- The qualifying home must be located in Canada and can be a single-family home, semi-detached home, townhouse, mobile home, apartment in a duplex, triplex or fourplex, apartment building, condominium unit, or a share in a co-operative housing corporation that entitles you to possess and gives you an equity interest in a housing unit. A share that only provides the right to tenancy does not qualify.
- You must be a resident of Canada when you begin making eligible withdrawals from your RRSPs to buy or build a qualifying home
- You, or the specified disabled person, must intend to occupy the qualifying home as your principal residence within one year of buying or building it
- Once repayment begins, a minimum of 1/15th of the with withdrawal must be paid back each year
- The First Home Savings Account has its own set of rules, summarized as:
- Annual contributions of up to $8,000 can be made beginning in 2023
- FHSA holders must be 18 years of age
- The annual $8,000 contribution room, which can be carried forward, begins once an FHSA is opened
- Contributions to a FHSA are tax deductible, like an RRSP, and withdrawals are not subject to taxation, like a TFSA, if strict conditions are met
- Contributions are tax deductible for the year that they are made, unlike RRSPs contributions made in the first sixty days of the year are not deductible on your income tax return for the previous year
- Over-contributions to an FHSA are taxed at 1% per month
- Lifetime contributions are capped at $40,000
- The same rules as the Home Buyers’ Plan regarding qualifying homes, residency, written agreements, and living and owning a qualifying home apply to the FHSA
- Direct transfers into an FHSA from an RRSP are not tax deductible, and have no effect on unused RRSP room, and require a Form RC720 – Transfer from your RRSP to your FHSA
- Transfers from a RRIF to an FHSA are not permitted
- Direct transfers out of an FHSA that do not trigger a tax liability can only be made to your RRSP, RRIF or other FHSAs
- Transfers to other registered accounts (TFSAs, RPPs, RESPs, RDSPs, PRPPs, SPPs) will be treated as both a taxable withdrawal from your FHSA and a new contribution to your registered plan
