As you may know, when you contribute to your RRSP, you do not pay income tax on the amount contributed in the tax year that you made the contribution. The purpose of this deferred tax program is to permit you to save more inside your RRSP then you otherwise could in an effort to prepare you for retirement. The catch is that once you deposit money into your RRSP, you can only withdraw it, penalty free, in exceptional circumstances.
This results in you controlling a considerable amount of cash inside your RRSP that you would not otherwise have access to (because the CRA would have much of it from you in the form of income taxes). You can take up to $25,000 of this cash (or $50,000 per couple) and invest it as a first-time home buyer into a principal residence, and since you must use these funds to purchase a principal residence, any equity increase in the property is a tax free capital gain.
Below is a breakdown of the RRSP program and important information:
- YOU MUST BE A FIRST-TIME HOME BUYER. You are considered a first-time home buyer if, in the “four year period”, you did not occupy a home that you or your current spouse or common-law partner owned. The four year period begins on January 1st of the fourth year before the year you withdraw funds and it ends 31 days before the date you withdraw the funds. For example, if you withdraw funds on May 31, 2017, the four-year period begins on January 1, 2013 and ends on April 30, 2017. In this example, to be eligible, you cannot occupy a home owned by you or your spouse between January 1, 2013 and April 30, 2017.
- ANY HOME USED AS A PRINCIPAL RESIDENCE. The home can be a resale home or purchased from a builder, as long as you use it as a principal residence.
- RESIDENT OF CANADA. You must be a resident of Canada at the time of the withdrawal.
- WRITTEN AGREEMENT OF PURCHASE AND SALE. You cannot withdraw money from your RRSP until you have actually entered into an Agreement of Purchase and Sale to purchase a home.
- ALL PRIOR HBP RRSP BORROWINGS MUST BE REPAID. You cannot still have money outstanding from a previous RRSP borrowing under the first-time Home Buyers Plan.
- $25,000 MAXIMUM. The maximum, per purchaser, is $25,000. If you are purchasing with a spouse, and you both are going on title, you may withdraw $25,000 each, for a total amount of $50,000.
- THE 90 DAY RULE. Your RRSP contributions must have been in your RRSP for 90 days before you can withdraw them.
- THE 30 DAY RULE. The latest you can make the withdrawal from your RRSP is 30 days after purchasing the property. If making multiple withdrawals (i.e. $10,000, then $5,000, then another $10,000), they must all be done in the same calendar year.
- LOCKED-IN OR GROUP RRSP. Normally, you will not be able to withdraw funds from these types of RRSPs.
- FORM T1036. You must fill out Form T1036, Home Buyers’ Plan Request to Withdraw Funds from an RRSP for each eligible withdrawal.
Repayment: With respect to repayment of the loan, your repayment period starts the second year after the year you withdrew the funds (i.e. if you purchase a home in May 2017, you will be required to begin repayment in 2019 – the CRA will send you a form with your Notice of Assessment detailing the amount you are required to repay in the current year and the amount you have repaid to date). Full repayment to your RRSP must be made within 15 years once the repayment period commences. You must pay a minimum of 1/15th of the loan amount every year during the repayment period. Prepayments are allowed at any time and are without penalty.
In conclusion, if you are a qualified buyer, you can withdraw up to $25,000 from your RRSP ($50,000 for a couple) to purchase a principal residence. You do not have to pay anything back to your RRSP during the grace period, but you must begin to pay the principal back in at least 1/15th instalments once the repayment period starts. The most important part is that purchasing a principal residence will result in a tax free capital gain if you sell your home or condo for a profit in the future.
Information herein is NOT legal, financial or investment advice. Should you have questions with respect to the information herein, please contact Lemke Law Professional Corporation or the Canada Revenue Agency at 1-800-959-8281