USING YOUR RRSP’S TO BUY A HOME
It’s allowed but watch the taxes.
Chances are you’ve heard someone talk about withdrawing money from their RRSP to buy a home. This is a pretty common practice and unless you have an employer-controlled RRSP, the money is usually yours to withdraw.
Where some of the confusion comes in however, is on the issue of taxes. Because money contributed to an RRSP is not taxed as part of your regular income, if you just pull it out to use for something else, the government is going to want that tax money that you avoided paying.
The institution that holds the RRSP will charge you what is called “withholding tax,” and the rates are determined by the amount of money you’re withdrawing:
- From $0 – $5,000: 10%
- From $5,001 – $15,000: 20%
- Greater than $15,000: 30%
THE HOME BUYERS PLAN (HBP)
What people are usually thinking of when they talk about using their RRSP for a down payment on a home, is the Home Buyers Plan (HBP).
Under this program, you can withdraw funds from your RRSP to use for a down payment on a home without paying withholding tax. So who can use the HBP and how?
WHO IS ELIGIBLE?
In order to be eligible to use the HBP, you must have a written agreement either to purchase or build a home as your principle residence. You also have to be considered a first-time home buyer.
It’s pretty clear that if you’ve never owned real estate before that you would meet the first-time home buyer requirement. However, for the purposes of the HBP you are also considered a first-time buyer if you have not owned property for 5 years.
For example, if you owned a house but sold it in 2007 and are now buying a home in 2013, you would be considered a first-time home buyer under the Home Buyers’ Plan. If you’re buying with a spouse or partner, both of you have to meet this requirement in order to take advantage of the HBP.
HOW MUCH CAN YOU WITHDRAW?
Under the Home Buyers’ Plan you can withdraw up to $25,000 in a calendar year. The catch is that in order to avoid paying the taxes you would owe had you not put that money into your RRSP, you must repay the amount you withdraw back into the RRSP within 15 years (at a set amount each year). Any money not paid back is taxed as income.
Basically, what this program allows you to do is borrow from yourself while still preserving the tax break you got for building up those savings.
The Home Buyers’ Plan can be a great resource for people looking to get into their first home, or get back into the housing market. For more information on how it works, and who is eligible, have a look at the Canada Revenue Agency’s guide, or have a talk about your plans with us!