First-Time Home Buyers – RRSP Withdrawal
A Home Buyers’ Plan is a program whereby individuals who qualify as “first-time home buyers” could borrow up to $20,000 from an RRSP to purchase a “principal place of residence”. The benefit of the RRSP Home Buyers’ Plan is that the taxpayer is not taxed in the year of withdrawal. The amount borrowed must be repaid to the individual’s RRSP over a maximum of 15 years.
Under the current plan, an individual will be considered to be a first-time home buyer if neither the individual nor the individual’s spouse owned a home and lived in it as their principal place of residence in any of the five calendar years beginning before the timeof the withdrawal. Individuals may participate in the plan more than once in their lifetime provided they meet the criteria of a “first-time” home buyer.
How the RRSP Home Buyer’s Plan Works
Under the Home Buyers’ Plan, individuals may withdraw up to $20,000 from their RRSPs to buy a home without having to pay tax on the withdrawal. Since the $20,000 limit is per individual, it is possible for a couple to withdraw up to $40,000. RRSP withdrawals are to be repaid to the home buyer’s RRSP in instalments over a maximum period of fifteen years.
The 15-year repayment period will begin in the second calendar year following the calendar year in which the withdrawal is made. In addition, a qualifying home must generally be acquired before October 1st of the calendar year following the year of withdrawal.
If, in any year, the individual decides not to repay the scheduled amount or decides to repay only a part of it, the amount that is not repaid will be included in the individual’s income for the year and, consequently, will be subject to tax.
These repayments are independent of your normal RRSP contributions, which you can continue to make to the extent of your annual contribution limits. Unclaimed RRSP contributions can be designated as repayments under the Home Buyers’ Plan on Schedule 7 of your personal tax return.
Many individuals participating in the Home Buyers’ Plan will want to restore the balance in their RRSPs as soon as circumstances permit to better provide for their retirement. They may pay more than the scheduled annual repayment in any year. This will result in a lower outstanding balance and lower scheduled annual repayments for the remainder of the payback period.
A special rule will deny a tax deduction for contributions to an RRSP that are withdrawn within 90 days under the Home Buyers’ Plan. For this purpose, contributions to an RRSP within the 90-day period will not be considered to be withdrawn except to the extent that the RRSP balance after the withdrawals is less than the amount of such contributions.
- The date on which an RRSP must be converted to an annuity or a registered retirement income fund (RRIF) is the end of the year in which he or she turns 69. You could still contribute to a spousal RRSP after you reach age 69 provided your spouse is not yet 70 at the end of the taxation year.
- There is no legal requirement that the plan annuitant be over 18 years of age. A child with earned income may have an RRSP in much the same way as any other individual, with one exception. There is no $2,000 over-contribution allowance for a person who has not attained the age of 18 in the previous year. This prevents a child’s RRSP from accumulating non-deductible gifts. Any amounts contributed to a plan of which the annuitant was a minor would create cumulative excess amounts and would incur penalties.
- If you leave Canada for an extended period, you must determine whether you are going to become a non-resident for income tax purposes.
- If you have withdrawn funds from an RRSP under the Home Buyers’ Plan and become a non-resident before acquiring your Canadian home, your withdrawals will be disqualified and added to your income in the year of withdrawal. You may cure the disqualification by refunding the withdrawal and cancelling your participation in the plan.
- If you have withdrawn funds from an RRSP under the Home Buyers’ Plan and become a non-resident after acquiring your Canadian home, you must repay the entire withdrawal within 60 days of becoming a non-resident. To the extent that you do not repay the amount within 60 days, the unrepaid balance will be included in your income for the period of the year in which you were still a resident of Canada and taxed accordingly.