How can RRSPs Help with Down Payment for Mortgage? 

March 2, 2015 is the deadline for RRSP contributions counting towards your 2014 tax year. RRSPs aren’t just for saving towards retirement; you can also use them to buy your first home. With home prices skyrocketing in cities like Toronto and Vancouver, it’s harder than ever for first-time homebuyers to get their foot in the door. You’ll need to save at least a five percent down payment, plus your closing costs (land transfer tax, home inspection, real estate lawyer fees, etc.). The Home Buyers’ Plan (HBP) is your golden ticket to homeownership. It helps makes it easier to save up towards the purchase of your first home.

What is the Home Buyers’ Plan?

The HBP was introduced by the federal government to help with housing affordability for first-time homebuyers.  It lets property virgins borrow up to $25,000 tax-free from their RRSPs.  If your spouse or common-law partner is also a first-time homebuyer, you can borrow a combined $50,000. A word of caution: if your spouse or common-law partner is a homeowner and you were living together anytime in the last four years, neither of you will qualify for the HBP.

Do You Qualify for the HBP?

Before you participate in the HBP, it’s important to make sure you qualify. First of all, you have to be considered a first-time homebuyer. The government is less strict in its definition of first-time homebuyers. You can’t have owned a home in the last four years. If you’ve participated in the HBP before, any prior RRSP loans must be fully repaid. Furthermore, you must reside in your home within a year of purchase.

How Do You Withdraw Funds from the HBP?

It’s important to follow the rules of the HBP. Any mistakes can result in RRSP withdrawals counting as taxable income. You’re only allowed to withdraw funds from your RRSPs once you’ve taken title of your home. You have 30 days to withdraw up to $25,000 from your RRSP. In addition, you have until October 1st to buy a home in the year you’re withdrawing funds under the HBP.

 To participate in the HBP, you’ll need to complete Form T1036, Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP. The homebuyer (you) needs to fill out Area 1; your bank completes Area 2. Once the RRSP withdrawal has taken place, you’ll receive a tax slip, Form T4RSP, from your bank. Be sure to keep it handy, as you’ll need it when filing your tax return.

 Making Repayments under the HBP

While you can withdraw up to $25,000 from your RRSP, you’ll need to start repaying it soon after. Starting in the second year, you have 15 years to repay the borrowed funds. The Canada Revenue Agency reminds you how much you need to repay each year after you file your tax return on your notice of assessment.

To learn more about the HBP, please visit http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/

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