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By Penelope Graham, Zoocasa
Special to the Financial Independence Hub
Of the tax breaks and incentives offered to first-time home buyers in Canada, the Home Buyers’ Plan is likely the most utilized; the program, which allows qualifying buyers to pull, tax-free, funds earmarked for retirement from their RRSPs for a home purchase, has steadily grown in popularity since it was first introduced back in 1992.
Eligibility for the program is fairly straightforward; first, the prospective buyer must have some funds saved in an RRSP. They must also be classified as a first-time home buyer, meaning they do not own, or have owned, a principal residence in Canada within the last four years.
The funds must be sheltered within the RRSP account for a minimum of 90 days before they can be withdrawn for the HBP, and the money must be paid back within a 15-year timeline, to kick in the calendar year after the withdrawal is made, in installments of one-fifteenth of the total amount.
While the program is structured to allow home buyers to tap into their retirement funds, it also ensures they pay themselves back; should one of the 15 installments be missed, that portion of the withdrawal funds loses its tax-free status, which the buyer will see reflected in their income tax bill.
However, there are some new changes afoot for the HBP, as announced as part of the federal budget in March, including the program’s first maximum expansion in a decade, and a tweak of the rules to improve eligibility for more home buyers. Let’s take a look at what’s new.
New maximum withdrawal now $35,000
As of March 19, the maximum withdrawal amount for the HBP has been expanded to $35,000, up from $25,000, where it had remained since 2009. This also means that, if a couple is purchasing a home together and both qualify as first-time home buyers, each could theoretically withdraw $35,000, to a combined total of $70,000; an amount that will give buyers greater pull in expensive markets, such as those buying homes for sale in Toronto.
For buyers who made a withdrawal prior to March of this year, the expansion is also temporarily retroactive; these buyers can make another withdrawal, to a total combined $35,000, if the first was made within January 1 – March 19. However, any withdrawals made prior to January cannot be expanded under the new rules.
Keep in mind though, that the original 15-year timeline hasn’t expanded along with the maximum; buyers tapping into their RRSPs to their fullest potential could face steeper annual payments over the same timeline as a result.
Post-breakup Buyers may still be considered First-timers
Perhaps the more dramatic update of the two is a new rule that allow individuals coming out of a marriage or common-law relationship to retain their first-time buyer status, allowing them to utilize their RRSP funds to either buy their former partner out of a matrimonial home, or purchase their own. Under previous rules, the four-year threshold extended to spouses as well; a buyer could not be considered a first-timer if they had dwelled within a home owned by their spouse or common-law partner within that timeframe.
As of 2020, these individuals may still be considered first-time buyers as long as they satisfy the following:
- They must have dwelled apart from their former partner for at least 90 days when the withdrawal is made, and the separation must have occurred within the last four years.
- If the applicant has a new spouse or common law partner, their new partner cannot own and occupy a principal place of residence.
- If the applicant still owns and lives in the former matrimonial home when they make the withdrawal, they must either have acquired their interest or right from their former partner no earlier than 30 days before the withdrawal is made (and no later than September 30 of the following year.
- If the applicant still owns and lives in the former matrimonial home when they make the withdrawal, and they don’t intend to use the funds to purchase the property out from their former spouse, they must sell or dispose of their interest in the home no later than the end of the second calendar year of the withdrawal.
Penelope Graham is the managing editor at Zoocasa, a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions. View MLS listings at zoocasa.com or download our free iOS app.
