Savings Plans for First Time Home Buyers

The prospect of home ownership, especially for young Canadians, is becoming less and less realistic. With increases in housing prices and high interest rates, a trend signaling the inability to purchase homes for young Canadians is becoming more and more apparent. That said, there are government initiatives that can assist a first time home buyer to secure their first home.  

What are the benefits of a Home Buyers’ Plan, and how does it work?

The Home Buyers’ Plan (“HBP”), which was introduced in 1992, is a program that allows you to make withdrawals from your Registered Retirement Savings Plan (“RRSP”) to buy or build a “qualifying home” for yourself. The recent federal budget released on April 16, 2024, increased the HBP withdrawal limit from$35,000 to $60,000 and temporarily extended the grace period on repayment by three additional years.

How does it work? After meeting eligibility and under specific circumstances, you can apply to make a withdrawal from your RRSP under the HBP. The benefit is that your RRSP issuer will not withhold tax on the amount withdrawn. You can then use the withdrawn amount to fund the purchase of your “qualifying home.”Once the funds are withdrawn you then have a specific period of time to repay the funds to your RRSP. The federal government has temporarily extended the grace period on repayment by an additional three years, meaning for qualifying withdrawals made between January 1, 2022, and December 31, 2025, your repayment won’t start until five years later. For example, if you made your first withdrawal in 2022, your first year of repayment will be 2027.

Repayment from an HBP withdrawal is mainly required because RRSP, by design, allows your income to be tax-exempt before withdrawal. Therefore, when you withdraw money from your RRSP under HBP, you are not paying taxes on the initially exempted income. So, to ensure that this is not a means to fully exempt income from tax, repayment is required. To repay under the HBP, you will need to make a contribution to your RRSP and then designate the contributed amount as a repayment. Repayments made to the RRSP cannot be claimed as a deduction, and therefore, the RRSP deduction limit will not be affected. If the minimum required repayment is not made in a given year, you must include the HBP minimum payable amount as your RRSP income in your annual tax return and pay the associated taxes.

What are the benefits of a First Home Savings Account, and how does it work?

Like the HBP, a First Home Savings Account (“FHSA”) utilizes your RRSP account. However, unlike the HBP, an FHSA receives funds directly from an RRSP or another FHSA through transfers while functioning like a TFSA when withdrawing funds. This means repayment is not required, allowing your money to go tax-free in and tax-free out. While holding an FHSA, funds can also be used to invest in “qualified investments” to seek returns.  The federal government has indicated that, after just one year of implementation, more than 750,000 Canadians have opened an FHSA to save for a down payment on their first home.

An FHSA has a yearly contribution limit of $8,000 up to 15 years, with a lifetime limit of $40,000. Funds are directly transferred into an FHSA by completing Form RC720 and submitting it to your RRSP issuer. The fund will not be directly transferred if you do not submit Form RC720 and withdraw from your RRSP directly. This withdrawal will be treated as a normal RRSP withdrawal, which must be included as an income on your annual tax return. However, in this case, you are permitted to claim an FHSA deduction. Once you open an FHSA, you must complete annual reporting on your tax return, even if you did not contribute to your FHSAs or make a transfer from your RRSP in the calendar year.

To make a qualifying tax-free withdrawal from your FHSA, you must meet all the qualifying withdrawal conditions. Funds can either be withdrawn at once or through a series of withdrawals.

To qualify for an FHSA, you must:

• Be a resident of Canada;
• Be 18 years or older but under the age of 72; and
• Be a first-time home buyer.

Conclusion

Both the HBP and FHSA can be used together simultaneously.

To be eligible for the HBP and or an FHSA withdrawal, you must meet the above criteria, subject to other conditions like:

• Have a written agreement to buy or build a “qualifying home” at the time of your withdrawal; and
• Intend to occupy the “qualifying home” as your place of residence no later than one year after buying or building it.

Please note this is not a conclusive list of requirements and if you think either of these first time home buyer initiatives may be of use to you, you should consult with your legal, financial and/or accounting advisors.

The information in this article is not legal advice. We encourage you to consult with your legal advisor for advice specific to you.

Frank Chou is a law student and summer student with Stevenson Hood Thornton Beaubier LLP in Saskatoon. Contact: office@shtb-law.com