Paying back the RRSP Home Buyers’ Plan

Q: I’ve always repayed what I owe via the Home Buyers’ Plan. But I really wonder if it’s that big of a deal to repay the amount owed every year. It’s my understanding that only the amount owed that particular year is added to your taxable income—and a friend tells me he used the Home Buyers’ Plan (HBP) and has never had the intention of paying it back. Is he on to something? — Loyal Reader from Nova Scotia

Dear Loyal Reader from Nova Scotia: If “on to something” means the government treating the HBP loan that your friend withdrew from his RRSP as income—and having to pay tax on that income—then, yes, he’s on to something.

Consider this example. Your friend withdraws $25,000 from his RRSP under the HBP and currently earns an annual salary that puts him in the 31% tax bracket. By not paying back the HBP your friend would have to pay $650 extra each year in taxes, for the next 15 years, until the HBP loan is paid back. And this doesn’t take into consideration the room he lost in his RRSP by withdrawing the money in the first place. Ouch and double ouch. Not much of a plan if you ask me.

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On the flipside, many home buyer’s wonder whether or not they should use RRSP carry-forward amounts to eliminate their HBP debt. But that’s not an effective way to use that carry-forward amount. An RRSP contribution is beneficial for two reasons: it defers income tax into the future, and gives you a higher tax refund in the present. Any repayment to your HBP doesn’t do either because you received those benefits already, when you made the RRSP contribution the first time around.

The rule of thumb is:

#1. Pay off all consumer debt first (debt with high interest, such as credit cards or personal loans);

#2. Pay off all lower-interest loans, such as HELOCs or secured loans;

#3. Make extra payments to pay down your mortgage;

#4. Max out your RRSP contributions (#3 and #4 can be inversed, depending on your investment and savings philosophy);

#5. Max out your TFSA contributions (#4 and #5 can be inversed, depending on your investment and savings philosophy).

If you still have cash in hand once you’ve completed all these prudent financial steps, then pay off your HBP early.

Home Buyers’ Plan Basics

Do I meet the HBP eligibility conditions?

→ You must be considered a first-time home buyer. You are a first time home buyer if, in the four year period, you did not live in a home that you or your current spouse or common-law partner owned. If you meet the four-year rule, and you previously participated in the HBP, you may be able to do so again if your repayable HBP balance on January 1 of the year of the new withdrawal is zero and you meet all the other HBP eligibility conditions.

→ You must have a written agreement to buy or build a qualifying home for yourself, for a related person with a disability, or to help a related person with a disability buy or build a qualifying home (obtaining a pre-approved mortgage does not satisfy this condition).

→ Note: If you are withdrawing funds from your RRSPs to help a related person with a disability buy or build a qualifying home, it is the related person with a disability who must have entered into such an agreement.

→ You must intend to live in the qualifying home as your principal place of residence within one year after buying or building it. If you buy or build a qualifying home for a related person with a disability, or help a related person with a disability buy or build a qualifying home, you must intend that that person lives in the qualifying home as his or her principal place of residence.

To cancel your participation in the HBP

You can cancel your participation in the HBP only if one of the following situations applies:

→ you did not buy or build a qualifying home or replacement property; or

→ you became a non-resident before buying or building a qualifying home or a replacement property.

You can also cancel your participation, if you withdrew funds under the HBP to help a related person with a disability acquire a home, and:

→ that person does not buy or build a qualifying home or replacement property; or

→ you become a non-resident before that person buys or builds a qualifying home or a replacement property.
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