What is the Home Buyer's Plan?
Struggling to afford to purchase your first home? The Home Buyer's Plan can be an useful tool for unlocking capital towards purchase of your home. The Home Buyer's Plan allows eligible first-time homebuyers to withdraw funds from their Registered Retirement Savings Plan (RRSP) tax-free to contribute towards a down payment. Withdrawals after March 2019 must not exceed $35,000. Prior to March 2019, the limit was $25,000. Withdrawals can be all at once, or in installments. The home cannot be purchased more than 30 days prior to the withdrawal and must be bought or built by October 1st of the year following the withdrawal. First-time homebuyers considering using the Home Buyer's Plan must keep in mind that the withdrawn amount is required to be repaid. If the taxpayer fails to repay the withdrawn amount according to the requirements of the Home Buyer's Plan, the amount will be included in income and the taxpayer will pay tax on the amounts not repaid. Taxpayers utilizing the Home Buyers' Plan must also report the amounts on their Income Tax Returns.
Eligible First-Time Homebuyers
To qualify for the Home Buyer's Plan, you must be a first-time home buyer. A first-time homebuyer is any individual who, in the past four years, has not occupied a home owned by themselves or his or her spouse or common-law partner. This four year period is the four years prior to purchasing a home beginning on January 1 of the fourth year before the taxpayer withdraws RRSP funds. The four year period ends 31 days before the taxpayer withdraws the RRSP funds.
There is an exception to the first-time homebuyer rule. Taxpayers who are persons with a disability or are assisting a related person with a disability buy or build a qualifying home do not need to be first-time homebuyers to qualify for the Home Buyer's Plan. Related person includes spouses, common-law partners and children (adopted and biological).
The taxpayer withdrawing money from his or her RRSP must be a resident of Canada for tax purposes when he or she withdraws the funds and remain a resident of Canada until the home is purchased or built.
Qualifying Home for Home Buyers Plan
The definition of home which qualifies for the Home Buyer's Plan is fairly broad. The home must be a housing unit located in Canada, and you must be acquiring an equity interest in that housing unit. Beyond those restrictions, the housing unit can be already built or in construction. The unit could be a single-family home, condo unit, unit in a duplex, share of a co-operative housing corporation etc.
Intention to Occupy
The taxpayer purchasing the home must have an intention to occupy that home as his or her principal place of residence within one year of buying or building the home. Of importance, this requirement is an "intention to occupy" not a requirement to occupy. It is possible for a taxpayer to not occupy the home within the year and will qualify for the Home Buyer's Plan. In Tax Interpretation 9702795, the Canada Revenue Agency stated their policy is generally to assume a taxpayer never intended to inhabit the home if the taxpayer has not occupied the home within the first year. This means the Canada Revenue Agency typically presumes every taxpayer who did not occupy the home in the first year does not qualify for the Home Buyer's Plan. Taxpayers can certainly dispute the Canada Revenue Agency's default position if they can demonstrate their intention to have occupied the house.
The taxpayer must intend to use the home as a "principal place of residence". While for many taxpayers their "principal place of residence" will also be their "principal residence", these terms have different meanings. The Canada Revenue Agency in its Technical News publication 31R2 and Technical Interpretation 2010-0355931E5 establishes a test for determining where a taxpayer's principle place of residence is located. The principal place of residence will be where the taxpayer regularly, normally or customarily lives. The significant factors in this determination are where the taxpayer normally sleeps, where the taxpayer receives his or her mail, where the taxpayer's belongings are located and where the taxpayer's immediate family lives. The Canada Revenue Agency's Technical Interpretations are not binding unless incorporated into law by the court or legislature.
To illustrate this difference between "principal place of residence" and "principal residence", take the example of Taxpayer A. Taxpayer A rents an apartment in Toronto and purchases a cottage in Port Severn. Taxpayer A normally lives at the apartment with her daughter, receives mail to the apartment and sleeps in the apartment most days of the year. She occasionally visits the cottage during the summer. Taxpayer A can consider the cottage her principal residence as her habitation is ordinary for a cottage. However, Taxpayer A "regularly, normally or customarily lives" at the apartment, as evidenced by the mailing address, where her daughter lives and where she regularly sleeps. Applying their definition of "principal place of residence" Canada Revenue Agency would likely find the apartment to be Taxpayer A's principal place of residence and consequently deny her using the Home Buyer's Plan to purchase the cottage. CRA's position is not necessarily correct and is open to challenge in these circumstances by an experienced Canadian tax lawyer.
For taxpayers' assisting a related person with a disability to buy or build a home, it must be intended that the person with the disability will inhabit the home as his or her principal place of residence within one year of buying or building the home.
Repayment of the Withdrawal
Taxpayers have 15 years to repay the funds withdrawn from their RRSPs under the Home Buyer's Plan. The 15 year period starts the second year after withdrawal of the funds. A taxpayer who withdraws funds in 2020 would have their 15 year period start 2022. The funds can be paid back any time in those 15 years and do not need to be repaid all at once. The Canada Revenue Agency will provide the taxpayer with an annual statement concerning his or her Home Buyer's Plan. This statement will indicate the minimum amount which must be repaid in the next tax year. If a taxpayer fails to repay the minimum amount in a given year, he or she will pay tax on the amount which is the difference between the amount repaid that year and the minimum repayment amount required. Taxpayers who pass away, turn 71 or become non-residents of Canada for tax purposes while they have an outstanding balance under the Home Buyer's Plan are subject to special repayment rules. A taxpayer must have repaid the entire withdrawal to participate in the Home Buyer's Plan again.
Participating in the Home Buyer's Plan Again
Taxpayers can utilize the Home Buyer's Plan more than once. There are three separate scenarios where a taxpayer may qualify to use the Home Buyer's Plan multiple times. Each of these scenarios has its own conditions which must be met to allow the taxpayer to requalify for the Home Buyer's Plan.
Scenario 1: Ordinary Use of the Home Buyer's Plan
The taxpayer must be a first time homebuyer. As mentioned above, this means he or she has not in the past four years occupied a home owned by themselves or his or her spouse or common-law partner. Additionally, the taxpayer must have repaid the entirety of his or her previous withdrawal. Funds must be in the taxpayer's RRSP for a period of at least 90 days before they can be withdrawn for use in the Home Buyer's Plan.
Scenario 2: Breakdown of Marriage or Common-Law Partnership
A taxpayer can requalify for the Home Buyer's Plan following a breakdown of a marriage or common-law partnership. In these cases,
- At the time the withdrawal is made, the taxpayer must live separate and apart from his or her spouse or common-law partner for at least 90 days for reasons of breakdown of the relationship.
- The partners or spouses must have begun living separate and apart for reasons of breakdown of the relationship within the four years preceding the withdrawal.
- The taxpayer must dispose of his or her principal place of residence within two years following the end of the year the withdrawal is made.
- This applies except where the taxpayer is purchasing his or her former spouse or partner's ownership interest in a home. In the latter case, the requirement the home cannot be purchased more than 30 days prior to withdrawal is also waived.
- If the taxpayer has a new spouse or common-law partner, that spouse or common-law partner cannot already own a home the taxpayer occupies.
- Any previous Home Buyer's Plan withdrawals must have been repaid and all other Home Buyer's Plan eligibility criteria not altered by the requirements above are met.
Scenario 3: Taxpayers with Disabilities
For taxpayers with a disability or those assisting a related person with a disability purchase a home, the taxpayer is not required to be a first-time homebuyer to participate in the Home Buyer's Plan again.
Pro Tax Tips: Leveraging Your Home Buyer's Plan
Properly leveraged, the Home Buyer's Plan provides taxpayers with an opportunity to access a substantial amount of cash to finance their housing purchases and open opportunities for future income earning such as rental or investment income. An ineligible withdrawal, though, becomes taxable income for the taxpayer so taxpayers must be careful they qualify for the Home Buyer's Plan and withdraw funds according the requirements of the plan. The Canada Revenue Agency can always dispute whether a taxpayer qualified for the Home Buyer's Plan, particularly where a taxpayer is not able to inhabit the home in the first year. Our experienced Canadian Tax Lawyers can provide you with tax guidance in determining whether you qualify for the Home Buyer's Plan and upholding that position with the Canada Revenue Agency.