Roger from Parksville asks: “What is the definition of first-time home buyer and does the home buyers plan make sense?”
Thanks for your question Roger. Let me tackle the first part of your question by defining what a new first-time home buyer is. You are not considered a first-time home buyer if you or your spouse or common-law partner owned a home that you occupied as your principal place of residence during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal.
You have to meet this condition at the time you withdraw an amount from your RRSPs under the HBP.
However, if you are a person with a disability, or you are buying or building a home for a related person with a disability or helping such a person buy or build a home, you do not have to meet this condition.
If at the time of the withdrawal you have a spouse or common-law partner, it is possible that only one of you will be considered a first-time home buyer.
Withdrawals — You can withdraw a single amount or make a series of withdrawals throughout the same year and January of the following year, as long as the total of your withdrawals is not more than $25,000. If you buy the home with your spouse or common-law partner, or other individuals, each individual can withdraw up to $25,000 from his or her RRSP, provided each of you meet the HBP conditions.
Repayments — Your first repayment is due the second year following the year in which you made your withdrawals. You have up to 15 years to repay the amount that you withdrew under the HBP. Generally, for each year of your repayment period, you have to repay 1/15 of the total amount you withdrew until the full amount is repaid to your RRSPs.
There is no rule that says you have to make the repayment — only that if you don’t, then the year’s required re-payment amount will be included as taxable income for that tax year. So if you are in a low income year and you have a repayment required — it might not be a bad idea to skip the payment and add the payment amount to your taxable income — it won’t make a significant impact on your taxes.
So for example, if your spouse is a stay-at-home parent with no income, they won’t pay tax on skipping the re-payments.
Additionally, you can make contributions to your RRSP and simply elect to not use the contributions towards the required HBP repayments in addition to not claiming the RRSP deduction. You would do this if you wanted to shelter money for long term growth now but wait until a higher income year in the near future to use the deduction to reduce taxes.
Does the HBP make sense? This is one of the only ways to withdraw from your RRSP tax free and a great way to get yourself into the real estate market.
Some may argue that you’re missing out on growth in your RRSP while the money is borrowed. However, if you get a good price for your first home relative to others in the neighbourhood, the appreciation of the home will hopefully make up for this. Remember to consult your financial advisor before taking any action.
Written by Stuart Kirk, CIM.
Stuart Kirk is a Retirement Planning Specialist with Hicks Financial Inc.
The opinions expressed are those of the author and may not necessarily reflect those of Hicks Financial Inc (www.ghicks.com). Your questions can be submitted by email to Stuart at stuart@ghicks.com or call 250-954-0247.