Did you know that with the first time home buyers plan, you can use up to $35,000 of your RRSP savings for a down payment tax free and if you’re a couple, it doubles to $70,000. Amazing right? but how do you qualify, and how do you even know if you’re a first time home buyer?

How to use RRSP for down payment

There are four conditions you must satisfy to qualify for the home buyers plan. We’re going to spend a little bit of time on the first criteria which is you must be a first-time homebuyer but how do you know if you’re a first-time homebuyer you think the answer would be obvious doesn’t mean you’re buying your very first home? Nope to make matters even more confusing even if you’ve owned a home in the past, you may still qualify, so according to the government of Canada website, you are considered a first-time homebuyer if in the four year time period, you did not occupy a home that you owned, or one that your current spouse or common law partner owned the four year period, means the four years prior to a home purchase the period begins on January 1st of the fourth year before the year you withdraw funds from your RRSP and ends 31 days before the date you withdraw the funds. Did you get all that? don’t worry; Here’s an easy way to figure this out start with the date you need the RRSP funds to purchase your home. As an example let’s say July 31st, 2021 the first step is to go back 31 days from that date that takes us to June 30th then go back exactly four years, or in this case, to June 30th, 2017. the final step is to move back to January 1st of that year which is January 1st, 2017. What if you sold your home on December 31st, 2016 and have been renting since you’re a first-time homebuyer? What if you owned and sold three properties before this period? You’re still a first-time homebuyer. What if your spouse or common law partner owned a home during that period, but you didn’t. Great question; the government of Canada website states even if you or your spouse or common law partner has previously owned a home, you may still be considered a first-time homebuyer if you have a spouse or common law partner. It is possible that only one of you is a first-time homebuyer so yes, you may be considered a first-time homebuyer providing you also did not occupy a home that your spouse or common law partner owned.

RRSP down payment rules

Each individual must satisfy the definition of a first-time homebuyer. Each person or both can be considered a first-time homebuyer the second condition that must be met is you must be a resident of Canada when you withdraw funds from your RRSP under the home buyer’s plan and up to a time a qualifying home is bought or built.

The third condition is you must have a written agreement to buy or build a qualifying home either for yourself or for a related person with a disability the fourth and equally important to understand is you must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it this means you cannot use your RRSP funds to buy a rental property unless you plan to occupy the property as your primary residence so if you rent out the basement for example that could be okay as long as you live in the house.

So to recap the four conditions to qualify for the home buyers plan are

  1. Be a first-time homebuyer.

  2. Be a resident of Canada.

  3. Have a written agreement to buy or build a qualifying home and

  4. You must live in the property you intend to buy.

Withdrawing RRSP for down payment

Based on this, do you qualify? if so you may be eligible to withdraw up to $35,000 tax-free remember both you and your spouse or common law partner qualify separately so if both of you qualify up to $70,000 tax free can be withdrawn to be used to purchase a home. I know this is too good to be true what’s the catch? Well the government of Canada is allowing you to take this money out tax free because it’s really a loan. The good news is that it’s an interest free loan, also you have 15 years to pay it back in equal instalments. The payments start two years after you

withdraw the money so for example, if you withdrew $35,000 from your RRSP divided by 15 that’s a repayment of $233 dollars per year. Finally, note that repayments do not affect your RRSP contribution room.

Now we’ve only covered the basics of the home buyers plan; if you would like to take advantage of this program or learn more, I suggest you get more details by visiting the government of Canada’s website.

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