1 Are you a first-home buyer? BENEFIT FROM THE HBP WHILE STAYING ON COURSE FOR RETIREMENT!
2 Research and Drafting Julien Michaud (Autorité des marchés financiers) Contributors Vincent Ardouin (Cégep Marie-Victorin) Marylaine Chaussé (Épargne Placements Québec) Jean-François Larocque (Investors Group Chair in Financial Planning Université Laval) Catherine Ratté (Question Retraite) Question Retraite 2600, boulevard Laurier, bureau 640 Québec (Québec) G1V 4T3 Autorité des marchés financiers 2640, boulevard Laurier, bureau 400 Québec (Québec) G1V 5C1 Graphic design Le groupe Flexidée for the Fonds de solidarité FTQ Production Question Retraite and Autorité des marchés financiers For more information: The Question Retraite website: The Autorité des marchés financiers website: Information Centre: Québec City: Montréal: Toll-free number: This brochure contains information that is current as of January 1, Changes may have occurred since that date. This brochure is offered by Question Retraite and the Autorité des marchés financiers for general information only. It does not cover all situations, only general cases. Question Retraite and the Autorité des marchés financiers are in no way responsible for the consequences of possible errors or omissions in this document. Consult a specialist to obtain information suited to your individual circumstances.
3 Since its inception in February 1992, the Home Buyers Plan (HBP) has helped about two million Canadians buy their first home. Around $15 billion has been withdrawn from Registered Retirement Savings Plans (RRSPs) to finance first-home purchases. 1 How does the HBP work? Is it better to pay back your HBP very quickly or contribute to your RRSP? Is it preferable to put the down payment in an RRSP and then withdraw it under the HBP or use the amount directly? What are the consequences of making HBP withdrawals? This brochure answers questions such as these. How does the HBP work? The HBP lets you withdraw as much as $25,000 from an RRSP to finance the purchase of a home. In the case of a couple wishing to purchase or build a home, each spouse can withdraw up to $25,000, for $50,000 in initial capital. Qualifying homes include single-family homes, semidetached homes, townhouses, mobile homes, and apartments in a duplex, triplex, quadruplex or apartment building. As we proceed through the brochure, we will follow Janet and Mark, a thirty-something couple that has just purchased a home using the HBP. In our examples, unless otherwise indicated, we assume a rate of return of 6% on investments and a rate of interest of 6% on money borrowed. Did you know that, in 2009, the maximum RRSP withdrawal under the HBP was increased from $20,000 to $25,000? This represents the first increase since the HBP was created in Meanwhile, the average price of a home in Quebec rose from $102,311 in 1992 to more than $250,000 in In 2006, roughly 53,000 homes were purchased in Canada with funds from RRSPs. We also assume that the marginal tax rate 2 remains unchanged at 40% and that there is sufficient contribution room for the targeted amounts in the RRSP. 1 Source: Canadian Real Estate Association (CREA) 2 Tax rate that applies to the last dollar of taxable income 3
4 Using the HBP in 3 steps 3 Step 1 Before you can use the HBP Before you can take advantage of the HBP, you must first have contributed to an RRSP. You also have to meet the following conditions: Be a first-home buyer and intend to occupy the home. Under certain conditions, you can participate in the HBP even if you already owned a home a few years earlier. Contact the Canada Revenue Agency for more information. Have entered into a written agreement to purchase or build a home. Neither you nor your spouse can own the qualifying home more than 30 days before a withdrawal is made. If you have already used the HBP, you must have paid back all the withdrawn amounts by January 1 of the year when you use the HBP again. If you occupied a home that belonged to your spouse, you may not be eligible. Contact the Canada Revenue Agency for more information. NOTE! If you plan on using the HBP, be sure that the amounts contributed to your RRSP will be available to you. If the funds are invested for several years and you want to use them to buy a home, you will have a problem. For example, if your entire RRSP is invested in a 10-year non-redeemable guaranteed investment certificate, there won t be any cash available for the HBP. You also need to set aside funds to pay the costs related to the purchase of a home, including notary fees, moving expenses, transfer duties (welcome tax), connection fees (electricity, telephone, etc.) and renovations. 90-day rule To enjoy the advantages of the HBP, you must have deposited the amounts in your RRSP at least 90 days before you withdraw them. Labour-sponsored funds If you own shares of a labour-sponsored fund, you must first withdraw all your other RRSP contributions before you can use your shares of a labour-sponsored fund. 3 Source: Canada Revenue Agency. The steps described in this section are not exhaustive. If you are a person with a disability, several special rules, exceptions and steps specific to your situation apply. Please contact the Canada Revenue Agency for further details. 4
5 Step 2 Withdraw funds under the HBP You must complete form T1036 available on the Canada Revenue Agency website and give it to the financial establishment where your RRSP is held. The targeted amounts will then be provided to you tax-free. Step 3 After making HBP withdrawals When you withdraw funds from your RRSP under the HBP, you are lending yourself money. You will therefore have to pay back the borrowed money to your RRSP. Generally speaking, you must repay 1/15 of the borrowed amount each year. For example, if you withdraw $10,000, you will be required to put at least $667 back into your RRSP each year for 15 years. The first HBP repayment For the first HBP repayment, you are given a grace period. You do not have to repay your HBP in the year the funds are withdrawn. The first repayment may be made according to the following timeline: December 31 of this year Following December 31 Following December 31 HBP withdrawal 60 days later: first HBP repayment For example, if you withdraw funds under the HBP on December 30, you will have to make your first HBP repayment no more than 2 years and 61 days later. If you make the withdrawal on January 3, your first HBP repayment will have to be made no more than 3 years and 58 days later. The RRSP, the HBP and income taxes When you contribute to your RRSP, you benefit from a tax reduction. If you withdraw funds from your RRSP under the HBP, you do not pay income taxes on the withdrawn amount. Consequently, if you repay your HBP, you do not receive any new tax reductions on the repayments. 5
6 What happens if you don t repay your HBP? If the HBP amounts owing are not paid back, they will be considered to be withdrawn from your RRSP. You will therefore be required to add them to your income and pay the applicable income tax. In 2006, on average, Canadians paid back 60% of the amount they were required to repay under the HBP. 4 Table 1 HBP amount to be repaid every period to avoid paying income tax on the withdrawn amounts HBP amount Minimum HBP repayment depending on whether you repay every year month 2 weeks $10,000 $ $55.56 $25.64 $15,000 $1, $83.33 $38.46 $20,000 $1, $ $51.28 $25,000 $1, $ $64.10 What is the advantage of paying back your HBP every two weeks instead of in a single payment at the end of the year? Making regular payments generally enables you to accumulate more capital because the earlier you contribute, the sooner the amounts accumulate within your RRSP. For example, if you are required to repay $1,333 under your HBP each year, but instead you pay back $51.28 every two weeks, you will accumulate $32,378 after 15 years as opposed to only $31,035 with annual payments. Moreover, it is often easier to save $51.28 every two weeks than $1,333 at the end of the year. 4 Canadian Real Estate Association 6
7 Once you have paid the minimum HBP amount, is it advisable to make additional HBP repayments or to make contributions to your RRSP? If you have unused RRSP contribution room, it is better to pay back the minimum HBP amount and then use the additional amounts to contribute to your RRSP. Take the case of Janet and Mark. Let s assume that each of them withdraws $10,000 under the HBP. Janet uses strategy 1 (Table 2). She invests $2,222 per year in her RRSP and pays back $667 of the HBP withdrawal annually. Her RRSP contributions are deducted automatically from her pay. Her pay will only be reduced by $1,333 per year because, by contributing to her RRSP through automatic payroll deductions, she immediately benefits from a tax refund of $889. Janet will therefore only have to disburse $2,000 a year ($1,333 + $667). Meanwhile, Mark uses strategy 2 (Table 2). He pays back his HBP at a rate of $2,000 per year. His HBP will therefore be repaid in 5 years. In subsequent years, he will contribute $3,333 per year to his RRSP, also through automatic payroll deductions. As a result, he will immediately benefit from $1,333 in tax reductions. His pay will therefore only have been reduced by $2,000 per year. Table 2 shows that by paying back the minimum HBP amount and investing the difference in her RRSP, Janet will accumulate $1,982 net of income tax more than Mark, who pays off the total amount of the HBP and then contributes to his RRSP. This is because, when new contributions are made to an RRSP, the taxpayer benefits from a tax reduction, which is not the case with an HBP repayment. What happens in the case of a tax-free savings account (TFSA)? Assuming your tax rate remains steady, the results obtained are the same whether you invest in a TFSA or an RRSP. For more information about the TFSA, visit the section for consumers of the Autorité des marchés financiers website or the Question Retraite website. 7
8 Table 2 Maximum HBP repayment or RRSP contribution Year of repayment HBP repayment Strategy 1 Strategy 2 Make minimum HBP repayment and invest difference in RRSP Investment in RRSP Total accumulated in RRSP Make maximum HBP repayment and invest in RRSP only after the HBP has been fully repaid HBP repayment Investment in RRSP Total accumulated in RRSP 1 $667 $2,222 $3,062 $2,000 $0 $2,120 2 $667 $2,222 $6,308 $2,000 $0 $4,367 3 $667 $2,222 $9,749 $2,000 $0 $6,749 4 $667 $2,222 $13,396 $2,000 $0 $9,274 5 $667 $2,222 $17,262 $2,000 $0 $11,951 6 $667 $2,222 $21,360 $0 $3,333 $16,201 7 $667 $2,222 $25,704 $0 $3,333 $20,706 8 $667 $2,222 $30,308 $0 $3,333 $25,482 9 $667 $2,222 $35,189 $0 $3,333 $30, $667 $2,222 $40,363 $0 $3,333 $35, $667 $2,222 $45,846 $0 $3,333 $41, $667 $2,222 $51,660 $0 $3,333 $47, $667 $2,222 $57,821 $0 $3,333 $54, $667 $2,222 $64,353 $0 $3,333 $60, $667 $2,222 $71,276 $0 $3,333 $67,974 Total: $10,000 $33,333 $71,276 $10,000 $33,333 $67,974 Accumulated amount net of income tax: $42,766 $40,784 Repaying the minimum HBP amount and making more RRSP contributions generates $1,982 more net of income tax. Table 2 is based on the following assumptions: The rate of return on investments is 6%, the marginal tax rate remains stable at 40% and there is sufficient contribution room to place the targeted amounts in an RRSP. What if you don t have the cash needed to contribute to your RRSP? Financial establishments offer loans to clients to help them contribute to their RRSPs. However, it is important to make sure you can repay the loan. 8
9 Mortgage insurance If your down payment is 5% of the value of the property, you will probably need to obtain mortgage insurance. Mortgage insurance protects the mortgage lender in the event you are no longer able to repay your loan. You personally will never be able to file a claim under this insurance. The lender, even if covered by such insurance, could seize your home if you don t make the payments you owe. However, with this type of insurance, you can obtain a loan you may not otherwise have had access to. Mortgage insurance has a cost. For example, let s assume that Mark and Janet wish to buy a $200,000 home and they manage to save $10,000 for the down payment. The mortgage insurance could cost them $5,695 (2.75% of $190,000 plus 9% provincial tax). If they had $40,000 for the down payment, their lender probably would not require loan insurance and they would save the $5,695. Therefore, by making HBP withdrawals, they could increase the down payment and thereby decrease the premium paid for mortgage insurance. Table 3 Example of the cost of mortgage insurance based on the down payment and the price of your home % down payment on the price of the home Based on the home price indicated below, mortgage insurance could cost: $200,000 $250,000 $300,000 5% $5,695 $7,119 $8,543 10% $3,924 $4,905 $5,886 20% (insurance optional) $1,744 $2,180 $2,616 25% (insurance optional) $1,063 $1,328 $1,594 This table is based on the following assumptions: traditional down payment and provincial tax on insurance of 9%. The higher the down payment, the lower the premium rate. The amount of the premium is usually added to the amount of the mortgage (except for the premium tax). Certain discounts and extra premiums may be applicable. For more information, contact your mortgage insurer. 9
10 What impact does an HBP have on your retirement? You don t have an RRSP. Can you still participate in the HBP? Let s assume you don t have an RRSP, but you have $10,000 in cash for the purchase of a home. Instead of using the $10,000 directly, you can first invest it in an RRSP, which will result in a tax refund of $4,000. You can then wait 90 days and make an HBP withdrawal. You now have $14,000 for a down payment instead of $10,000. Because your mortgage will be $4,000 lower, you will save on interest and possibly save money on loan insurance. Make sure, though, that you will be able to repay your HBP, in this instance $667 per year for 15 years. Look at the repayment as forced savings towards your retirement. This situation is illustrated in Table 4. An amount of $20,357 net of income tax is accumulated using the HBP as against an amount of $15,976 if the $10,000 is paid directly as a down payment on the home. NOTE! You will generate more if you use the HBP, but a portion of this gain results from the fact that your mortgage balance will decline more quickly. The funds are therefore not in your RRSP. To avoid any adverse impact on your retirement, since you will pay down your mortgage more quickly with the HBP, you could, when the mortgage has been paid off, continue making payments, but to your RRSP. 10
11 Table 4 Placing the down payment in an RRSP and then withdrawing it under the HBP OR using the down payment directly You have $10,000 in cash for the purchase of a home. In two and a half years, you will have $667 after tax per year to invest in your RRSP. After Strategy 1 Strategy 2 Contribute $10,000 to your RRSP. Claim a $4,000 tax refund. Down payment for the home: $14,000. Then repay the minimum HBP amount annually. Accumulation RRSP Amount by which Apply the $10,000 directly to the down payment without using the RRSP. Invest $1,111 in the RRSP each year. Accumulation RRSP mortgage is reduced 0 year $0 $4,000 $0 1 year $0 $4,240 $0 2 years $0 $4,494 $0 3 years $686 $4,764 $1,144 4 years $1,414 $5,050 $2,357 5 years $2,185 $5,353 $3,642 6 years $3,003 $5,674 $5,004 7 years $3,869 $6,015 $6,449 8 years $4,788 $6,375 $7,979 9 years $5,761 $6,758 $9, years $6,793 $7,163 $11, years $7,887 $7,593 $13, years $9,047 $8,049 $15, years $10,276 $8,532 $17, years $11,579 $9,044 $19, years $12,960 $9,586 $21, years $14,424 $10,161 $24, years $15,976 $10,771 $26,627 Total before income tax: $26,747 $26,627 Total net of income tax: $20,357 $15,976 Based on the preceding example, when income tax is taken into account, using the HBP can save $4,381. Table 4 is based on the following assumptions: The rate of return on investments is 6%, the marginal tax rate remains stable at 40% and there is sufficient contribution room to place the targeted amounts in an RRSP. We assume that, in two and a half years, you will disburse $667 net of income tax annually for deposit in your RRSP ($1,111 tax refund of $444 = $667). Why can you invest $1,111 per year in your RRSP using strategy 2, compared with only $667 using strategy 1? In strategy 1, the amounts you place in the RRSP are HBP repayments. You therefore cannot claim any tax refunds on these amounts, since you received a $4,000 tax refund when you invested the $10,000 in your RRSP. In strategy 2, you can invest $1,111 because you will receive a tax refund of $444. Your disbursement net of income tax will therefore be $
12 In the preceding situation, instead of strategy 1, would it be more advantageous to use the income tax refund to make a larger RRSP or TFSA contribution instead of paying down the mortgage? Repaying a mortgage and investing in an RRSP or TFSA are equivalent options in this situation. However, if the tax rate you expect to pay during retirement is lower than your current tax rate, it is generally advisable to make RRSP contributions. The RRSP is also preferred if the rate of return earned in the plan is higher than the interest rate on your mortgage or in your TFSA. NOTE! There are a variety of strategies that can be used with the HBP. Make sure you consider all the relevant factors that apply to YOUR situation, including the tax benefits. For an analysis of your situation and personalized advice, contact a specialist. Make HBP withdrawals without paying back the amounts to your RRSP Amounts withdrawn from your RRSP under the HBP no longer accumulate in your RRSP. As a result, your RRSP will be lower in value at retirement than if you had let the amounts grow within the RRSP. Take the case of Mark. Let s assume that the amounts he invests earn 6% annually. If he does not participate in the HBP, $10,000 invested today would be worth $57,435 in 30 years. If he withdraws the $10,000 under the HBP and does not pay back the amount, when he retires in 30 years, the $57,435 will not be available to him. What s more, for 15 years, he will have to pay $267 in income tax each year if he does not pay back his HBP. In short, in terms of retirement, the decision not to pay back your HBP is a very expensive one. It is important to remember what the ultimate objective of an RRSP is: to save for retirement. How much should you save for retirement? Graph 1 shows what you would accumulate in 20 years, depending on the strategy you choose, if your RRSP is currently worth $10,000. For example, the yellow rectangle shows that you will accumulate $32,071 if you choose not to make HBP withdrawals and do not make further contributions to your RRSP. While this option could be tempting if, for example, you preferred to pay down your mortgage more quickly, it does not let you build significant retirement savings. 12
13 Graph 1 Accumulated amounts according to various HBP or RRSP strategies Initial value of an RRSP: $ Value of an RRSP after 20 years $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 Amount of the HBP: $10,000 Minimum HBP repayment $19,028 The HBP is not used No annual RRSP contribution $32,071 Amount of the HBP: $10,000 No HBP repayment Annual RRSP contributions of $2,000 (note 1) $77,985 Amount of the HBP: $10,000 Minimum HBP repayment Annual RRSP contributions of $2,000 (note 2) $97,013 The HBP is not used Annual RRSP contributions of $2,000 $110,057 Note 1: Note 2: In this case, you will have to pay $267 in income tax as a result of not paying back your HBP. On the other hand, you will benefit from an $800 tax refund because you contributed $2,000 to your RRSP. You will benefit from an $800 tax refund because you contributed $2,000 to your RRSP. Note that the preceding strategies are not equivalent: For some strategies, the amounts invested are higher. 13
14 Conclusion As you can see, you can draw on an HBP to your advantage and achieve home ownership. When used properly, it can usually save you money when you purchase a home. However, to ensure that the accumulation of retirement savings is not adversely affected, repaying your HBP each year and contributing regularly to your RRSP can be highly beneficial. The HBP can be used in different ways. You should choose the best strategy based on your personal situation. It may therefore be important to consult a specialist in order to maximize the funds you have to buy a home without compromising your retirement plans. 14
15 Question Retraite and the Autorité des marchés financiers If you wish to continue reading about retirement planning, you may visit Question Retraite Website at or the Autorité des marchés financiers Website at You will find the following publications: Inflation and Life Expectancy: a dangerous combination for retirement? A brochure that presents and explains consequences that inflation and life expectancy have on retirement financial planning. Investing to optimize retirement income A brochure that presents and explains Registered Retirement Savings Plans (RRSPs), investments that earn interest, investments that produce capital gains, labour-sponsored investment funds and effects of a lower tax bracket after retirement. 15
16 Question Retraite is a public-private consortium dedicated to the promotion of financial security at retirement. It is an association of partners who encourage and organize activities to educate and inform Quebeckers about the importance of financial security at retirement. Its members guide the public on how to achieve their planning goals. Among the activities sponsored by Question Retraite are the Guide to Financial Planning for Retirement and the presentation of Financial Planning for Retirement Month each year in October. The members of Question Retraite are: