Are you a first-home buyer?

Are you a
first-home buyer?
BENEFIT FROM THE HBP
WHILE STAYING ON COURSE
FOR RETIREMENT!
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
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Québec (Québec) G1V 4T3
Autorité des marchés financiers
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This brochure contains information that is current as of April 30, 2009. 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 marches 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.
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has been withdrawn from Registered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
you possess in a duplex, triplex,
quadruplex or apartment building.
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 1992. Meanwhile, the average price
of a home in Quebec more than
doubled between 1992 and October
2008, rising from $102,311 to $209,890.1
As we proceed through the brochure,
we will follow Janet and Mark, a
thirty-something couple that has just
In 2006, roughly 53,000 homes
purchased a home using the HBP.
were purchased in Canada with
In our examples, unless otherwise
funds from RRSPs.
indicated, we assume a rate of return
of 6% on investments and a rate of
interest of 6% on money borrowed.
We also assume that the marginal tax rate2 remains unchanged at 40% and that
there is sufficient contribution room for the targeted amounts in the RRSP.
1
2
Source: Canadian Real Estate Association (CREA)
Tax rate that applies to the last dollar of taxable income
3
Using the HBP in 3 steps3
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.
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.
3
4
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:
HBP
withdrawal December 31
of this year
Following
December 31
Following
December 31
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
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.
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
Minimum HBP repayment depending
on whether you repay every…
HBP amount
year
month
2 weeks
$10,000
$666.67
$55.56
$25.64
$15,000
$1,000.00
$83.33
$38.46
$20,000
$1,333.33
$111.11
$51.28
$25,000
$1,666.67
$138.89
$64.10
hat is the advantage of paying back your HBP
W
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
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
Table 2 – Maximum HBP repayment or RRSP contribution
Strategy 1
Year of
repayment
Total:
Strategy 2
Make minimum HBP repayment
and invest difference in RRSP
Investment Total accumulated
HBP repayment
in RRSP
in RRSP
Make maximum HBP repayment and invest in RRSP
only after the HBP has been fully repaid
Investment Total accumulated
HBP repayment
in RRSP
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
$30,544 10
$667
$2,222 $40,363
$0
$3,333
$35,910 11
$667
$2,222 $45,846
$0
$3,333
$41,598 12
$667
$2,222 $51,660
$0
$3,333
$47,628 13
$667
$2,222 $57,821
$0
$3,333
$54,019 14
$667
$2,222 $64,353
$0
$3,333
$60,793
15
$667
$2,222 $71,276
$0
$3,333
$67,974
$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
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
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 $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
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.
Strategy 1
After…
0 year
1 year
2 years
3 years
4 years
5 years
6 years
7 years
8 years
9 years
10 years
11 years
12 years
13 years
14 years
15 years
16 years
17 years
Strategy 2
Contribute $10,000 to your RRSP. Claim a $4,000 tax
Apply the $10,000 directly to the down payment
refund. Down payment for the home: $14,000. Then
without using the RRSP. Invest $1,111 in the RRSP each
repay the minimum HBP amount annually.
year.
Amount
by
which
Accumulation RRSP
Accumulation RRSP
mortgage is reduced
$0
$4,000
$0
$0
$4,240
$0
$0
$4,494
$0
$686
$4,764
$1,144
$1,414
$5,050
$2,357
$2,185
$5,353
$3,642
$3,003
$5,674
$5,004
$3,869
$6,015
$6,449
$4,788
$6,375
$7,979
$5,761
$6,758
$9,602
$6,793
$7,163
$11,322
$7,887
$7,593
$13,146
$9,047
$8,049
$15,078
$10,276
$8,532
$17,127
$11,579
$9,044
$19,299
$12,960
$9,586
$21,600
$14,424
$10,161
$24,040
$15,976
$10,771
$26,627
Total before income tax:
Total net of income tax:
$26,747
$20,357
$26,627
$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 $667.
11
In the preceding situation, instead of strategy 1,
would it be more advantageous to not use the
­income tax refund to pay down the mortgage
and to use it to make a larger RRSP or TFSA
­contribution instead?
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
Graph 1 – Accumulated amounts according to various HBP
or RRSP strategies
Initial value of an RRSP: $10 000
Value of an RRSP after 20 years
$0
„„ Amount of the HBP: $10,000
„„ Minimum HBP repayment
$20,000
$80,000
$100,000
$120,000
$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
Note 2:
$60,000
$19,028
„„ The HBP is not used
„„ No annual RRSP contribution
Note 1:
$40,000
$110,057
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
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.
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Question Retraite and l’Autorité des marchés financiers
If you wish to continue your reading about retirement planning, you
may visit Question Retraite Web site at www.questionretraite.qc.ca or
l’Autorité des marchés financiers Web site at www.lautorite.qc.ca.
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Investing to optimize
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A brochure that presents and explains Registered
retirement saving plans (RRSPs) , investments that
earn interest, investments that produce capital gains,
labour-sponsored investments founds and effects of
a lower tax bracket after retirement.
15
Question Retraite is a public-private consortium dedicated to the promotion
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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.
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