Would change to Home Buyers’ Plan help clients?

One tool that can help clients buy homes is the Home Buyers’ Plan (HBP), which allows first-time buyers to withdraw up to $25,000 from their RRSPs to fund home purchases.

In this year’s federal budget, tax experts expect the Liberals to loosen the requirements of the HBP. It’s proposed that even if people don’t meet the existing definition of a first-time homebuyer, the government may allow them to qualify under the plan if they’re dealing with life events, including relocating for work, divorce or the death of a spouse.

As a result, people in those situations would be able to “dip into their RRSPs and avoid immediate tax on withdrawals,” while keeping the contribution room they’ve generated, says accountant Stephanie Dietz. Plus, they’d have “a greater amount of funds available if [they] don’t have other savings.”

Using the HBP is like taking “a 15-year loan of $25,000 from the government,” she adds. Homebuyers have to pay at least 1/15 of the amount withdrawn from their RRSPs each year over that 15-year period – in this case, $1,667. For any amounts not paid back, people don’t pay penalties, but unpaid amounts are added to people’s incomes for the year for tax purposes. They also lose that RRSP room.

Read: Dos and don’ts of RRSPs: Golombek

Dietz notes the tax rate on any annual income inclusions would be based on clients’ marginal tax rates.

The benefits

Changes to the HBP would benefit divorcees the most, says Dietz. “There’s the most need there,” she says, since people can be put at a disadvantage if they own homes jointly.

Under current rules, it’s possible for a divorced person to qualify under the HBP:

• as long as his name wasn’t on the title of his former house; or
• if the title is transferred to him by the courts, as long as he doesn’t occupy the home during that process or afterwards.

However, he’d have to wait four years after he moves to qualify under the HBP if he doesn’t meet these conditions.

Criteria to qualify as first-time home buyer

To qualify under the Home Buyers’ Plan, CRA says a client must be a Canadian resident and satisfy its definition of a first-time homebuyer. A client can meet these requirements more than once by:

• not having occupied, as a principal place of residence, a home that was bought by him or his spouse through the HBP for a period of four years, from the year of his withdrawal ending 31 days prior to the new withdrawal of his RRSP funds (e.g., if a client had wanted to make a withdrawal in November 1, 2015, he could not have owned a home at any time between January 1, 2011 and October 1, 2015); and
• making sure his HBP balance is $0, meaning all amounts owed for prior purchases have been paid back.

If he intends to use RRSP funds to build or buy a home that is more accessible for a disabled person, whether that’s him or someone related to him (by blood, marriage, adoption, or common-law rules), he doesn’t have to be a first-time homebuyer to access the HBP, and nor does he have to have a zero balance.

Dietz isn’t sure why Canadians who are relocating for work would be included, unless the intention is to help “someone who’s moving to Vancouver or Toronto, where house prices are high. If you’re moving to a place where housing prices are hot, you may need to dip into your RRSP to cover the costs.”

Read: One-third of homeowners say housing unaffordable

Regardless, she says, more flexible HBP rules would allow advisors to help clients decide whether or not to use their RRSPs to buy a house in these types of situations. “It’d be hard to lose by using the HBP, [given] the majority of mortgage payments go toward interest in the beginning.” The tax return on interest savings can exceed potential RRSP investment returns, “unless [clients] hit the jackpot by choosing a fantastic investment.”

Read: Pay mortgage or save? Help young homebuyers decide

When advising a client on his options, says Dietz, it’s best to start by discussing his mortgage and the rate he’s likely to get. “[Then] put together an amortization schedule [that] includes the total cost of borrowing, and the current and forecasted rate of returns in his RRSP,” which will help highlight the pros and cons of using the HBP plan.

A tweak to the HBP might also encourage more RRSP contributions. If people have already used the HBP, says Dietz, they might avoid making extra RRSP contributions for fear of losing access to savings that could be used for home upgrades, for instance.

Read: More than one-third pulling money from RRSPs

The main risk

But if clients don’t have adequate retirement savings, using RRSP funds for home purchases in more scenarios is an issue. “It wouldn’t make sense for a person to dip into their RRSP and get a mortgage if they don’t have other assets,” says Dietz.

“There’s a risk they’ll have to withdraw [again] to pay the mortgage and would have to pay tax on that amount. But, in that kind of situation, they might have to dip into the RRSP regardless, so it’s debatable on what the best approach would be. The limit right now is just $25,000 per person, [which is] not necessarily a huge hit.”

Read:

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