Home prices continue to rise across Canada making it difficult for first-time home buyers to get into the housing market. According to the Alberta Real Estate Association, the average home price as of March 2022 in Calgary was $538,283, a year-over-year increase of six per cent and the average home price in Edmonton was $410,805, a year-over-year increase of five per cent¹.   

For most people, buying a home is life’s most expensive purchase—and step one is coming up with the down payment. One option for sourcing your down payment is to tap into your RRSP through the Home Buyers’ Plan (HBP). While most RRSP withdrawals are taxable and result in a loss of contribution room, the HBP provides tax-free access to RRSP savings to be used as a down payment on your first home.

If you are considered a first-time homebuyer and have most of your savings inside an RRSP, the HBP might be a good option. But like most government programs, the HBP comes with some conditions, so this isn’t a resource that will work for everyone.

Conditions for using your RRSP to buy a home

To start, here are the three most important conditions:

• You have to be considered a first-time homebuyer
• You cannot withdraw more than $35,000
• You have to repay the funds that you withdraw back into your RRSP (or have the required repayment added to your taxable income)

If the three conditions above are met, the rest is relatively straightforward: 

• You have to enter into a written agreement to buy or build a qualifying home
• You have to intend to occupy the qualifying home as your principal residence no later than one year after buying or building it
• Your HBP balance on Jan. 1 of the year of the withdrawal has to be zero, meaning you have to put all the RRSP funds you withdrew into the purchase of your new home
• Neither you nor your spouse or common-law partner can own the qualifying home more than 30 days before a withdrawal is made
• You have to receive all withdrawals in the same calendar year
• You have to buy or build the qualifying home before Oct. 1 of the year after the year of the withdrawal

There are also special considerations for people with disabilities or relatives purchasing a home for a person with a disability. The details of the Home Buyers’ Plan can be found on the Government of Canada’s website.

What about using your Tax-Free Savings Account to fund a down payment?

Another alternative to save for a down payment is using funds from a Tax-Free Savings Account (TFSA). As the name suggests, a TFSA is tax free—there is no tax payable on any income earned while invested, or on withdrawals. There’s an annual contribution limit ($7,000 for 2024) and you’ll always be able to recontribute the amount you withdraw—you just have to wait until the following year. Any unused room carries forward. This flexibility makes it a great place to save tax-efficiently for the down payment of a home. 

These two options for saving for your down payment aren’t mutually exclusive. If you’re eligible and accessing the HBP for a down payment, you can still top it up with funds from your TFSA. Funds in your TFSA would also be available for many of the other costs associated with purchasing a home, such as moving costs, appliances, furniture, yard and garden tools, to name a few.

What about the upcoming Tax-Free First Home Savings Account?

A new option will soon be available to help homebuyers save for a down payment on their first home. The federal government announced the Tax-Free First Home Savings Account (FHSA),which will be available in 2023. 

The FHSA is a new registered account that will be available to Canadian residents over the age of 18, as long as they haven’t lived in a home they owned in the current year or any of the four previous years. 

A contribution of up to $8,000 per year can be made into an FHSA, up to a lifetime limit of $40,000. If you contribute less than the FHSA participation room for a year, the unused portion is your FHSA carryforward. The maximum amount of unused FHSA participation room that can be carried forward in a subsequent year is $8,000 (it is not cumulative). These contributions will be tax-deductible, similar to an RRSP contribution.

Investments within an FHSA will grow tax free. If the funds are used for a qualifying home purchase, they can also be withdrawn tax free. An individual can claim this benefit only once and it can be combined with the Home Buyers’ Plan. 

If funds in an FHSA aren’t used for a qualifying purpose, they’ll be taxable upon withdrawal, similar to RRSP withdrawals. FHSA funds can be transferred tax free to an RRSP or RRIF, without affecting your existing RRSP contribution room. Similarly, you can transfer funds into an FHSA from your existing RRSP, though this wouldn’t create any new RRSP contribution room.

If you have questions about the Home Buyers’ Plan, the new Tax-Free First Home Savings Account, or anything else RRSP or TFSA related, please reach out to an ATB Wealth advisor.