Along with longer days, warmer temperatures, and blooming buds, spring also tends to bring an increase in real estate sales. If you are planning on taking the plunge into home ownership for the first time, you may qualify for a number of programs, credits, and rebates.
Use your RRSPs for your down payment
In most cases, early withdrawal of your RRSP funds is a bad idea. Not only are you removing part of your nest egg, the withdrawal is also subject to high tax penalties if it is taken out prior to retirement. However, there is a way to use your RRSPs tax free to buy your first home.
The Home Buyers' Plan (HBP) allows first-time home buyers to "borrow" up to $25,000 from their RRSPs to build or purchase a home and pay back the "loan" over time -- 15 years to be exact -- without penalty. If you are purchasing your home with another qualified first-timer, such as your spouse, you can each withdraw up to $25,000 to put towards your down payment.
Before you speed to your bank to withdraw your funds, however, there are a few things you need to know about participating:
- If you meet the qualifications for the HBP, you must register as a participant before you withdraw the funds. The process is rather simple; it's just a matter of submitting a Form 1036 completed by you and your RRSP issuer. You'll receive a T4RSP slip for tax time that records your withdrawal as part of the HBP.
- Any funds you withdraw for the HBP must have been in your RRSP account for at least 90 days prior to the withdrawal. In other words, if you pull 10,000 from your savings account and invest it into RRSPs tomorrow, that 10,000 isn't eligible for HBP withdrawal for at least three months.
- You're required to start repaying your RRSP two years after your purchase. CRA will inform you of your annual repayment amount, total amount borrowed, and your HBP balance on your Notice of Assessment.
- Repayment of your HBP withdrawal is not done directly. Since you've borrowed from your RRSP, you repay with RRSP contributions. For example, if your annual repayment amount is 1,000, you must contribute at least 1,000 to your RRSP and then designate this amount to your HBP repayment on your annual income tax return. As long as you continue to contribute the required amount each year, your withdrawal will remain tax free.
- Failing to contribute enough back into your RRSP has tax consequences. If you don't re-contribute enough to your RRSP to cover your HBP repayment, the missing contribution amount will convert to taxable income. For example, if your annual HBP repayment amount is 800 and you only contributed 300 to your RRSP last year, you'll pay income tax on the 500 difference.
Credits and rebates are available
The Home Buyers' Amount credit is available to qualifying first-time buyers. This non-refundable credit is worth $5,000 at tax time and can be shared between spouses. If you're a person with a disability, you don't need to be a first-timer. As long as you've purchased a qualifying home that's more accessible to your needs, you could qualify for this credit.
Buying your first home can be an overwhelming, expensive and exciting experience.
If you're buying a new build, you can also receive a rebate of the federal component of any GST/HST paid on your purchase. Usually the builder will rebate the amount back to you directly and submit the necessary paperwork on your behalf to the government. If you're building your own home, you may also qualify for a rebate of any GST/HST paid for land or building supplies. Many provinces, including British Columbia, Nova Scotia and Ontario, offer similar rebates for the provincial portion of the HST.
Whether it's a new build or a fixer-upper, investigate provincial energy rebates for even more savings. Most provinces offer cash back for purchasing energy-efficient furnaces, cooling systems and appliances. Check the terms and conditions of the programs in your area before you buy.
Buying your first home can be an overwhelming, expensive and exciting experience. These programs, rebates and credits can help off-set some of the expense. A good tax preparation software, like TurboTax, can guide you through your taxes to ensure you get your maximum refund as a first-time home buyer.
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