The Home Buyers Plan

When Martin Millican and his wife Laurie Hall decided to take the plunge and purchase their first home, they had one significant obstacle to overcome: putting together a down payment. Laurie had managed to tuck away $10,000 in a Registered Retirement Savings Plan (RRSP) and through the Home Buyers' Plan, the couple was able to use that money (together with some help from Martin's dad) to enter Toronto's real estate market without getting charged with a tax penalty.

"The legislation exists and we thought, why not? So we took advantage of it," says Millican. They aren't the only ones. Since its introduction in 1992, more than 1.3 million Canadians have used the plan to purchase homes.

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If you want to join that group, here's what you need to know:

Plan basics

The Home Buyers' Plan (HBP) is essentially the government's way of giving diligent savers a break by allowing them to tap into their RRSP savings tax free. Consider it an interest-free loan to yourself. You are in effect borrowing from yourself and will have to repay what you borrowed. Geared to first-time home buyers the HBP allows participants to withdraw up to $20,000 from an RRSP to buy or build a qualifying home. That means married or common-law couples can potentially access a maximum of $40,000.

"In the past, RRSP withdrawals for a down payment were taxable so you ended up tapping into a lot less money and you lost the opportunity to shelter that income for retirement savings," says Tina Di Vito, vice president and managing director of retirement planning with BMO Nesbitt Burns in Toronto. "The Home Buyers' Plan is the best of both worlds-allowing you to save for retirement and your first home."

How to qualify

To be considered a first-time homebuyer, you or your spouse cannot have owned a home at any time for a minimum of four years before the year of withdrawal.

You can also take advantage of the HBP if you are disabled, or if you are withdrawing funds to help buy or build a more accessible home for a disabled relative. In this situation, previous home ownership is not an issue.

In each case the home has to be a principal residence, meaning you have to move in within a year of buying it. You'll also need a written agreement proving you intend to buy or build a qualifying home-a pre-approved mortgage is not enough.

Accessing the plan

Simply pick up a T1036 form from a Canada Revenue Agency office or download it from the CRA web site. Complete it and hand it in to the financial institution that holds your RRSP. "If you don't fill in that form, you'll be charged an income tax penalty on any withdrawal," warns Di Vito.

You cannot withdraw from a locked-in RRSP and some employer group plans are also off limits, so do your homework and check with your financial institution or HR department.

You have the option of making one lump sum withdrawal or a series of withdrawals throughout the same year.

Paying it back

Repayment starts the second year following the year of withdrawal and you have 15 years from that time to repay your original HBP balance. So, if you make a withdrawal this year, you don't have to start paying it back until 2008 (or the first 60 days of 2009) and your payment period will end in 2023. The math is straightforward: the amount of the repayment is 1/15 of the total withdrawal. So, if you withdraw $15,000 your repayment is $1,000 a year. You can choose to pay more without penalty, but if you pay less than the designated amount or miss a payment, you will have to include the difference or that missed payment as income on your tax return. Any increase in payments will reduce your future mandatory payments.

The faster you pay it off the better, says (Di Vito). "Remember, you are withdrawing up to $20,000 from a tax sheltered environment, so you are missing out on-tax-sheltered growth." To make a repayment, simply contribute to any of your RRSPs and complete Schedule 7 of your income tax return.

For more information, visit your local tax office, the Canadian Real Estate Association or the CRA website.