First-time home buyers now have extra incentive to contribute to their RRSPs after the federal government announced on Thursday it would increase the home buyers’ plan (HBP) withdrawal limit to $60,000 from $35,000.
Buyers may now direct more savings to their RRSP “because they know they can rely on that amount [and] tap into that amount later to get a down payment for their first home,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth in Toronto.
“It’s a good reminder that taxpayers need to be diligent with making their annual RRSP contributions so they can benefit from the increased [HBP] limit,” said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S., in an email.
Golombek said first-time home buyers would still benefit from contributing to an FHSA first, because contributions to that plan provide a tax deduction, growth is tax sheltered and withdrawals are tax-free if made to buy a qualified home. However, there’s now “additional incentive” to direct any remaining savings toward an RRSP.
“When you add the $60,000 [from the HBP] on top of $40,000 [of maximum FHSA contribution] — and over 15 years, you can probably double [the FHSA] with a reasonable rate of return — now you’re looking potentially at $140,000. And remember, that’s per person. In a couple, each can do $140,000.”
An FHSA can be open for 15 years or until the holder turns 71, whichever comes first.
Finance Minister Chrystia Freeland said in a release that the proposed boost to the HBP limit would be included in the 2024 federal budget, which will be tabled April 16. The new limit would be effective on budget day.
The HBP rules permit multiple withdrawals as long as they’re in the same calendar year as the first withdrawal, so clients who have already withdrawn the maximum $35,000 would likely be able to take advantage of the higher withdrawal limit after budget day.
The HBP allows a first-time homebuyer to borrow from their RRSP to purchase or construct a new home without having to pay tax on that withdrawal, provided the amount is used to acquire or build a home before Oct. 1 of the following year.
Under existing rules, amounts withdrawn under the HBP must be repaid over a maximum of 15 years, starting in the second calendar year after the withdrawal. Amounts not repaid in a particular year are added to the person’s income for that year.
As part of its announcement Thursday, the government proposed that people who withdraw from the HBP between Jan. 1, 2022, and Dec. 31, 2025, will see their repayment grace period extended to five years “so they can focus on their mortgage payments and getting ahead.”
The government also announced that the 2024 budget would propose allowing 30-year mortgage amortization for first-time home buyers purchasing newly built homes, effective Aug. 1, “which will enable more young Canadians to afford a monthly payment and will encourage new supply.”