What is the First Time Home Buyer's Plan?

The First Time Buyer's Plan allows people to borrow from their RSP's, interest free, to use towards a down payment for the purchase of their first home.  There are no taxable consequences with this RSP withdrawal, (unless it is not repaid) and the person has 15 years to pay back the loan, which can be paid using your normal RSP contributions.  A person is also considered a first time home buyer if they have not owned a home for the previous 5 years. 

How the First Time Home Buyer's Plan Works?

For this illustration we will assume it is Jan 1 20xx and John and Mary have $20,000.00 sitting in a savings or non-registered fund account to be used towards the 5% down payment for a $400,000.00 home they have purchased.  The home closing date is May 1, 20xx.  John and Mary both have $40,000.00 each in unused RSP contribution room available.  John is in a higher tax bracket then Mary, with a marginal tax rate of 40%.

John and Mary are currently paying taxes on the growth of their funds while they are waiting to buy their home.  Because John is in a higher tax bracket, he could invest the down payment money into his RSP, preferably in a 90 day GIC, moneymarket fund, or other investment vehicle which secures the principal. The funds must also be invested with no fees which would affect your withdrawal amount.  The funds need to stay invested for a minimum of 90 days before they can be withdrawn, and be eligible for the FTHB plan, during which time they will continue to grow in a tax sheltered manner. 

By investing the $20,000.00 into his RSP, he will reduce his taxable income by $20,000.00, generally triggering a refund of approx $ 8,000.00 when he files his taxes the following year.  (This amount is based on this illustration and may differ from your current situation.)  If only Mary had contribution room available, then they could use her room instead.  The idea is to make the RSP contribution under the name of the person in the higher tax bracket in order to maximize the effectiveness of this strategy.

The Funds could then be withdrawn after 90 days, but before May 1, 20xx to be used as qualifying funds under the First Time Buyer's Plan.  The First Time Buyer's Plan allows the client to payback their RSP loan in equal installments over 15 years.  In this case John and Mary could use the $8,000.00 tax refund to immediately start to repay the First Time Buyer's Plan loan, or even use the funds to pay for any immediate home renovations or upgrades.

As you can see, by utilizing this strategy, John and Mary added an additional $8,000.00 of cash flow which they did not have before utilizing this strategy.   If they use that to pay down the RSP loan, they will have effectively only paid $12,000.00 for a $20,000.00 down payment