RRSP Home Buyers Plan: borrowing $35,000 from yourself without penalty

You can pull up to $35,000 from your RRSP to buy your first home without the usual 20%+ withholding tax. The catch: you're borrowing from yourself, and the CRA expects you to pay it back over 15 years.

The Home Buyers Plan (HBP) lets you withdraw RRSP money for a down payment as long as you haven't owned a home in the past four years. No tax on the withdrawal. No penalty. But it's not free money - it's a loan from your future self.

How the repayment works

You have 15 years to put the money back. The minimum payment each year is 1/15th of what you withdrew. Take out $30,000? You owe yourself at least $2,000 back into your RRSP every year for 15 years.

Miss a payment and the CRA adds the missing amount to your taxable income. Skip that $2,000 payment and you'll owe tax on it - roughly $600 if you're in a 30% bracket.

You can pay back more than the minimum in any year, which reduces future payments. Pay back $5,000 in year one instead of $2,000, and you only need to repay $25,000 over the remaining 14 years.

The real cost

Here's what most people miss: that RRSP money was growing tax-free. Take it out for a house, and you lose years of compound growth. A $30,000 withdrawal could have been worth $50,000+ by retirement at 6% annual returns.

Your RRSP contribution room doesn't increase to account for HBP repayments either. If your annual limit is $15,000 and you owe $2,000 back from the HBP, you can only contribute $13,000 in new money that year.

When it makes sense anyway

The HBP works best when you're young and haven't built much RRSP value yet, or when you're pulling from recent contributions that haven't had time to grow. It's also better than paying CMHC insurance on a smaller down payment - that can cost thousands and doesn't go toward your mortgage.

If you're in a lower tax bracket now than you expect to be later, the HBP lets you get that RRSP money working in home equity instead of generating modest returns in conservative investments.

The fine print

Both spouses can use the HBP if you're buying together - that's $70,000 total. You need to have the money in your RRSP for at least 90 days before withdrawal. The four-year rule resets after you use the plan, so you can't use it again until you've repaid the full amount and haven't owned a home for four years.

TaxSplit.ca can show you what your RRSP refund looks like with and without an HBP withdrawal - useful for figuring out whether it's worth borrowing from yourself or finding the down payment elsewhere.

If you're buying your first home and have RRSP money sitting there: the HBP gives you access without the tax hit, but you're trading future growth for present equity.