Introduction
If you are planning to buy your first home in Ontario and you have savings in both a TFSA and an RRSP, you may wonder which account gives you the best advantage for a down payment. The Home Buyers' Plan (HBP) allows you to borrow from your RRSP without paying tax on the withdrawal, provided you repay the amount over a set period. This article compares the TFSA and RRSP/HBP strategies, outlines the rules, provides real‑world numbers, and helps you decide which option fits your financial situation.
How the Home Buyers' Plan Works
The HBP is a federal program that lets first‑time home buyers withdraw up to $35,000 from their RRSPs to use toward a down payment. Key points:
- The withdrawal is not included in your income for the year, so no tax is withheld.
- You must repay the withdrawn amount to your RRSP over a maximum of 15 years, starting the second year after the withdrawal.
- If you miss a repayment, the outstanding amount is added to your income and taxed accordingly.
- Both spouses can each withdraw up to $35,000, allowing a combined $70,000 tax‑free source for a down payment.
To qualify, you must be a Canadian resident, have a written agreement to buy or build a qualifying home, and not have owned a home in the past four years.
TFSA Basics for a Down Payment
A Tax‑Free Savings Account (TFSA) lets you contribute after‑tax dollars, and any growth, interest, or dividends earned inside the account are tax‑free. Withdrawals are also tax‑free and do not affect your contribution room.
- Annual contribution limit for 2024 is $7,000 (indexed to inflation).
- Unused contribution room carries forward indefinitely.
- There is no repayment requirement; you can withdraw whenever you need the funds.
- Because contributions are made with after‑tax money, you do not get a tax deduction when you contribute.
Using a TFSA for a down payment means you simply take out the money you have saved; there are no strings attached.
RRSP vs TFSA: Numbers Side‑by‑Side
Below is a simplified comparison assuming an Ontario resident with a marginal tax rate of 30.5% (typical for income between $50,000 and $90,000).
| Factor | RRSP (HBP) | TFSA |
|---|---|---|
| Contribution tax benefit | Tax deduction at marginal rate (e.g., $1,000 contribution saves $305 tax) | No immediate tax deduction |
| Growth inside account | Tax‑deferred | Tax‑free |
| Withdrawal for home purchase | Up to $35,000 tax‑free via HBP (must be repaid) | Any amount tax‑free, no repayment |
| Impact on contribution room | Withdrawn amount reduces room until repaid | Withdrawn amount adds back to room immediately |
| Repayment obligation | Must repay over 15 years; missed payments taxed | None |
| Effect on mortgage approval | Lenders view HBP funds as borrowed; may affect debt‑service ratios | Lenders view TFSA funds as own savings; neutral |
Scenario Analysis: Ontario First‑Time Buyer
Consider Maya, a 28‑year‑old marketing coordinator in Toronto earning $65,000 per year. She has saved $20,000 in her TFSA and $15,000 in her RRSP. She plans to buy a condo priced at $500,000 and needs a $100,000 down payment (20%).
Option 1: Use TFSA Only
Maya withdraws the full $20,000 from her TFSA. She still needs $80,000, which she could obtain from a mortgage or other savings. Because the TFSA withdrawal is tax‑free and does not affect her contribution room, she can re‑contribute the $20,000 later in the same year if she wishes.
Option 2: Use RRSP/HBP
Maya can withdraw up to $35,000 from her RRSP under the HBP. She decides to withdraw the full $15,000 she has saved, plus an additional $20,000 by making a new RRSP contribution just before withdrawal (she gets the tax deduction on the $20,000). The withdrawal is tax‑free. She now has $35,000 toward her down payment. She must repay $35,000 to her RRSP over the next 15 years (minimum $2,333 per year). If she misses a payment, the unpaid amount is added to her income and taxed at her marginal rate.
Option 3: Combine Both Accounts
Maya could withdraw $20,000 from her TFSA and $15,000 from her RRSP (via HBP), totaling $35,000 from tax‑advantaged accounts, and finance the remaining $65,000 through a mortgage. This approach gives her immediate access to TFSA funds while still benefiting from the RRSP tax deduction on any new contributions made before the HBP withdrawal.
Pros and Cons of Each Approach
TFSA for Down Payment
- Pros: Simple, no repayment, withdrawal adds back to contribution room immediately, viewed favorably by lenders.
- Cons: No upfront tax deduction, contribution room is limited annually ($7,000 in 2024).
- Best when: You have sufficient TFSA savings, prefer flexibility, or want to avoid any repayment obligation.
RRSP/HBP for Down Payment
- Pros: Immediate tax deduction on contributions, ability to access up to $35,000 per person tax‑free, can boost down payment size significantly.
- Cons: Repayment schedule required, missed payments taxed, withdrawal reduces RRSP room until repaid, may affect lender debt ratios.
- Best when: You can make a substantial RRSP contribution shortly before withdrawal, expect to be able to repay the HBP amount, and want to lower your current taxable income.
Practical Steps to Implement the RRSP/HBP Strategy
- Check your RRSP contribution room on your most recent notice of assessment or CRA My Account.
- If you have room, make a lump‑sum contribution (e.g., $20,000) shortly before you plan to withdraw.
- File your tax return to claim the deduction; you will receive a refund or lower tax payable.
- When ready to buy, complete Form T1036 (HBP request) and submit it to your financial institution to withdraw the funds.
- Set up a repayment schedule: divide the withdrawn amount by 15 (or fewer years if you wish to repay faster) and ensure you make at least the minimum annual RRSP contribution to cover it.
- Keep records of all contributions and repayments to avoid accidental tax on missed repayments.
People Also Ask (FAQ)
Can I use both my TFSA and RRSP for the same down payment?
Yes. There is no rule preventing you from drawing from multiple sources. Many buyers combine TFSA savings with an HBP withdrawal to maximize their down payment while keeping repayment obligations manageable.
What happens if I sell the home before repaying the HBP?
If you sell the home, you must still repay the HBP amount according to the original schedule. The CRA does not cancel the obligation because the property is sold.
Is there a limit to how many times I can use the HBP?
You can participate in the HBP more than once, provided you have repaid any previous HBP withdrawals in full before making a new one.
Does using the HBP affect my mortgage pre‑approval?
Lenders typically treat HBP funds as a loan that must be repaid, which can slightly affect your debt‑service ratios. However, many lenders are familiar with the HBP and may not penalize you if you have a solid repayment plan.
Conclusion
For most Ontario first‑time home buyers, leveraging the RRSP through the Home Buyers' Plan offers a powerful way to increase your down payment while receiving an immediate tax deduction. The strategy works best when you can contribute a meaningful amount to your RRSP shortly before withdrawal and are confident you can meet the 15‑year repayment schedule. If you value simplicity, flexibility, or have limited RRSP room, using your TFSA (or a combination of both) is a perfectly sound alternative. Evaluate your cash flow, tax situation, and long‑term homeownership goals to choose the approach that aligns with your financial plan.