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Has one of your clients ever wanted to tap into their RRSP to help their adult child buy a home? Well, the Canadian Real Estate Association says doing so should be encouraged via expansion of the Home Buyers’ Plan (HBP).

Extending the HBP to allow for “intergenerational RRSP loans” would ease the financial burden that many young Canadians face when trying to purchase a home for the first time, wrote CREA in its 2018 pre-budget submission to the House of Commons Standing Committee on Finance.

Under the current plan, first-time buyers can withdraw up to $25,000 from their RRSPs to contribute to the purchase of a home. The tax-free loan must generally be repaid within 15 years.

CREA also wants the maximum withdrawal limit for RRSPs to be bumped up by $10,000.

Allowing parents access to the plan would help many first-time buyers enter the market and ease their financial obligations, says CREA. The organization adds that recent and rapid home price increases have resulted in many parents already gifting down payment money to children.

In fact, according to a Canada Mortgage and Housing Corp. online survey of 3,002 mortgage consumers completed in March, nearly one in five first-time homebuyers have received help from a family member with a down payment.

One reason it’s tough for first-time buyers is home prices continue to creep up. The national average price for a home sold in October was $505,937, up 5% from a year ago, according to figures from CREA earlier this month.

In October, the benchmark price of a property in Greater Vancouver hit $1,042,300, up 12.4% from the previous year, according to figures from the Real Estate Board of Greater Vancouver. Meanwhile, in the Greater Toronto Area that month the average property price was $780,104, up 2.3% from the previous October, according to figures from the Toronto Real Estate Board.

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CREA is calling for both parents of a child to be eligible to loan funds from their RRSPs to anyone they had previously claimed as dependents on their income tax return.

In addition to expanding the HBP to include parents, CREA suggests the government extend it to homeowners who relocate for work, decide to accommodate an elderly family member or suffer the loss of a spouse or a marital breakdown.

The Toronto Real Estate Board is also lobbying for expansion and modernization of the HBP.

TREB says the HBP “effectively amounts to a zero-interest self-loan” because it allows Canadians to borrow from their own savings. As such, “A formalized mechanism which allows for the transfer of RRSP funds from parents to their children would help not only increase the available down payment and reduce the amount borrowed, but also limit risk to the lender,” TREB said in a statement.

Too much risk?

Allowing intergenerational RRSP loans and expanding the HBP may seem like an interesting solution, but is it the right call? It may help more first-time buyers enter the housing market—and it would make it easier for parents to gift down payment money—but the question remains of whether or not Canadians should be taking on debt and additional financial obligations they can’t afford.

A recent Bank of Canada report says healthy job creation, tightening housing policies and higher mortgages rates are helping ease the pressure of climbing household debt and housing prices, but the economy is still vulnerable to the latter two forces.

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Also, while CREA’s proposal is not unreasonable, there’s no obvious answer to whether or not people should be able to dip into retirement savings in a tax-free way to fund a property down payment, said Thomas Davidoff, a professor at the University of British Columbia’s Sauder School of Business.

He’s concerned the plan could be a risk for people who are under-saving for retirement, and that it would be utilized more by wealthier families, amounting to a transfer from less-wealthy families to better-off ones.

Read: Canadians save, but not necessarily in RRSPs

It would also likely push up housing prices, he says. “Part of what you do when you subsidize housing in any way is push up the price,” he said, “which just helps property owners rather than buyers.”

The biggest thing the federal government should be considering when it comes to their approach to real estate and taxation is how to add tax burden to real estate, he said, not subtract it. The government could, for example, limit how much of a principal residence’s capital gains are tax exempt when it is sold.

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Originally published on Advisor.ca
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