As happens most years, pre-budget submissions to the House of Commons finance committee have urged the government to increase the available amount within the RRSP Home Buyers’ Plan (HBP). This past year, there was a novel suggestion to enable parents to use the plan to help their children buy their first homes.
Rather than expanding the HBP, I’d argue it’s time to abandon it.
While my objection is not related to the real estate market specifically, it’s worth noting that housing prices and household debt remain among the Bank of Canada’s top three economic concerns.
No, it is the deceptive simplicity of the HBP as a temporary funding source that concerns me. Plan users have a significant risk of permanently depleting their retirement savings.
HBP can be a tax illusion
First, a quick review. An RRSP is a government-sanctioned tax shelter with two key features:
- contributions are deductible, meaning it is funded with pre-tax money; and
- growth is not subject to tax.
With respect to the second feature, others can debate the merits of tax-sheltered investment growth in an RRSP versus tax-sheltered appreciation of a home using the principal residence exemption.
My concern is with the first feature: an RRSP contains pre-tax money, but you buy a home with after-tax money. You cannot use pre-tax money until you pay tax on it, usually as a fully taxable retirement draw. Yet it’s not obvious when and how you pay the tax when using the HBP, which currently allows each person to borrow up to $25,000 and a combined $50,000 for a couple of first-time purchasers.
To use simpler arithmetic in an example, let’s round that down to $45,000, which would work out to a $3,000 annual repayment over the maximum 15-year timeframe. Unlike normal RRSP contributions, HBP repayments are non-deductible. If each partner in the couple earned about $80,000, their marginal tax rate would be around 33% (provinces vary a little), so each repayment would actually cost $4,500 a year.
This $4,500 must be repaid on top of mortgage payments, property tax and other household maintenance costs.
If you choose not to make the annual HBP payment, you’re still not out of the woods, as the unrepaid amount is then included in your income. You would owe $1,000 on the $3,000 inclusion, requiring $1,500 gross income to net the cash for the tax. In the process, you lose $3,000 in RRSP room, so in a sense the failed repayment still cost present-you and retired-you $4,500.
Expanding the program?
What about the recurring request to increase the HBP’s borrowing amount, with $10,000 commonly suggested? This does not change my concerns illustrated in the example above; it just makes the numbers larger.
It becomes worse if parents’ RRSPs were available to assist their children as first-time purchasers. Practically, that would mean that the children had insufficient savings from all their sources (including their own RRSP HBPs), and that the parents didn’t have enough after-tax savings to fill the gap. Apart from halting investment growth for parents who are nearing or in retirement, it would make those parents dependent on the financial fortunes of the new homeowners. This complicates and compounds the example above, creating both financial stress and family discord.
Better transparency with a TFSA
Unlike the opaqueness of the RRSP HBP, the TFSA is effectively transparent. You know exactly what you have to spend, and exactly what future repayment obligations you will have—there are no required repayments.
At the present allotment of $5,500 per year after age 18, there is plenty of room to save in a TFSA before reaching home-buying age. TFSA contributions are made after tax, so it will take longer upfront to accumulate in a TFSA rather than in an RRSP. But you can more clearly see what you can afford, and you have greater certainty about your post-ownership finances.
Taking into account all these factors, it’s time to wave goodbye to the HBP.
Doug Carroll, JD, LLM (Tax), CFP, TEP, is Practice Lead — Tax, Estate & Financial Planning at Meridian.