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Registered Retirement Saving Plans & Canadian Home Buying Through HBP

Written by Posted On Tuesday, 24 February 2004 00:00

According to an Ipsos-Reid poll, only half of adult Canadians will make contributions to a Registered Retirement Saving Plan (RRSP) even though a majority (63 per cent) of Canadian adults say "saving for retirement" is a very important financial goal for them. Reportedly, those with RRSP savings may also add to personal wealth by taking advantage of The Home Buyers' Plan (HBP) which allows home buyers access to RRSP savings.

Canada Mortgage and Housing Corporation (CMHC) research revealed that the HBP provides households with a net financial gain even if homeowners had to borrow to repay the RRSP or did not repay the RRSP and received a tax penalty. The CMHC interpretation of this pattern is simple: "By allowing households to make a tax-free withdrawal of an amount that gave them a tax credit when it was contributed, governments are implicitly granting these households an interest-free loan equal to the amount of tax to which the withdrawal should normally have been subject."

The Home Buyers' Plan, overseen by the Canada Customs and Revenue Agency (CCRA), aims "at facilitating access to homeownership by allowing households to withdraw up to $20,000 tax free from their Registered Retirement Saving Plans (RRSPs) to cover the down payment for the home." Between its introduction in 1992 and 1998, the HBP has enabled over 777,000 individuals to withdraw close to $7.5 billion from their RRSPs to finance the purchase of their first home and, in 1998, just over 111,000 households withdrew an average amount of $9,400.

These withdrawals must be repaid through a series of annual payments equal to 1/15 of the amount withdrawn over a maximum period of 15 years to escape adding the repayment amount to taxable income. Apparently, a significant proportion of participants do not make the full repayment required into their RRSPs according to the terms of the HBP.

The increase in the accumulated value caused by the HBP depends on several factors:

  • The interest rate.

  • The tax rate - The present value of the financial gain is then equal to the tax rate multiplied by the initial withdrawal from the RRSP. The HBP is therefore more profitable to those households with the highest tax rate. In fact, a household which has a marginal tax rate of 40 per cent and makes the maximum withdrawal of $20,000 benefits from a wealth gain with a present value of at least $8,000.

  • The inflation rate.

  • The initial withdrawal amount.

  • Whether or not the repayments are made - The gain is greater if the repayments to the RRSP, on which the return is taxed only at the time of the final withdrawal, can be made using assets on which the return is taxed annually. The least favourable case is where the household must borrow to contribute to the RRSP and to make the repayments required under the HBP, since the interest paid on these borrowings is not deductible.

According to CMHC, homeowners use the gain in their wealth to proportionally increase their consumption of other goods and housing. These increases in consumption and housing demand are also proportional to the lifetime gain in their wealth and also come with a proportional increase in terminal wealth. The total saving of the household, therefore, rises during the period of home ownership. Some home buyers use the HBP to buy a home of greater value, but not to the detriment of saving.

In general, real estate ownership makes solid financial sense. In a recent Financial Post/COMPAS Inc. web-poll, and contrary to "media Cassandras foretelling dire straights as a result of rising debt," business leaders and CEOs did not see rising household debt as a problem, partly because it is linked to real property. They also predict no drop in real estate values even after a rise in interest rates and so are opposed to increasing interest rates or introducing regulatory barriers to household debt.

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