The Canadian Real Estate Association (CREA) is proposing a number of items to expand and modernize the RRSP Home Buyers’ Plan—the biggest of which is “inter-generational RRSP loans” to help first-time home buyers.
At first glance, this seems like a good idea to expand and modernize the RRSP Home Buyers’ Plan (HBP). Home prices are rising fast in big cities like Toronto and Vancouver, requiring larger down payments, so why not throw more money at the problem? Unfortunately, this proposed change could do more harm than good.
In effect, it could be useful for parents if you are tax planning for your family, tax planning for your retirement, or managing your estate. For the children, it would incorporate tax planning as young professionals. However, let’s take a closer look.
The Bank of Mom and Dad
Parents are already gifting money to their adult children through the Bank of Mom and Dad, so why not let them do it in a tax-advantaged way?
The Canadian Real Estate Association (CREA) wants both parents to be able to lend RRSP funds to anyone they had previously claimed as a dependent on their income tax return. CREA says allowing inter-generational RRSP loans would “ease the financial burden that many young Canadians face when trying to purchase a home for the first time”.
The Toronto Real Estate Board (TREB) echoed this statement, saying: “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.”
Nearly one in five first-time home buyers are already getting financial help from a family member with their down payment, finds an online survey by the Canada Mortgage and Housing Corp. (CMHC).
With rapidly rising home prices in major cities across Canada, the increase in adult children making withdrawals from the Bank of Mom and Dad should come as no surprise. So are inter-generational RRSP loans the solution?
Putting retirement savings at risk
On the surface, inter-generational RRSP loans look like a good idea. The points CREA and TREB have made are valid, but there are several key flaws that they conveniently left out from this retirement fund withdrawal strategy.
Inter-generational RRSP loans would tend to favour the rich. Children of wealthy parents would have a distinct advantage over parents who can’t afford to gift their adult children their down payment funds. I don’t know about you, but my parents aren’t in the financial position to gift me money toward a down payment for a home and I’m not alone. Many parents aren’t. The average Canadian’s retirement savings may not suffice for a down payment on a house.
And for the parents that do gift their kids money, some of that money’s not even coming from savings. Some parents are tapping into the equity of their homes to gift their adult children the money. While I’m all for helping your adult child when possible, putting your financial well-being in danger, especially when your child’s peak earnings years are ahead of them, makes absolutely no sense.
Letting parents lend their RRSP funds to their children so they can buy a first home is a slippery slope. The RRSP should be used as it was intended: for retirement savings.
The facts speak for themselves. Only about a third of Canadians have a workplace pension plan. With people living longer than ever before, combined with the perpetually low interest rate environment, our parents will likely need every penny in retirement. Splitting pensions amongst your children isn’t what it was designed for.
Higher home prices
And then there are those darn ‘unintended consequences’. Although inter-generational RRSP loans may help some first-time home buyers in the short-term, they’re likely to push up home prices in the long term for everyone. This policy of financial liberalization is meant for economic development but it may curb it instead. This helps homeowners and real estate agents, but not so much home buyers.
Instead of throwing more money at the problem, a much better answer would be fixing the lingering housing supply issue. Cities like Toronto and Vancouver need higher density along transit corridors and creative solutions like lane-way houses and family-sized condos to address the ‘missing middle’.
There’s no silver bullet to fixing the rising home price phenomenon. But the sooner governments realize that, the sooner they can start addressing the housing supply mismatch in big cities.
Sean Cooper is the author of Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post, Tangerine: Forward Thinking blog and MoneySense. You can follow him on Twitter @SeanCooperWrite or visit his website at seancooperwriter.com.
This is an edited version of an article that was originally published for subscribers in the December 22, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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