Disappointing New Stats on the RRSP Home Buyers Plan



RRSP-Home-Buyers-PlanWe received surprising data last week from Revenue Canada on participation in the Home Buyer’s Plan (HBP).

That’s the program where “first-time buyers” can borrow up to $25,000 from their RRSP to use as a down payment.

Almost 1.8 million Canadians participate in the HBP, according to the latest available numbers from CRA1 but here’s the interesting part…

We’ve long operated under the assumption (based on past StatsCan research and CRA data) that 25-35% of people don’t make the annual repayments required by the plan. It turns out those numbers are a bit shy.

CRA told us last Wednesday that almost one-half of HBP participants (47%) “paid less than the full required repayment amount in tax year 2011.” (2011 is the latest data available.2)

That means almost 1 in 2 HBP users paid income tax on the RRSP money they borrowed and didn’t repay on time. (The amount of any repayment shortfall is considered taxable income, and tax is assessed on this amount at the individual filer’s marginal tax rate.)

That’s not to mention the tax-deferred investment gains they’re forgoing by not leaving the down payment funds in their RRSP. This lost growth directly impacts their income in retirement.

Such is the price that many young buyers are paying to own a home sooner. Is it worth it? Rob Carrick wrote this critique yesterday in the Globe.

 


Footnotes:

1 An HBP participant is anyone who, as of the beginning of 2011, had any outstanding withdrawals from an RRSP under the Home Buyer’s Plan.

2 CRA states that this data “includes the most recent assessment as of August 31, 2012 for all individuals who filed a T1 tax return for the 2011 tax year. Processing for the 2011 tax year is not yet complete. Data represents approximately 97% of expected total returns.”


 

Rob McLister, CMT

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Comments

  1. Comment avatar

    Dizzle    

    Perhaps it’s time to start including the RRSP withdrawals in the GDS/TDS calcs. It is, after all, 50K that must be paid back, and the effective interest rate if it’s not is higher than any credit card on the planet.

     
  2. Comment avatar

    Anthony    

    Can be–in 2009 I received a large back payment from work. I immediately put it in a spousal RRSP. 100 days later we used it as a down payment on our first house. We made repayments the first couple years so I would avoid being taxed, then stopped. Since my wife has nearly zero income, the extra tax is minimal. I pay into a good pension at work, so I don’t feel the need to repay the RRSP.

     
  3. Comment avatar

    rob    

    Tax deferred gains? Gains do do not happen in RRSP.

     
  4. Comment avatar

    Many Franks    

    Rob, do you have any trend information on the low repayments? I wonder if increasing trouble repaying HBP obligations might be an indicator of higher defaults down the road. If household books aren’t balancing, the HBP repayments will be among the first to be cast aside.

     
  5. Comment avatar

    Westmount FP    

    What are you talking about?

     
  6. Comment avatar

    Matt    

    From personal experience, i joined a company that had a matching RSP plan. I participated in that, and looked at the amount contributing in first year, and it was much higher than 1 year HBP repayment, and thought no additional contributions were necessary. However, employer treated RSP contribution in Pre-Tax $. Therefore from just T4, RSP contribution and basic personal credit amount, tax owing would be nil (simplistically) after employer remits source deductions. Therefore 1st year of HBP was added into income, resulting in tax liability. We had no other credits or deductions, therefore it was easy to see why we owned taxes. If those with child benefits, student loans interest, or any other credits/deductions, this may go unnoticed, and become part of the “Net receivable/payable”. They may be contributing to RSP well over HBP repayment, its just not being applied on Tax Return properly.
    We learned our leason year 1. And I have passed along this information to many co-workers taking advantage of the HBP, as they assumed participating in employer’s matching RSP program was more than sufficient. HBP should stay, it is a great program, the only issue i have is that most early contributions would be in lower income bracket, then withdraw, then when replaced, you dont get deduction at a higher marginal tax rate. If i had to do it all over again, and the program existed, i would have exclusively used the TFSA program to save for our first home.

     
  7. Comment avatar

    @YYCmortgageguy    

    Clients are either not understanding they have to designate from regular contributions to their RRSP as a HBP repayment on their taxes.
    Or it may be that it is a nominal amount for many to take as a “hit” adding it into their income – $1666/yr based on 25 years repayment period if you max out the full $25,000 withdrawal.
    That is about $140/month you would need to contribute back, assuming you did not max out your budget just to get into the home

     
  8. Comment avatar

    David    

    I’d say that your case is an exception. 🙂

     
  9. Comment avatar

    Many Franks    

    To partially answer my own question, http://www.uoguelph.ca/~msteele1/07ctj1-steele.pdf suggests a stable 1/3 of HBP participants failed to meet their repayment obligations from 1995 to 2007 (when the article was published). The current level of 1/2 is therefore remarkably high.

     
  10. Comment avatar

    Jeff    

    I am not really sure what the big deal is with this.
    I have a HBP that i am not repaying; i have an investment loan instead and write off the loan interest charges in order to offset the RRSP difference. Is it soo bad that i don’t want to end up paying income taxes in my retirement?

     
  11. Comment avatar

    Bad bet    

    You are not the type of person the HBP was designed for. You are an exception, and I question the soundness of your strategy. Assuming an equal loan and HBP withdrawal, your interest deduction won’t offset the tax paid and leave you with a net return. Plus you’re losing RRSP contribution room.
    On top of that, from a strict return standpoint you probably would have been better off keeping your money in an RRSP and getting an investment loan separately. That assumes you are making a good enough return on your leveraged bet. Again, you are the exception and not the rule.

     
  12. Comment avatar

    JohnH    

    I am getting so tired of ‘experts’ – both inside and outside the government – who try to beat people into submission on a wide range of issues from personal safety to saving for their retirement. People are smart and will make the best decision for themselves; and if they don’t, they will work harder to make it the right decision.
    Sure, are there people who wouldn’t be able to repay their RRSP ‘loans’? Absolutely – why do you think the feds introduced this program? To help people out; a public relations effort; or was it part of a plan to collect more tax revenue. Should we cancel the program because 45% can’t repay the loan to themselves? Absolutely not! It was happening before with a much bigger tax hit to the home buyer, or people were deferring deposits into their RRSP to save for their home. Just because we have some statistics now that tell what we long suspected isn’t a reason to kill the program.
    There are only two things this government has done that are worth saving when the Liberals or NDP take over … one is the TFSA and the other is the HBP.
    I used to have such respect for Rob Carrick and your ideas, but I’m starting to believe you are a mouthpiece for the financial services industry. The RRSP can include more than stocks, bonds and GIC’s; real estate is one of the options as well.

     
  13. Comment avatar

    Mortgage Guy    

    Deferred investment gains….that would require the RRSP to make money. So maybe the better choice in the last five years was to cash out and put it into your home. At least most markets have at least held their own or gone up. Can’t say that for my RRSP.

     
  14. Comment avatar

    banker in an ivory tower    

    Perhaps not. If your borrowing from yourself, its not debt. This is currently a non-issue in respect to defaults. No need to fix what is not broken.

     
  15. Comment avatar

    M K    

    You really need to improve what your RRSP is invested in. Even a humble, low-MER TSX index fund has a 2.6% annualized rate of return over the last 5 years, and 5 years is the worst-performing window.

     
  16. Comment avatar

    Robert McLister    

    Hi JohnH,
    Thanks for the comments. Just for the record, the above story doesn’t advocate shutting down the HBP. It asks readers for their opinions on whether using it is worth the trade-offs. In many cases it is, but clearly not always. The comments in this thread add some fantastic perspectives.
    This article also reports data, which contrary to your prior hunch, comes as a surprise to many. That data highlights important considerations about a program that some position as bulletproof.
    If you’ve read us long enough, you’ll know our position is that more financial flexibility in the hands of responsible informed borrowers is economically and socially beneficial. But that shouldn’t preclude the disclosure of risks where they exist.
    Cheers…

     
  17. Comment avatar

    Paolo Di Petta, Mortgage Agent    

    You can make some decent gains if you have a Self Directed RRSP through private mortgages.
    That being said, the problem isn’t often the gains, it’s the tax penalties when you’re retired and trying withdraw your own money.

     
  18. Comment avatar

    Canadian    

    educate yourself , rob !

     
  19. Comment avatar

    Terminal Renter    

    JohnH you say, “People are smart and will make the best decision for themselves; and if they don’t, they will work harder to make it the right decision.”
    People make decisions based only on the information they have available. There is no harm is pointing out the disadvantages of pillaging your retirement savings to buy a highly illiquid asset that, at best, will appreciate at the rate of inflation over the long term.
    When it comes to real estate, there is no such thing as “work harder to make it the right decision.” Once you sell investments to buy a house, you’re stuck with that property at the price you paid, less significant liquidation costs. You are also stuck with the RRSP and tax consequences.

     
  20. Comment avatar

    Robert McLister    

    Hi Many,
    The following data was graciously provided by Rob Carrick. It was obtained directly from CRA.
    The number of HBP participants has been generally decreasing with:
    131,112 participants in 2007
    115,927 participants in 2010
    106,281 participants in 2011
    The dollar value of HBP withdrawals reflects this trend with approximately:
    $1.56 billion withdrawn in 2007
    $1.54 billion in 2010
    $1.42 billion in 2011
    I have no comparative data on repayment rates other than the report you cite, a few earlier studies and the latest figures from CRA above. But it appears that repayment rates have been dropping.
    Cheers,
    Rob

     
  21. Comment avatar

    Dizzle    

    If you must pay it back out of cash flow, regardless who the payment is to, it’s debt in my view.
    I suspect we will disagree on that, so here’s an alternate that I think we would agree in: at a minimum, the taxes owing in the top marginal tax bracket for the mortgagor is debt (to CRA). An RRSP is a tax deferral. If you borrowed from your TFSA, that would aptly fit your description above.

     
  22. Comment avatar

    drmortgage    

    In part, some of the “investments” in to RRSP accounts by first time buyers was not for investment purposes. Many would not (could not?) save monies each year to ‘repay” their withdrawal. In fact, since a bulk of these took sums of $ 15,000 to $20,000 as a short term loan to put in to the rrsp, prior to buying, only to withdraw the rrsp money to repay the rrsp loan, they had no real monies in the rrsp account to start with. They were simply picking up the “free” ( deferred) tax referral of say $5,000 immediately to help them buy a home. The fact that over the next 15 years, this “free gift” trickles back to the gov’t in higher taxes is no BIG deal. ( yes. financial planners are all shaking at the ramifications of that comment, but many of these people would not have been contributing to rrsps anyways) My hope for some of these clients was that the act of being asked every year to “repay” their (non) rrsp monies taken out, that some might actually start an rrsp savings plan that they never planned on doing- all while now owning a house !

     
  23. Comment avatar

    Jim Brown    

    Actually it’s a 15 year repayment period….not 25;
    Jim

     
  24. Comment avatar

    JP    

    How do you get gains with a self-directed rrsp through private mortgages?

     
  25. Comment avatar

    Gregus    

    What loosers! This is essentially an interest free loan to yourself! I have used this to put 10% on my house in 2006 and have paid back over every year for 15 years.

     
  26. Comment avatar

    J    

    You’re the one that loses if your home “investment” underappreciates compared to what your RRSP would have made.

     
  27. Comment avatar

    Pat Redman    

    My children were searching for Canada T1 General earlier today and were told about a web service with a lot of fillable forms . If people are looking for Canada T1 General too , here’s http://goo.gl/sQ7H29

     

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