RRSP or Your Child’s House?

The housing market is insane in Canada. The average home in Toronto and Vancouver cost over $1,00,000 in 2017. 20 years ago, it was less than half of today’s price. What happened? Easy. As more people come to Canada and the citizens already here are having kids, the population grows. Since Toronto and Vancouver have very little space to build more homes, the value of each condo or house increase. Simple supply and demand.  There are more factors to the housing market, but this is a simplified version that everyone can understand. This is great news if you own property in Toronto or Vancouver. Your investment increased! Now, if you’re a millennial, you are in a bad situation. You might have to pay twice as much as your parents did for the same home. Since millennials cannot afford to buy or rent in today’s housing market, they choose to live with their parents for a much longer time than previous generations or hey take out personal loans for a home they cannot afford. What happens when the millennial wants to move out? Their parents help them financially. Most of Generation X does not have enough personal saving to help, so they use they used their RRSP saving. Is this wise to help your offspring or dumb because now you have less retirement funds?

Letting retirees raid RRSPs to buy houses for their kids is an awful …

iPolitics.ca–Dec. 9, 2017

Just as Canada badly needs to put a lid on its overheated real estate markets to make housing more affordable (and avoid a debt-fueled financial meltdown), our nation’s real estate agents have come up with a self-serving scheme that will do just the opposite — and endanger the retirement savings of aging baby-boomers in the process.

Take a close look at the latest concoction of the Canadian Real Estate Association, one of the most powerful lobbies in the country. In a pre-budget submission to the House of Commons Finance Committee, the Association proposed a new wrinkle in the current Home Buyers’ Plan, which allows first-time home buyers to borrow up to $25,000 from their Registered Retirement Savings Plans, provided they pay it back within 15 years.

Under CREA’s proposal, aging parents would be able to borrow up to $25,000 each from their RRSPs and lend it to their children, who in turn would go out and buy their first homes and then pay back their parents over time. According to the real estate agents, this intergenerational RRSP loan scheme would be “a compassionate and fiscally responsible way to help modern Canadian families finance the purchase of a home.”

We all know that young buyers are increasingly turning to the “Bank of Mom and Dad” to finance their first homes, particularly in overpriced real estate markets. But fuelling this trend with taxpayer money is the very last thing the government should be thinking about now.

The federal government already provides billions of dollars in subsidies to homeowners. According to Finance Canada’s estimates, the non-taxation of capital gains on the sale of a principal residence cost the government $7.5 billion in foregone revenues in 2016. The First-Time Buyers’ Credit, introduced by the Harper government in 2009, provides a tax credit of $750 for first-time buyers at a cost of another $120 million annually. Plus, there’s the GST exemption on the sale of existing housing. The list goes on.

CREA’s proposal comes just when other parts of government are trying to deflate the real-estate bubble, not pump it up with more cash and more stimulus. But brokers don’t care about the health of the greater economy; they want to sell houses and condos. And since they work on commission, anything that boosts prices and keeps people buying is, to them, a good thing.

While nobody will say it out loud, the goal of these market-cooling measures is to take money out of the real estate market — and lower prices. Allowing parents to raid their RRSPs to help their kids buy homes would do the opposite.

When the former B.C. government of Premier Christy Clark tried to buy votes by introducing a loan program for first-time homebuyers in 2016, CMHC President Evan Siddall made it clear he thought it was a bad idea. In an email obtained by The Tyee under an Access to Information request, Siddall said: “Programs that support demand in supply-constrained markets like Vancouver serve primarily to increase prices and make the affordability problem worse.”

Furthermore, CREA’s intergenerational loan plan would be a direct negation of the policy purpose of tax-assisted retirement programs like RRSPs. People often forget that taxes on RRSPs aren’t cancelled; they’re simply deferred until the taxpayer retires and needs the funds. That’s why you can’t contribute to a RRSP after the age of 71 — you have to start taking the accumulated funds into income.

Under the current Home Buyers Plan, you have to pay back the loan you made to yourself from your RRSP by the time you’re 71. Otherwise, the Canada Revenue Agency forces you to include the balance of that loan as income.

The real estate group is silent on how the parental scheme would work in practice. Would there be an age cap on when a parent could make a loan? If a parent who is 70 lends $25,000 to an adult child and gets 15 years to pay it back, the loan would remain unpaid until that parent is 85. The retiree would be deprived of that income in the meantime and the government wouldn’t be able to tax the RRSP income that was deferred to support that retirement.

For lower-income seniors, this scheme would mean less money in the bank just as they need it most. For well-heeled seniors — the kind of people who already have enough money to give to their kids — it would be just another tax break. In both cases, the public policy case is questionable, to say the least.

Here’s what a CREA spokesman said in response to these concerns: “We trust that only people who can afford to lead their children money will. Indeed, it’s already happening.” As for the cost of the scheme, CREA offers no estimate.

I personally won’t give up my retirement money for just about anything. However, I would be more than willing to help my children if I have the capability to. If you do ever find yourself in a situation where you need to take out money from your RRSP, please do not take out more than 20%. Anything more can be truly harmful to you. Taking out 20% is more than 20% in the long-term because of the interest that that money could’ve made. Example, if you had 200,000 in your RRSP and gave 20% to your child ($40.000) at 7% interest over 10 years, you actually lost $78,686!  That only 10 years. 15 years would be $110,361! 20 years would be $154,787! That initial $40,000 just got a lot bigger in just 20 years. Before you give any money from RRSP, you have to ask yourself if you would be fine without that money? If yes, great. If not, ask yourself if your child will take care of your financial needs later on in life? If yes, good. If no, you better hold on to your money. If your child is upset with your decision, you can tell them to live with roommates until they are financially ready to live on their own. This is a very personal decision and can be looked at a non-financial view. I, however, look at everything from a financial view (working in finance does that to you).

To conclude, parents, you are not responsible for your child not affording a home. You do not have to shorten retirement for them. Millennial, if you partners say no, do not blame them. They want to enjoy the money they saved their entire life for retirement. If you cannot afford the place in the city, consider roommates or living further away from a big city.

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