Do RAP and pension go well together?

Impact of RRSP withdrawals under RAP on retirement. (Photo: 123RF)

GUEST EXPERT. In April’s federal budget, the government increased the withdrawal limit allowed under the Home Buyers’ Plan (RAP) from $35,000 to $60,000 per person. In addition, the grace period during which owners are not required to repay amounts withdrawn from their RRSPs without the amount owed being assessed has been extended for another three years. So now she is five years old.

Please note that this latest measure is temporary and will expire on December 31, 2025.

These new measures lead me to question another aspect of RAP. Indeed, according to the 1992 federal budget, the year the RAP was introduced, the goal was to finance the purchase of a principal residence, but also not to jeopardize the role the RRSP must play in retirement.

This article therefore seeks to determine the impact of RRSP withdrawals under the RAP on retirement. Of course, several hypotheses could be used, but here are the ones I kept:

  • A couple in their 30s, each with $60,000 in RRSPs, buying a $500,000 first home, with a mortgage amortized over 25 years;
  • They have savings in their TFSA and CELIAPP for their start-up costs and a $100,000 down payment, avoiding the CMHC premium;
  • Borrowing interest rate equal to RRSP rate of return ie 5%.

Scenario 1: the couple does not use RAP

  • $400,000 mortgage (using their TFSA and CELIAPP for down payment);
  • Annual mortgage payment = $27,917;
  • They let the $120,000 in their RRSP grow for 25 years at 5%.

Scenario 2: A couple uses RAP

  • $280,000 mortgage (they will use their TFSA and CELIAPP for their down payment, in addition to withdrawing the total amount from their RRSP, i.e. $120,000, under HBP);
  • Annual mortgage payment = $19,542;
  • So they have a savings capacity of $8,375 per year, which they use as follows:

– Save this amount in a TFSA for the first five years with a 5% return;

-From 6E at 20E they pay off their RAP of $8,000 per year. The remaining $375 of their available savings is invested in the TFSA;

-From the 21stE at 25E in a year, it will return to $8,375 in annual savings in their TFSA.

In both scenarios, they work the same annually, i.e. 27 917 dollars, in the amount of 5%. According to these hypotheses, will there still be a better off couple after 25 years?

Let’s take a look at the final results, making sure they’re converted to net dollars with different withdrawal thresholds:

In this example, you can see that if the marginal tax rate at withdrawal is between 30% and 50%, scenario 2 using HBP has a significant net financial benefit. However, we should not forget that in Scenario 1, since the couple has no savings in their TFSA, they would have room to contribute $89,375 after 25 years. But the benefit of claiming a TFSA is less at age 55 because, other things being equal, there is less time to capitalize tax-free returns.

So I repeated the exercise with the same hypotheses, but with an investment in an unregistered vehicle rather than a TFSA. We get the same result, which suggests that in all cases the scenario using HBP wins by a significant margin (marginal tax rates used below, all taxes are paid including the capital gain at the end, including 50% given that the amounts are less than 250 000 USD, the profile gives 5% gross distributed according to the Projection Assumption Standards of the Institute of Financial Planning and FP Canada, a 33% return in the form of dividends and an annual turnover rate of 20%):

Of course, several hypotheses can be changed and each situation is unique. The one presented in this article presents the case of a couple who are richer than the average person. The fact remains that it would seem entirely possible to use an HBP without compromising the role the RRSP has to play in retirement. Even if the couple doesn’t need HBP for their deposit! However, a person using RAP should observe the following two conditions:

  1. Store the difference between the non-RAP and RAP mortgage payment in an asset generating a rate of return at least equal to the first year’s mortgage rate;
  2. Save your minimum payment each year instead of adding it to your taxable income.

If you’re planning to buy your first property and have RRSP rights, don’t underestimate HBP, which can also be included in retirement planning. Consult your financial planner!

Charles Hunter-Villeneuve, M. Fisc., Pl., TEP

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