We Have TFSAs Now: Lose the HBP
September 18th, 2014 by PotatoA little while ago Rob Carrick idly wondered on his facebook page/discussion group if the home buyer’s plan (HBP) was a good idea. In case you’re not aware, the HBP is one of the few ways you can take money out of your RRSP without paying tax on it: you can pull up to $25,000 out as a first-time buyer, and repay it over the next 15 years. The HBP primarily accomplishes two things.
1. It lets people contribute to their long-term (retirement) savings with an “out” to use those funds for a down payment on a house/condo. This way they can save for the future without having to plan what will be house funds and what will be retirement funds.
2. It lets people get a tax refund on their down payment that they can also use on the house right away, effectively borrowing from their future selves. In the short term, it’s an incentive to buy.
On top of this, it has a psychological effect: home ownership and post-secondary education are the only sanctioned reasons for borrowing from your RRSP. Add how irrational people can be about taxes and tax deductions, and it’s a bit of a sacred cow. In the right light (octarine?) it looks like the government encouraging buyers to reach for as much real estate as they can, using everything at their disposal (including their RRSP).
With TFSAs in place now though the first point is well taken care of by that tax shelter: you can easily throw all your long-term savings in there as a young person, and if you need to raid them for a down payment (or whatever) then you can, even in excess of $25,000. Plus it’s already set up to be indexed to inflation so we won’t have to worry about future whining that the HBP isn’t big enough. As for point two, I really don’t think we need any more tax incentives or holiness attached to housing, so doing away with the HBP in favour of encouraging TFSA use would suit my politics just fine.
To be fair, this may need a few years for transition, and would present a bit of a savings conundrum to people who get employer RRSP top-ups, but I find it hard to feel that’s a major flaw in my plan. Let’s simplify the RRSP that one extra step, and phase out the HBP.
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September 19th, 2014 at 4:28 am
I had to stop at octarine and laugh for a good long while. I wonder how much of our perspectives are informed by your proximity to Toronto and mine to Smalltownville?
September 19th, 2014 at 8:06 am
A further thought: what’s the point of saving for a down payment in a TFSA, unless you’re saving over such a long term that you’ll receive meaningful (meaning: big enough to be taxable enough to impact your bottom line)? If you have the capacity to save quickly enough that a home purchase is a short- or medium- term goal, you should be saving in pretty low-risk/low-potential-returns type of vehicle…so why waste precious TFSA room on low returns that don’t really need to be sheltered in the first place?
September 19th, 2014 at 8:07 am
^ meaningful returns, that is. My parentheses distracted me.
September 20th, 2014 at 12:03 am
Well, the usual reasons:
– saving tax
– avoiding the effort of tracking and reporting
Plus my own special blend of:
– special risk tolerance and uncertainty
– continued savings
The implicit assumption is that most of the savings at first will be sheltered. If you just start saving at 22 you’ll already have over $25,000 of TFSA room to use as you work towards a house or whatever. And not all of that may be in cash/GICs — per the usual “of course you invest it” argument (and the “even if you only want to be 20% equities, if you’re saving over 5 years then you can put the first year in!”).
Part of the “of course you invest it” argument is that you may not know when or if you’ll buy a house. You can start saving at 22 and may not buy until you’re 32 and starting a family.
Anyway, it’s late and I’m rambling. Perhaps a better way to address the point: there should be no wasting of TFSA room. It should all be used. If you’ll have some savings for retirement that you won’t be using on the house, then you can use your RRSP (or put them in your TFSA and not use them for the house, like people who had RRSP funds but didn’t use the HBP before). But just as likely is the case where the downpayment is a laser-focus so there is nothing to put in the TFSA aside from that.
September 26th, 2014 at 8:42 am
So who is the HBP harming that it needs to be cancelled? Who benefits from its cancellation? Simply saying the TFSA can replace the RRSP HBP doesn’t necessitate stopping such a program that may help some individuals who could benefit from it.
What’s missed by the author is simply that money put into an RRSP allows further saving than funds placed in a TFSA. In other words, there is a benefit to contributing to an RRSP that is not present with a TFSA and that is the taxes saved which should then be invested in either the RRSP or the TFSA.
If you are trying to save for a house and the government helps just by allowing you to keep a little bit extra of your own money by a tax credit I would say that’s a benefit to use while it is available.
September 26th, 2014 at 10:09 am
There are only so many things that can get tax credits/deferral/etc. It’s not a question of who is it harming, or that it’s not a benefit — but rather is this incentive needed and a good use of our tax system?
Do we need more incentives to get people to buy houses? With ownership levels at record highs my argument is no, no we don’t.
September 26th, 2014 at 4:27 pm
I would go one step further and say it’s time to say lose the RRSP. It’s definitely not meant for retirement. Proof is that years ago when the government needed revenue it increased the minimum withdrawal in the RRIF. There should not be a minimum to begin with.
Also in February and March we get bombarded with ads and Canadians who use the RRSP will typically ask an employee of the local bank branch where to put the money. Of course the sales pitch is all about saving taxes and not about investing. Like you say, we have the TFSA…Of course we need to change the name of the TFSA, it is not a savings account! Heck it should never been allowed as a savings account, it’s clearly an investment account. It’s meant to eliminate the capital gains tax by the back door, at least when it comes to stocks.
September 27th, 2014 at 7:10 am
I won’t go as far as Erick, the RRSP is a great account for many reasons, I just don’t think a “retirement plan” by design should be used to “buy a home”.
I see these objectives at odds: a home is not a retirement plan. A home is a home and a tax-deferred retirement account are not the same things. But, with HBP, we have almost made them equal. I don’t get it, even if the TFSA (the greatest account ever) wasn’t around.
Mark
September 27th, 2014 at 5:50 pm
There’s a bit of a debate on the minimum RRIF withdrawals now. It does make sense to try to get people to spread their withdrawals out earlier, rather than having the estate end with a large lump-sum tax, though the argument can be made that the current minimums are too high.
But the sales pitch and focus on getting a refund has always irked me. Still, RRSPs and TFSAs are important tools when people have to fend for their own retirements.
@MOA: I think having the “out” to buy a home is helpful to young people: it lets them throw money in long-term savings without having to figure out in advance how to apportion it. But I agree: a house is not a retirement plan.
October 1st, 2014 at 12:16 pm
That assumes you make enough to max out your TFSA and pay into an RRSP. Most young people do not.
From my experience, I bought what I could afford. Then took out the $20,000 from my RRSP, plus another $15,000 so I could put 25% down. As of last January I paid off my home and will take care of the repayment on my RRSP this tax year.
If I didn’t have the HBP, I likely would’ve put 10% down out of my RRSP or removed the entire 25% down from that account. I’m glad I did it the way I did.
October 3rd, 2014 at 9:33 am
The HBP isn’t big enough; but as you said, the TFSA is indexed to inflation, so it will never be big enough either.
Note, I am currently using both TFSA and RRSP to save for a down payment (I do have retirement money that is only for retirement).
As a side effect, the HBP will allow me to move some money to my wife’s name (take it out for HBP, then she puts it back in so there is only one RRSP account). Also will allow me to fix some early mutual fund mistakes (all those DSC mutual funds coming out through HBP, and will go back into the DIY account).