When the federal government introduced the Homebuyers’ Plan in 1992 and the Lifelong Learning Plan seven years later, many advisors viewed the programs as dangerous invitations for clients to rob their retirement savings.

“When they originally came out, I was totally against them,” says Ryan Beebe, a partner with Edmonton-based Caplan Beebe & Associates. “I thought, ‘Why would you ever take money out of your RRSP? You never should do that’.”

But Beebe admits he softened his stance in subsequent years. He now considers the HBP and the LLP — programs that allow individuals to borrow funds interest-free from their RRSPs — as acceptable strategies for cash-strapped clients to finance homes or education.

And if people are disciplined about saving money and repaying the loan, he adds, they can mitigate the damage they would otherwise do to their RRSP’s growth potential.

“In all honesty, [I’m] a little more objective,” he says. “There are some advantages to the plans, particularly for younger people.”

The HBP and the LLP share many similarities, although they have different mandates.
The HBP is the better known and the more popular of the two because many Canadians eventually buy homes, whereas only some choose to go back to school.

According to the Canada Revenue Agency, 159,282 withdrawals totalling almost $1.8 billion were made under the HBP in 2004. In 2003, the most recent year for which the CRA has LLP statistics, 16,692 participants withdrew slightly less than $90.9 million under that program.

The HBP allows first-time homebuyers or those who have not owned homes in the past five years to borrow up to $20,000 from their RRSPs without having to include the amount of the withdrawal on their annual tax returns and without the RRSP issuer withholding taxes. A couple can each borrow up to $20,000 from individual plans to buy a home if both parties qualify. The clients then have to pay back the money, without interest, to their RRSPs over the course of 15 years in equal instalments, beginning in the second year following the year of withdrawal. The entire loan can also be repaid at any time.

Beebe says that he usually recommends the HBP only if he knows the clients well and believes they are disciplined enough to pay the money back. “One of the problems with the HBP is that some people will take the money out, then not make the repayments,” he says.

The amount of a missed repayment has to be included in the individual’s income for the year, and it will be subject to taxes. “They say: ‘I’ll just pay the taxes, it’s not a big tax bill’,” he notes. “So, over the 15 years, they don’t make the HBP repayments and then it’s a big [long-term] cost to their RRSPs.”

Beebe also says using the HBP to reach the 25% down payment required to eliminate the need to obtain mortgage insurance is usually a good idea for clients. On the other hand, he says, clients who have already saved up a significant down payment — say, 50% of the price of the desired home — should dismiss the idea of borrowing from their RRSPs in order to add to their down payment and decrease their mortgage.

Double whammy

“If a person has a 75% mortgage, the interest savings are great,” Beebe says. “But for a person who has a 40% mortgage, what are the interest savings? Not a lot. So, you have a double whammy — you’re not saving as much interest and you’re paying an opportunity cost in terms of lost investment and possible growth in your RRSP.”

There are myriad strategies for mitigating RRSP damage. For example, clients can apply the savings on mortgage interest from the use of the HBP toward the RRSP year over year, even after the HBP has been paid back. But, Beebe says, ambitious plans can sometimes require more discipline than clients can be expected to muster.

Instead, he encourages his clients to accelerate their HBP repayments by paying more than the yearly minimums, with the ultimate intention of retiring the debt before the 15-year repayment period. “It mitigates the loss by having shorter repayments,” he says.

On the other hand, Nora Dunn, an advisor with Investors Group Inc. in Toronto, usually counsels her clients to make only the minimum HBP repayment, using any extra money to maximize contributions to the RRSP because HBP repayments don’t affect available contribution room.

@page_break@“As long as clients have RRSP contribution room available, and as long as their income is steady, I will almost always recommend that they make the minimum HBP repayment and get the tax deduction for the rest of their RRSP contributions for the year,” Dunn says. “They can use the tax refund for either debt reduction or further investing.”

She does suggest, however, that it may make sense to be more aggressive about HBP repayments than RRSP contributions if income is low one year. Then, contribution room can be saved for a future year when income levels are higher.

Both Dunn and Beebe acknowledge that, in certain circumstances, it is possible to come out ahead using the HBP. This is especially true in the current climate of rising house prices or if mortgage savings are reinvested in a hot equity market. But if house or equity prices plummet, the effect will be the opposite.

Under the LLP, which was created for those who want to enrol full-time in a university, college or other qualifying educational program, a total of $20,000 can be withdrawn, but over a period of four years. There is also a $10,000 withdrawal limit in any one year.
Repayments are then made in equal instalments over a period of 10 years, beginning in the fifth year following the first LLP withdrawal.

Although fewer people know about the LLP compared with the HBP, there is evidence that the LLP is gaining in popularity. Participation in the LLP in 2003 represented a 13.6% increase over the previous year.

Dunn says the LLP is used in greater frequency in a changing marketplace, in which clients who find themselves out of jobs realize their present skills aren’t enough to get them new jobs.

“They’re basically forced to return to school to update their skills,” she says. “In cases like this, and if they don’t have the money to pay for education, it may make sense to use the LLP. But, in an ideal world, going back to school would be a premeditated decision for which clients could properly plan and budget with their financial planners.”

However, Beebe notes, the only times he has discussed an LLP with his clients is when they ask about it for their children, who are increasingly coming out of post-secondary school with mountains of debt. He always has to inform them that the LLP can only be used by the person who is withdrawing the money from his or her RRSP, or by his or her spouse.

As with every other aspect of financial planning, it is important to look at a client’s overall financial picture when considering tax-exempt RRSP withdrawal plans. In the case of the HBP, if there is little cash for a down payment and only modest amounts in the RRSP, the clients may not be ready for home ownership. And clients who decide to take advantage of the LLP should do so only if they are fairly certain the education they will receive using funds from this plan will allow them to increase their earning power and to replenish their RRSP.

“Both the HBP and the LLP can be excellent planning tools,” Dunn says. “But they aren’t for everybody.” IE