The Conservative government's election promise to allow first-time homebuyers to withdraw an extra $10,000 tax-free from their RRSPs through the Home Buyers' Plan (HBP) contradicts the purpose of RRSPs and would lead to Canadians losing out on their retirement savings, says Ian Russell, president and CEO of the Investment Industry Association of Canada in Toronto.
"RRSPs are designed for retirement savings. They're not designed for savings to spend on other goods and services, be it cars, boats, planes, houses or whatever," he says. "The [current HBP] is what it is, but I don't think they should be increasing [the withdrawal limit]."
Prime Minister Stephen Harper announced on Wednesday that if his Conservative Party of Canada remains in power following October's vote, his government would increase the tax-free withdrawal limit in the HBP to $35,000 from the current level of $25,000. Under the plan, Canadians can take funds from their RRSP in order to finance the purchase or construction of their first home, but they must repay those funds within 15 years in order not to be taxed for the withdrawal.
Russell disagrees with those who may argue that Canadians' retirement savings will be unharmed because any withdrawn amount must be returned to the RRSP.
"By increasing the withdrawal [limit] by another $10,000, there is a loss to the individual and a loss to his retirement savings in terms of the interest rate foregone," he says.
Russell contends that Canadians have another tax-free tool in the form of the tax-free savings account (TFSA) to use for large purchases such as a home. He notes that the annual maximum contribution limit for the TFSA was increased to $10,000 from $5,500 in April's federal budget.
"They can withdraw their TFSA money any time they want to for whatever purpose they want," he says. "That's what [TFSAs] were designed to do."
Russell also believes the proposal will add more fuel to an overheated housing market, with the likely consequence being that housing prices will continue to rise.
In addition to TFSAs, low interest rates can also help new homeowners who require a mortgage, he says.
All in all, the proposed increase would only make a small difference to Canadians looking to buy their first home, says Russell.
"They're going to lose out on the interest foregone by taking the money out," he argues. "House prices are going to go up. In some sense, the net benefit is very small."