mature woman with tablet

Recently, I’ve been hearing from a number of retirees who are not eligible for any form of Covid-19 government assistance. They would benefit from some support, given that their portfolios are down and some of them are incurring additional expenses during quarantine, such as home food and grocery delivery. They’re not eligible for the $2,000 monthly Canada Emergency Response Benefit since they weren’t working when the pandemic struck, and they’re too young to benefit from the 25% reduction in the minimum required RRIF withdrawal for 2020, since they still have RRSPs.

But, what if they could access their RRSPs tax-free in the short term to help meet cashflow needs during the pandemic?

This was proposed recently by the C.D. Howe Institute’s Alexandre Laurin and Nick Pantaleo, executive in residence at the University of Waterloo’s School of Accounting and Finance, who recommended the government consider allowing tax-free RRSP withdrawals, calling the idea Financial Relief Plan (FRP).

The FRP would be modelled after the existing Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP), which both effectively allow tax-free borrowing from your RRSP, provided the required annual repayments are made on time. The HBP is designed to support the purchase of a home, allowing first-time home buyers (and their spouse or partner) to withdraw up to $35,000 tax-free, to be repaid over 15 years. The LLP is meant to support enrolment in an educational program, allowing students (and their spouse or partner) to withdraw up to $10,000, tax-free from their RRSP, to be repaid over 10 years.

No tax is payable on the RRSP withdrawals under the two plans and, if funds are repaid on time (or before), there are no further tax consequences to the participants, other than the loss of tax-deferred income/growth on the amounts withdrawn. A failure to repay the annual required amount, however, results in the unpaid amount being included in income in that tax year.

In making the case for the FRP, Laurin and Pantaleo argue that since many households already have “an ample source of financial wealth at hand” (i.e., inside their RRSPs), allowing Canadians to temporarily withdraw funds from their RRSPs tax-free would provide “an immediate and cheap source of financial assistance.”

The proposed plan has a couple of benefits. First, amounts could be withdrawn from an RRSP without the normal government withholding taxes. Under the normal rules, when funds are withdraws from an RRSP, the financial institution withholds tax. The withholding rate depends on the annuitant’s residency and the amount withdrawn. For Canadian residents, the rates range from 10% on amounts up to $5,000 to 30% on amounts over $15,000. (Quebec rates are higher for withdrawals under $15,000).

But perhaps the most important benefit is that, unlike a normal, taxable RRSP withdrawal, withdrawals under the HBP and LLP schemes do not lead to a loss of contribution room, so participants would not be penalized by temporarily withdrawing funds from their RRSP, other than through the loss of the tax-deferred growth, as discussed above.

While many design factors are possible, Laurin and Pantaleo suggest the FRP could be available for the next six months, withdrawals could be limited to $20,000 and repayments could extend over a maximum of 10 years.

In the end, the government will collect its taxes on the RRSP withdrawal, either when Canadians fail to repay what they are supposed to annually, or after they have repaid the amounts, when they eventually withdraw their money for retirement. Given our low interest rates, “the cost to the government of what amounts simply to a delay in tax payments would be negligible,” Laurin and Pantaleo argue.