“Save for your retirement. Put money in your RRSP. Don’t touch it!”
This is the advice given to young Canadians so they have future savings and wealth.
Well, I have a confession to make.
I liquidated my RRSP to self-fund my accounting business.
I didn’t have wealthy friends and family to support me in starting up. There weren’t grants or venture capital funds to access. I felt scared and ashamed liquidating something intended for my future. This wasn’t the savvy business planning I learned.
But I believed in myself and my business. What were my options?
This was the only way to fund my business at the time. It was also my only savings at the time.
I wasn’t alone. A friend of mine also liquidated her savings and we nervously stepped into entrepreneurship.
Deciding to use RRSP savings to start a business should raise red flags for the government. Women have less access to capital on average, compared to men for many reasons.
Barriers to Accessing Capital for Canadian Women
- Raising money from wealthy friends and family is usually not an option. Women have less access to wealthy networks, on average, than men do.
- Women are less likely to receive investment from Venture Capitalists than men
- 73% of women owned small businesses are self-funded, compared with 69% of male-owned small businesses
Women business owners face barriers to accessing capital. Liquidating their RRSPs or other savings is often their only option for self-funding their business.
This is a problem. It eliminates personal savings and limits women from accessing and building future wealth. Women-identified and other underrepresented business owners are affected and face barriers at every turn.
Canada needs solutions to this funding gap. I acknowledge that the design of the RRSP system, in general, is flawed. That is a topic for a future post. For those that have RRSP savings, this article introduces an option that would address a variety of needs.
Current Government RRSP Withdrawal and Payback Plans are Limited
If you withdraw money from your RRSP, you have to pay tax on the amount you take out. You also lose the contribution room, so you can’t make additional contributions in the future to make up for the amount you removed. Your total RRSP savings will always be reduced by that amount.
How Canadian RRSPs Work
- Establish a savings plan and register it with the Canadian government
- Sign up for a registered retirement savings plans (RRSPs) available through Canadian financial institutions
- Only contribute a certain amount per year – this is your “contribution room”
- If you don’t use your contribution room for a given year, carry it forward to use it in a future year (plus that year’s contribution room)
- At tax time, you will receive a RRSP Contribution Receipt. The receipt shows your total contributions for the year
- You can use the RRSP deduction on your personal tax return to reduce the amount of tax you owe or to create a tax refund. If you don’t deduct the full amount, amount, carry it forward in a future tax year
- You only pay tax when you withdraw money
- You and your spouse or common-law partner can contribute to one RRSP
There are only two exceptions to the rule when taking money out early from your RRSPs. The First Time Home Buyers’ Plan and the Lifelong Learning Plan.
These plans allow Canadians to withdraw money from their RRSP for a specific purpose and repay the amount according to a schedule. If the repayments are made, no tax penalty is applied. The funds remain in the RRSP to grow in value until retirement.
Use your RRSP savings against the purchase of your first home.
Use your RRSP savings to finance full-time training or education for you, your spouse, or partner. Both programs create greater wealth, either through real estate or education.
Wealth Creation Has Changed A Lot
Wealth creation is very different than it was 60 years ago. Millennials are not purchasing homes at the same rate Boomers did. Those investing in RRSPs often have undergraduate and postgraduate degrees. They may not up-skill through traditional training or education programs. Skills training has changed. Work culture has changed. The habits of Canadians have changed.
Canada Needs a 21st Century RRSP Repayment Plan
The Canadian Women’s Chamber of Commerce proposes a third repayment plan for RRSP savings. This 21st century program reflects the cost of living, changing nature of work, debt, and increase in entrepreneurship. This third program fills the gap left by the First Time Home Buyers’ Plan and the Lifelong Learning Plan.
This plan is called the 21st Century Rebuild Savings Plan, allows Canadians to:
- Restore credit
- Cope with unexpected events
- Start a business
The program supports women who will liquidate savings to start their business. Individuals can withdraw money from their RRSP (and their spouse or common-law partner’s RRSP) to start or grow a business without losing the value of their contributions or contribution room to date (providing repayments are on time).
Individuals can also withdraw money to pay down debt and deal with unexpected expenses. For entrepreneurs, having less debt and a good credit score improves the chances of being approved for a bank loan. For everyone else, this plan will give people a chance to borrow from themselves, interest-free. Payment terms should be realistic and flexible to encourage successful repayment.
Besides purchasing a home, the most common reasons people withdraw money from RRSPs are to pay for living expenses, unexpected expenses, and debt. This plan allows repayment of savings that are withdrawn for these reasons.
Canadians will be able to rebuild credit and improve their financial position. It will also reduce Guaranteed Income Supplement payments. Individuals will be able to recoup the RRSP contribution room that they would have lost if they liquidated their savings.
The new plan unlocks the funds to cope with immediate financial concerns while preserving a chance to rebuild savings.
When policy reflects the current realities for women entrepreneurs, we will be one step closer to equality.
Join us in advancing this proposal.
This proposal is adapted from CanWCC’s 2019-2020 Advocacy Agenda, Access to Capital Section, Recommendation #5.