UNLOCK RRSP FUNDS TO (RE)BUILD A PROSPEROUS FUTURE
Recommendation: Implement an RRSP withdrawal and payback plan, similar to the First Time Home Buyers Plan, to allow individuals to access the funds they need for debt consolidation, unexpected expenses, and entrepreneurship
THE PROBLEM: ACCESS TO CAPITAL
Business ownership can be a means to create personal wealth above and beyond standard employment. Canadian small businesses also create jobs and contribute to the economy. A common obstacle to starting or growing a business is access to capital. This is particularly true for certain segments of entrepreneurs; specifically, those who identify as women, Indigenous, LGBTQ2S+, and other minority groups.
In addition to systemic barriers, individuals with poor credit and high levels of debt face difficulty accessing traditional bank loans. Many women-identified entrepreneurs self-fund their businesses, which puts their credit at risk and increases their debt load, making access to bank financing less likely at a future stage, especially when personal guarantees are required. Regardless of one’s entrepreneurial intentions, a divorce, job loss, or unexpected pregnancy can result in a significant change in financial position.
RRSPS: A BRIEF OVERVIEW
The Registered Retirement Savings Program (RRSP) is a method for Canadian adults to save money for retirement with associated tax benefits. Income tax on RRSP contributions and accrued interest are deferred until funds are withdrawn. Contributions are tax-deductible, starting the year that the contribution is made, with an unlimited carry-forward period. These tax attributes make the RRSP more attractive than the Tax-Free Savings Account (TFSA), but unlike the TFSA, RRSP contribution room, once used, is lost forever. This means that if you withdraw funds from an RRSP you cannot replace those funds. This results in a loss of tax-deferred savings and the compound interest that can be earned on those funds.
There are two exceptions to this rule. Two programs are in place that allow Canadians to withdraw funds from their RRSPs without losing the contribution room (provided the funds are repaid within a certain timeframe): the First-Time Home Buyers Plan and the Lifelong Learning Plan. In both cases, the withdrawn funds must be used for a specific purpose: to purchase or construct a primary residence or to pay tuition for a recognized course, respectively. Presumably, the goal of these programs is to provide a mechanism for Canadians to achieve greater net worth or earning potential, with the result being a net increase in their standard of living and overall retirement savings.
The Canadian Women’s Chamber of Commerce (CanWCC) proposes that the Government implement a general RRSP withdrawal and payback plan to allow Canadians to recover from debt, unexpected expenses, and to start a new business. Realistic and flexible terms for repayment should be established to encourage successful repayment.
This plan will save money that would ordinarily be spent on income support payments, allow individuals to rebuild their credit, and to take action to improve their overall financial position. It will also reduce Guaranteed Income Support payments since individuals will be able to recoup the RRSP contribution room that would otherwise be lost if they were to liquidate their investment.
When faced with mounting debt or a financial emergency, individuals with RRSPs will withdraw the funds regardless of the tax consequences. The proposed plan is unlikely to increase the rate or volume of RRSP withdrawals. But it will unlock the funds individuals need to cope with immediate financial concerns while preserving a chance to re-build savings they worked hard to build during a less complicated stage of life.
Note: This proposal is adapted from CanWCC’s 2019-2020 Advocacy Agenda, Access to Capital Section, Recommendation #5.