Promoting Home Ownership
Many people with disabilities, supported by their families, would like to be able to own their own home. Owning one’s own home has numerous advantages (See www.plan.ca and Safe and Secure, by Al Etmanski). Furthermore, owning a home is an investment and as prices of homes in Canada have increased year over year, they have been a solid investment. Research shows that the most significant difference between Canadians who have accumulated wealth from those who have not is whether an individual owns one’s own home.
In the years to come, many people will reach middle age with significant assets in an RDSP. Eventually, RDSPs containing assets of $500,000 will not be uncommon. We anticipate that many people will have an interest in using a portion of their RDSP as a down payment to purchase a home. The federal government currently encourages home ownership through the first time homebuyers program that permits individuals to borrow from their RRSP to purchase a home.
People who contribute more than government are able to make a withdrawal of any amount, although they must consider the holdback amount. Based on our experience, however, the majority of RDSPs will have more government than private contribution. These people will be limited to a withdrawal determined by the LDAP formula. Especially earlier in people’s lives, this amount is unlikely to be of great assistance with a down payment; though payments will provide a valuable income stream to support mortgage payments.
There are several possible solutions:
- A loan program
- A specialized withdrawal
- An investment
The RRSP Homebuyer Plan sets a precedent and a framework for a loan program. The Homebuyer Plan limits the withdrawal to $25,000 and has a number of requirements of the RRSP Annuitant, such as: not have owned the home for more than 30 days; enter inter a written agreement to buy or build a home; intend to occupy the home and be considered a first time home buyer.
The amount that is withdrawn must be repaid over a period of 15 years or less; the minimum annual repayment is 1/15th of the amount withdrawn. The primary downside of a loan program from an RDSP would be repayment. In many circumstance, people would not be able to make mortgage payment and repay the amount they borrowed from their plan.
A second option would be to permit a withdrawal for the purposes of homeownership. For example, a specialized withdrawal of 50% of the value of the RDSP, excluding the holdback amount, for the purpose of purchasing a home could be permitted. The funds would be tied up in the home and so tax slippage shouldn’t be an issue. If the home is sold, the funds could be returned to the RDSP. There are two major drawbacks to this option. To be useful for many people, a withdrawal of this for would need to be exempt from triggering a repayment of the holdback amount. Additionally, a withdrawal will trigger a tax payment.
The third option would be to permit to consider a person’s place of residence as an investment. While the income tax act does not currently recognize a person’s home as a legitimate investment, permitting home ownership as a legitimate RDSP investment would promote home ownership among people with disabilities.
A major advantage of this option would be that it would be easier to waive the holdback amount it would not be a withdrawal. There would also be no requirement to repay a borrowed amount – upon sale of the home the funds, including growth, would need to be returned to RDSP eligible investments within the RDSP. Because the goal of the RDSP is long term savings, a limit could be put on the amount invested to ensure that some portion of the RDSP remains liquid. The amount invested in a home could be limited to 50% of the value of the RDSP at the time of the investment.
The investment in a home would serve the dual purposes of home ownership, growth of capital while at the same time ensuring that there are funds for the future.
Recommendation: Permit up to 50% of the value of the RDSP, to be invested in a home that is the primary residence of the beneficiary.