George & Bell Consulting Inc. is calling on the federal government to allow non-punitive withdrawals from registered retirement savings plans for Canadians to meet their short-term financial needs.
Currently, Canadians can withdraw assets from their RRSPs at any time, but the treatment on withdrawal is generally punitive, with withdrawals resulting in personal income tax on the total amount of the withdrawal, and re-contributions of withdrawn assets at a later date only possible by consuming RRSP contribution room — effectively, the withdrawal results in a permanent loss of RRSP room.
The effect of this treatment is that Canadians are encouraged to leave their RRSPs invested to provide income during retirement. In other words, Canadians are discouraged from using RRSPs as a savings plan or a bank account. In normal times, this long-term focus is a reasonable policy.
However, there are two RRSP withdrawal programs that provide for RRSP withdrawals on fair terms for short-term needs: the home buyers’ plan and the lifelong learning plan. With both programs, withdrawals don’t attract income tax when withdrawn, and re-contributions are allowable and are required over a long period of time (10 or 15 years) regardless of RRSP room.
The coronavirus pandemic represents an acute short-term financial need for many Canadians. These needs will result in many Canadians setting aside long-term retirement planning in favour of rent, mortgages, food and other obligations. Canadians will make withdrawals from their RRSPs, and should be provided access to these withdrawals on a non-punitive basis, the consultancy argues.
“Many Canadians are going to access their RRSPs during the COVID-19 crisis out of desperation,” says Jeremy Bell, partner at George & Bell. “They shouldn’t face steep tax consequences. They definitely shouldn’t be treated worse than those who have used their RRSP savings to buy a house or go to school.”
George & Bell is proposing the introduction of a new RRSP withdrawal program, called the COVID-19 Plan. The terms of the program would closely mirror the existing home buyers’ plan by allowing all Canadians to withdraw up to $35,000 from an RRSP during 2020 without the withdrawal attracting withholding taxes or personal income tax. And it would allow up to 15 years for repayment of the withdrawal, with no impact on RRSP room.