Rt. Hon. Justin Trudeau, P.C., M.P.
Prime Minister of Canada
Ottawa, ON K1A 0A2
Hon. Chrystia Freeland, P.C., M.P.
Deputy Prime Minister and Minister of Finance
Ottawa, Ontario K1A 0A3
Hon. Mary Ng, P.C., M.P.
Minister of International Trade, Export Promotion, Small Business and Economic Development
Ottawa, Ontario K1A 0G2
Re: Allow RRSP withdrawals to be used towards the purchase of a new or existing business
Dear Prime Minister, Minister Freeland, and Minister Ng;
Raising capital to invest in the purchase of a business is always a challenge. It is one of the biggest hurdles that entrepreneurs need to overcome to start their business.
Many Canadians have extensive savings held in a Registered Retirement Savings Plan (RRSP) or Registered Education Saving Plan (RESP). If it could be withdrawn, tax free, this capital could be used to help finance all or part of the purchase of a new or existing business.
The U.S. allows individuals to borrow up to $50,000 from their 401(k) account
In the United States, the Internal Revenue Service (IRS) allows individuals to borrow from their 401(k) accounts to help capitalize a new business endeavour. The IRS rules allow individuals to borrow the lesser amount of:
- $50,000; or
- Half of their vested balance.
For example, if an individual has $80,000 in their 401(k) account, the maximum amount that can be borrowed in a calendar year is half of that balance—$40,000. Let’s imagine that individual borrows $10,000 from their 401(k) in January of the calendar year. After that, they find that they need more money in July. In July, they can borrow a maximum of $30,000.
Home Buyers Plan could serve as a model
The Home Buyers’ Plan (HBP) is a program that allows individuals to withdraw from their registered retirement savings plans (RRSPs) to purchase or build a qualifying home for themselves or for a related person with a disability.
Under the current rules, the federal Home Buyers Plan allows first-time buyers to use up to $35,000 from their Registered Retirement Savings Plans (RRSP) to make a down payment. Amounts withdrawn under the HBP must be repaid on a non-deductible basis to an RRSP over a period not exceeding 15 years, beginning the second calendar year following the calendar year in which the withdrawal was made. Any amount that is not repaid in a year will be included in the individual’s income for that year.
Not for refinancing an existing business
The program should be scoped to only allow for the purchase of a new or existing business, not to refinance an existing business. There are already a sufficient number of credit vehicles available to small businesses to refinance their operations. If a business is unable to secure refinancing through a lending institution and can only rely on their RRSP/RESP for refinancing, then public policy should not allow the withdrawal, due to the precarious financial state of the business.
Allowing individuals to withdraw from the RRSP/RESP will help grow the economy
If the Canadian economy is to return to its pre-COVID-19 levels, private sector investment will need to grow. Throughout the pandemic, many Canadians lost their jobs, temporarily or permanently. While most will look for new jobs, many will choose to go into business for themselves.
Let Canadians invest in themselves—not Bitcoin
Many Canadians have significant investments in registered retirement products that are not growing, or are growing very slowly, as the economy recovers. That capital is inaccessible for those that want to buy or start a new business, forcing them to go farther into debt in order to realize their dream of owning their own business.
The capital Canadians have in their RRSP/RESPs could be used to help finance the purchase of a new or existing business. While it is technically possible to use RRSP assets as security for a loan, the tax consequences are quite severe, which leaves that capital stranded instead of being put to a more productive use.
Under the current structure, it is easier and more straightforward for a Canadian to invest in Bitcoin than it is to invest their money in themselves by starting and growing a business.
Canada’s economy cannot grow—and Canadians cannot look forward to improvements to their standard of living—without higher levels of private-sector investment.
We believe the government of Canada should allow individuals to withdraw up to $100,000 from their RRSP/RESPs to make a down payment on the purchase of a new or existing business, without having to pay tax on the withdrawal provided they repay, on a non-deductible basis, the amount withdrawn over a period not exceeding 15 years, beginning the second calendar year following the calendar year in which the withdrawal was made.