With HBP the $10 will compound 7% tax-free to $17.18. The original $10 is still taxable at 40%, so after-tax is $6 $7.18 = $13.18. I’m compounding because in order to compare apple-to-apple, you wouldn’t have new money to pay off the 7% interest each year had you used the unsecured LoC.”

I think most of your numbers above are right, except in the second situation there should be some of the $10 being paid back in to the RRSP every year.

I’m digging out an old spreadsheet right now I used for this stuff and see if that clarifies anything for myself.

$10 inside RRSP will grow to $21.44 @ 10% compound after 8 years. After tax is $12.86.

With HBP the $10 will compound 7% tax-free to $17.18. The original $10 is still taxable at 40%, so after-tax is $6 + $7.18 = $13.18. I’m compounding because in order to compare apple-to-apple, you wouldn’t have new money to pay off the 7% interest each year had you used the unsecured LoC.

In addition, the 10% projection for RRSP is not guaranteed. So if you include risks into the calcuation, the gap is widen.

I still find the article very confusing overall. One question. For person 1, how did the $20,000 RRSP grow to $89,078.41 after 15 years at 10%? Based on my calculator, it should be $83,544.96. It’s over by $5,533.

I think you’ve analyzed it correctly then. And you’re right, the the return should be identical, you will get out $6500 either way. It’s just:

FV=(0.6*PV)*(1+0.10)^25
or
FV=0.6*(PV)*(1+0.10)^25

The difference as you pointed out is that outside of the RRSP you will have to pay capital gains, interest, and dividends taxes along the way.

I think Harper had some idea 2 years ago or something (during the campaign maybe?) where he wanted to allow Canadians to swap investments outside an RRSP without having to declare a capital gain (ie. to sell 100 shares of Stock X at $1/share and by 200 shares of Stock Y at $0.50/share without paying any capital gain tax on Stock X). You only pay tax when you convert to cash (or something like that). This would make RRSPs essentially useless for non-interest bearing, non-dividend paying investments. I might have blogged about this a long time ago, if not, then I think the Canadian Capitalist blogged about it. Anyways, nothing like this has been proposed in parliament yet as far as I know.

Shouldn’t you be using $1000 outside and $1000 inside?

I also did the similar calc on $600 - which is the net after tax amount of the $1000 I used in the first example. This would represent money invested outside the rrsp. $600 @ 10% for 25 years works out to…$6500.82!

In this particular case the 10% return inside the rrsp corresponds to the 7.775% outside the rrsp (ignoring a whole bunch of stuff like dividends/capital gains etc).

Interesting stuff…I’ve always been skeptical of the idea that investing in rrsp vs cash accounts is significantly better but looking at numbers like this is making me think the rrsp is a lot better. If you count capital gains/interest/divs on the amount outside the rrsp, it’s hard to imagine it would do better than the amount invested in the rrsp. I’m going to have to spend some more time on this.