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The Fund Library publishes Samantha Prasad's "The many uses of an RRSP mortgage loan"

Jun 22, 2018

The many uses of an RRSP mortgage loan

Image: Samantha Prasad, Tax and Succession Planning LawyerWith interest rates on rising, many homeowners with mortgages are looking for ways to reduce their debt or at least make it more tax efficient. Luckily, there is a way to do this for those who have a substantial amount tucked away in their Registered Retirement Savings Plan (RRSP).

In fact, you can take out a mortgage loan from your RRSP, provided that the mortgage is insured by the Canada Mortgage and Housing Corporation (CMHC) or a public mortgagor insurer (such as Genworth Financial Canada or AIG United Guaranty Canada). This is an exception to the rule that an RRSP cannot hold the mortgage of the planholder or a family member.

One obvious use of your RRSP loan is to pay down your mortgage from another lender. So instead of paying mortgage interest to a bank, for example, you pay back your own RRSP. In this case, your benefit is largely based on the difference between the interest rates you’d otherwise pay on your mortgage (i.e., this is what you “save”) and the return you’d make on your RRSP if you didn’t follow this strategy. In addition, if you are paying more into your RRSP than the return you would make on a conventional investment, you will have more money compounding in your plan on a tax-deferred basis.

There is no tax rule that you have to use your RRSP loan to pay down your mortgage, or even put the money into your home, for that matter – the tax rules require that the loan must be secured by Canadian real estate. So the loan might be used, for example, to provide financing for a new business (the mortgage insurer must approve of the use, though). What’s more, if the money is used for business or investments, the interest should generally be tax-deductible to the borrower. (The CMHC does not allow these “equity takeout” loans, though; so when it comes to this sort of thing, you’re better bet is to go with Genworth or AlG.)

According to the Canada Revenue Agency (CRA), the “RRSP mortgage” – which must be secured by Canadian real estate – must have normal commercial terms, including market interest rates.

A word of caution

Now you might be thinking that this is a great idea, and how do you sign up? Well, word of caution. Obtaining an RRSP mortgage is not as easy as it may seem. For one thing, the insurance providers such as Genworth tend to be very particular about when they would provide insurance, especially as some believe that when you borrow from your own RRSP, there may be a higher risk of default.

Why? Well, some people may think that when they are borrowing from themselves, then maybe it’s not such a big deal if one or two payments are missed. However, both the CRA and the mortgage insurers would have an issue with this because you would effectively be taking money tax-free from your RRSP without repaying it.

Tax Tip #1 – Make catch-up RRSP contributions

One interesting use of an RRSP mortgage could be to make a catch-up contribution to your RRSP, that is, if you haven’t maxed out on your RRSP contributions in the past.

It works like this. First, your RRSP makes you a mortgage loan. Then you put the proceeds right back into your RRSP – as a catch-up contribution, that is – and you get a tax deduction based on the amount of your catch-up contribution.

Tax Tip #2 – RRSP loan to other family members

It’s possible to make an RRSP mortgage loan to another family member. It is also possible (theoretically, at least) to do the RRSP mortgage manoeuvre based on a second mortgage or even a vacation property. However, it may not always be possible to get mortgage insurance in these circumstances as the insurers tend to shy away from the risk associated with a non-income-producing property (especially if it is already subject to another bank’s mortgage).

An RRSP mortgage loan is a fairly complex procedure. I’d recommend getting expert tax and legal help if you ever contemplate making such a manoeuvre.

Previously published in The Fund Library on ​June 21, 2018 by tax and estate planning lawyer, Samantha Prasad.​​​​​​​​​

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