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
#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.
Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a
Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-author of
Tax and Family Business Succession Planning, 3rd Edition . She is also
co-editor of various Wolters Kluwer Ltd. tax publications.
Portions of this article first appeared in The TaxLetter, © 2018 by MPL
Communications Ltd. Used with permission.
© 2018 by Fund Library. All rights reserved. Reproduction in whole or in
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The foregoing is for general information purposes only and is the opinion
of the writer. This information is not intended to provide specific
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