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Self Directed RRSP Mortgage
March 24, 2024
3:57 pm
kesa
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Hi All.

If anyone has any experiences to offer regarding self directed RRSP Mortgages, especially where one is both the lender and the borrower, please share.

Thanks to Peter for suggesting this forum.

March 24, 2024
10:13 pm
Norman1
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Those are called non-arm's length mortgages in an RRSP. Those mortgages were in vogue decades ago when Madonna's hit "Vogue" was in vogue! Now, you'll have a hard time now finding a self-directed RRSP that will hold them.

For example, Scotia iTRADE will only allow existing ones to continue. No new non-arm's length mortgages can be set up in their self-directed RRSP accounts.

Someone reported on Financial Wisdom earlier this year that CIBC Trust (not its parent CIBC) will do RRSP's that hold a non-arm's length mortgage.

I don't think a single large insured mortgage is a good RRSP investment. For the 15, 20, or 25 year time horizon of a mortgage's amortization, there are much better investments. It's not worth much to me to be able to say I'm paying mortgage interest to my RRSP instead of to a mortgage lender.

March 25, 2024
12:39 am
RetirEd
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I don't claim expertise on this, but wasn't the self-directed loan to/from RRSP more or less obsoleted by the official government RRSP-to-Home Loan plan quite a few years ago? I seem to recall there was a loan limit as well as a prescribed repayment option over 15 years.

The idea of borrowing from oneself, particularly turning your payments into tax-free income, always made sense to me and I suggested it to several people I knew back then. Eventually one came back to say he'd been told that only the government program was still available.

RetirEd

March 25, 2024
8:59 am
Norman1
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The Home Buyers' Plan (HBP) didn't obsolete non-arm's length RRSP mortgages. HBP maximum is $35,000. Non-arm's length mortgages in an RRSP are limited to the maximum for mortgage insurance, $1 million.

According to Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs, FHSAs and TFSAs, non-arm's length mortgages are still allowed in an RRSP:

1.36 A debt obligation secured by a mortgage or hypothec on real or immovable property situated in Canada is a qualified investment if it is administered by an approved lender under the National Housing Act and insured by the Canada Mortgage and Housing Corporation (CMHC) or by an approved private insurer of mortgages. The list of approved lenders is available on the CMHC website. The interest rate and other terms must reflect normal commercial practice and the mortgage or hypothec must be administered by the approved lender in the same manner as a mortgage or hypothec on property owned by a stranger. Failure to do so may result in adverse tax consequences.

The mortgage option is still available for RRSP's. There is a challenge now to find an approved lender and an RRSP trustee that are willing to do the arrangement.

However, what one co-worker described didn't really make sense to me. He was going to make the minimum payments on his mortgage in order to have the money to max out his RRSP contributions. That needed years to eventually have enough in the RRSP to take over his mortgage from the bank.

I would have just paid off the mortgage as fast as possible. The mortgage interest I would save during the years needed to build up the RRSP and afterwards would have been tax free as well.

March 25, 2024
9:17 am
kesa
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Norman1 said
Those are called non-arm's length mortgages in an RRSP. Those mortgages were in vogue decades ago when Madonna's hit "Vogue" was in vogue! Now, you'll have a hard time now finding a self-directed RRSP that will hold them.

For example, Scotia iTRADE will only allow existing ones to continue. No new non-arm's length mortgages can be set up in their self-directed RRSP accounts.

Someone reported on Financial Wisdom earlier this year that CIBC Trust (not its parent CIBC) will do RRSP's that hold a non-arm's length mortgage.

I don't think a single large insured mortgage is a good RRSP investment. For the 15, 20, or 25 year time horizon of a mortgage's amortization, there are much better investments. It's not worth much to me to be able to say I'm paying mortgage interest to my RRSP instead of to a mortgage lender.  

my understanding is a market rate is acceptable, and open mortgages are about 10%…sounds appealing?

March 25, 2024
9:26 am
Norman1
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kesa said

my understanding is a market rate is acceptable, and open mortgages are about 10%…sounds appealing?

No. Were you going to get a 10% open mortgage anyways?

You're not really earning 10% because you are the one paying the RRSP 10%. It's not the same as a 10% RRSP GIC where you are paying 0% and the bank is paying your RRSP 10%.

Don't kid yourself. David Chilton describes that kind of self-deception when he finds people following his advice by taking 10% off each pay and putting into their RRSP. He then looks at their debts and discovers that their home-equity line of credit is growing by the same amount each month. There's really no savings.

As well, one will be screwed if one is laid off and can't keep up the payments on a 10% mortgage. RRSP trustee will foreclose and charge the RRSP for all the costs involved.

March 25, 2024
4:01 pm
RetirEd
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Norman1 said:

You're not really earning 10% because you are the one paying the RRSP 10%. It's not the same as a 10% RRSP GIC where you are paying 0% and the bank is paying your RRSP 10%.

That's right. The advantage comes from splitting the spread between lender (you) and borrower (also now you) as well as getting more cash into the RRSP. Which will then become taxable later on of course.

RetirEd

March 25, 2024
4:50 pm
Jon
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I see the foolishness of putting money into a tax shelter account without getting tax refund (interest on mortgages of property that the owner live in is NOT tax-deductible) and have to pay tax later on when withdrawing the money under this operation. However, what about the viability of doing the same operation in a TFSA, where money is withdraw tax-free?

March 26, 2024
7:23 am
Norman1
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An RRSP is equivalent to a TFSA when the tax rate on the RRSP deductions is the same as the tax rate on the RRSP withdrawals.

The RRSP is actually not as bad as it looks initially. But, one is still not increasing one's net worth 10% per annum because one is paying the 10% per annum that the RRSP is gaining.

It will be much harder to actually do with a TFSA because one will need a TFSA large enough to fund one's mortgage.

March 26, 2024
8:00 am
Jon
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Norman1 said
An RRSP is equivalent to a TFSA when the tax rate on the RRSP deductions is the same as the tax rate on the RRSP withdrawals.

The RRSP is actually not as bad as it looks initially. But, one is still not increasing one's net worth 10% per annum because one is paying the 10% per annum that the RRSP is gaining.

It will be much harder to actually do with a TFSA because one will need a TFSA large enough to fund one's mortgage.  

But the problem is when one use this method (paying interest into RRSP) to increase their RRSP amount, this money is not tax deductible. However, when one withdraw money from RRSP later on, the money that one pay into the account in the form of interest is taxed. Therefore, one is taxed when earning income, and taxed again when withdrawing the money from RRSP.

March 27, 2024
9:58 am
kesa
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March 28, 2024
6:50 pm
Norman1
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Jon said

But the problem is when one use this method (paying interest into RRSP) to increase their RRSP amount, this money is not tax deductible. However, when one withdraw money from RRSP later on, the money that one pay into the account in the form of interest is taxed. Therefore, one is taxed when earning income, and taxed again when withdrawing the money from RRSP.

The net taxes with an RRSP is zero when the withdrawals are taxed at the same rate the RRSP contribution deductions were used at. We looked into this net taxes question earlier.

The problem with paying 10% per annum on a mortgage in an RRSP is that one is paying 10% per annum on both the portion of the RRSP that's yours after tax and the remaining portion that will be returned to the government.

Another problem is that one is unlikely to do an non-arm's length mortgage in a TFSA because the TFSA doesn't have enough funds.

If one has a $500,000 RRSP and deducted the contributions at an average of 35%, then 35% of the $500,000 was with the help of deducting the RRSP contributions. The remaining 65% ($325,000) is what one would have in a TFSA without the income taxes saved from deducting the RRSP contributions.

$325,000 in a TFSA won't be enough if one needs a $500,000 mortgage. With the TFSA contribution room to date, it is not likely someone has a $325,000 TFSA.

I don't think it makes sense financially having one's own mortgage in an RRSP or TFSA. One will be paying years of rent or mortgage interest to a lender while trying to build up the RRSP or TFSA to a size that can lend one's mortgage.

Once one has one's mortgage in the RRSP or TFSA, one only ends up moving additional funds into the RRSP or TFSA above the contribution limits. There's no actual increase in one's net worth when one pays the mortgage in the registered account.

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