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How to Transfer an RRSP to a TFSA without Tax Consequences
January 24, 2019
1:30 am
martik777
Lower Mainland, BC
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Anyone tried this strategy.

I am dubious especially regarding fees and possible CRA changes midterm

January 24, 2019
7:44 pm
Norman1
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Their annual management fees are 1% to 2% of account size.

If one had a $500,000 RRSP, lent it out to oneself as mortgages, and invested the $500,000 proceeds, won't one have total account size of $1 million?

  • $500,000 of mortgages between the RRSP and TFSA accounts
  • $500,000 of investments in a taxable account

Consequently, fees would be 1% to 2% of $1 million! That would be 2% to 4% each year of the $500,000!

January 24, 2019
8:24 pm
Norman1
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I would also question the suggestion that the second mortgage is a bona fide second mortgage, entitled to second mortgage interest rates.

When the lender of the first mortgage on a property is the same as the lender of the second mortgage, is the lender really taking on the risk of a second mortgage lender?

January 25, 2019
4:21 am
Loonie
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Maybe one partner gets the first mortgage and the other one gets the second?
I thought the idea of a 15% second mortgage was out of line, but I've never dealt with one. I just can't imagine such a large spread between the two on the same house when the lender's credit is good.

I decided not to post anything until someone else who is better with these complicated things than I am had ventured an opinion, but it seemed to me that there was a problem in the fact that there was no real accounting provided in this example, which was mostly about selling a concept.

I would have found it a lot more credible if a complete breakdown of costs and fees and timelines were provided. (He suggests the person is 56 and will live to 90 in order to complete the strategy.)
Among other things, it sounds like there would be four mortgages to set up and later to discharge, each of which involves lawyer's fees. (Two for each partner in a couple).

My conclusion was that, if it works at all (which I can't say for sure), it would likely only work for someone with large RSPs, maximum TFSAs, fully paid off house of high value (compared to average house price across the country), in good health and probably no older than 50 (preferably younger) in order to have enough years left (34 appear to be required) to bring this strategy to fruition, considering that average life expectancy is now in the mid-80s as I understand it.. I am reminded that the vast majority of people choose to take their OAS and CPP at 65 or younger because they report that they're not sure they'll have average life expectancy. So, suddenly they are going to live a lot longer?

I also noted that he admitted that CRA would be watching you carefully. Who wants that?

It's worth bearing in mind that RSPs were intended to provide tax-deferral, not tax avoidance. While this manoeuvre may be legal according to the letter of the law (I can't say), it is not in the spirit of the law, so one can expect that in due course it will be blocked. And when that happens, they won't care that you are only part-way through your plan. You could be stuck with trying to discharge the four mortgages quite early, and total fees etc would outweigh usefulness.

There is no good reason why such a person should get their RSP proceeds without being subject to income tax when everyone else is paying.

He has another video explaining it which has a bit more detail in some areas. He seems to be looking at people who have RSPs that are worth several million dollars.
https://www.youtube.com/channel/UCIstqTVJYHwiolPcyrJckQg

January 25, 2019
7:37 am
Norman1
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Loonie said
Maybe one partner gets the first mortgage and the other one gets the second?
I thought the idea of a 15% second mortgage was out of line, but I've never dealt with one. I just can't imagine such a large spread between the two on the same house when the lender's credit is good.

In such cases, they are still non-arms length mortgages. So, the mortgages will still have to be insured (¶1.32 and ¶1.36 of Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs). Mortgage insurance premiums would still be needed.

But, then, 15% per annum is definitely not the current market rate for an insured mortgage.

Loonie said

Among other things, it sounds like there would be four mortgages to set up and later to discharge, each of which involves lawyer's fees. (Two for each partner in a couple).

My conclusion was that, if it works at all (which I can't say for sure), it would likely only work for someone with large RSPs, maximum TFSAs, fully paid off house of high value (compared to average house price across the country), in good health and probably no older than 50 (preferably younger) in order to have enough years left (34 appear to be required) to bring this strategy to fruition, considering that average life expectancy is now in the mid-80s as I understand it.. I am reminded that the vast majority of people choose to take their OAS and CPP at 65 or younger because they report that they're not sure they'll have average life expectancy. So, suddenly they are going to live a lot longer?

It's worth bearing in mind that RSPs were intended to provide tax-deferral, not tax avoidance.

He has another video explaining it which has a bit more detail in some areas. He seems to be looking at people who have RSPs that are worth several million dollars.
https://www.youtube.com/channel/UCIstqTVJYHwiolPcyrJckQg

There will be tax avoidance, like a TFSA, with the RRSP when the taxes and clawbacks on the RRSP withdrawals are at the same or lower rate than the tax rate when RRSP deductions were claimed. This zero net taxation was confirmed in an earlier thread.

Someone with such a large RRSP and large house would likely been an high income earner. He or she would have saved top rates on RRSP contributions and probably would have had OAS clawed back anyways. For such a person, the RRSP would have the same effect as a TFSA as the tax rates on the withdrawals wouldn't be higher than the tax rate when the RRSP deductions were claimed.

January 25, 2019
8:30 am
Alexandre
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Married couple, 56 years old, with cash assets of $600,000 (RRSP+TFSA), own fully paid house, employed, and no other debt to worry about.

Canadian dream came true.

Find these people and tell them not to be greedy.

January 25, 2019
1:13 pm
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Started to watch the presentation. First thing to come into my mind was the opening segment of many of the American Greed stories.If it sounds too good to be true it probably isn't.

January 25, 2019
4:51 pm
Jon
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This strategy can work if you buy a property in Vancouver or Toronto very early on and have huge equity on it as a result. You will also need to be a avid saver and have massive RRSP (as other members have mention), especially if you are someone that have contribute too much into RRSP (Marginal tax rate at withdrawal >>>> Average marginal tax rate at contributions).

But regulatory risk is the problem here. What if the government cancel or significantly reduce or eliminate the tax credit on interest pay for investment? With if the government disallow non - arms-length mortgages in register account? Can this scheme be take apart quickly? Most importantly, what if your investment is underwater (the mortgage in you RRSP and TFSA is higher that the total balance of your investment) when you need to ger rid of this scheme?

January 25, 2019
5:56 pm
martik777
Lower Mainland, BC
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I don't mind paying 20% marginal on RIF withdrawals. As a couple we only would need to pay any excess over 40k per year since this is our personal + age exemption.

After all, I got 40+ yrs tax free growth and was in a 45% marginal when contributing.

What I think is very unfair is the 50% they will be taking from my estate

January 25, 2019
10:03 pm
Loonie
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martik777 said

What I think is very unfair is the 50% they will be taking from my estate  

I agree. But there are ways to reduce this if you plan ahead so that you don't have a whopping amount left when last spouse dies. McLay makes it sound like it's inevitable and that what he is proposing is the only alternative. There is a middle ground where the government still gets a reasonable share. Even that can be messed up by early deaths, but so can McLay's plan.

RSPs have risks, and one of them is that your estate might get stuck with a huge bill which your heirs did not anticipate. Nobody ever tells you that when you buy into them though. I have complained elsewhere on this forum that the promotional material on RSPs is not comprehensive enough. Some people would be better off without them - me included!

January 25, 2019
10:21 pm
Loonie
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Alexandre said
Married couple, 56 years old, with cash assets of $600,000 (RRSP+TFSA), own fully paid house, employed, and no other debt to worry about.

Canadian dream came true.

Find these people and tell them not to be greedy.  

Amen!

Once they find out how much it's really going to cost to do all this, greed may become self-limiting. I think he's really after those with much higher net worth. What we've seen is essentially an infomercial, which leaves out lots of relevant information. It's probably a great long term income stream for him (if govt doesn't cut it off). I'm not quite sure where his cut figures in, but i'm sure there is one!

January 25, 2019
10:37 pm
Loonie
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Further,
if, as I suspect and Norman1 seems to agree, the second mortgage rate will be less than 15% (I'm guessing significantly less), then the strategy will take even longer to complete. McLay said (90-56) = 34 years, but the speed of asset transfer is related to the interest rate.
So perhaps you should start at 30-35 with your fully paid off house, topped-up TFSA and multi-million-dollar RSP. sf-laugh

January 26, 2019
8:34 am
Norman1
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Loonie said

… It's probably a great long term income stream for him (if govt doesn't cut it off). I'm not quite sure where his cut figures in, but i'm sure there is one!

Annual management fees. 1% to 2% of account size. It is 1% for account size over $1 million. But, I think it will end up being 2% because account size is doubled by the mortgages.

For example, Alexandre mentions a married couple, 56 years old, with cash assets of $600,000 (RRSP+TFSA). That will result in total account size of $1.2 million:

  • $600,000 worth of mortgages in the RRSP and TFSA accounts
  • $600,000 worth of investments in non-registered accounts

1% of $1.2 million ends up being 2% of the couple's original $600,000.

I don't know if that management fee includes the fees for the non-arms length mortgages in the registered accounts. To give an idea of how much those would be, TD Waterhouse charges $250 per mortgage for setup and $225 per mortgage annually for administration. For four mortgages, it would be $1,000 to set them up and $900 per year to administer them in the registered accounts.

January 26, 2019
9:01 am
Loonie
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And it might be rather difficult to transfer this complicated scenario to another "advisor", particularly if you chose one with a higher ethical bar who didn't want to be involved in these shenanigans, so you'd be stuck paying this fee for a long time.

If he gets enough of these deals lined up, he doesn't have to do any more work, just collect the annual fees! sf-wink

So, taking this a step further, if the client has to pay 2% on the relatively modest situation just described, with 600K registered, working out to 1.2m., that's 24K/yr for the advisor.
But, from what the video said, it's going to take 34 years (even at 15% on 2nd mortgage) to complete the transfer.
So, is that 24K x 34? (and, if RSP is larger and/or 2nd mtg rate lower, it will take even longer, I presume). That would come out to $816,000. There must be something wrong with my math. sf-confused
In any event, the cost needs to be compared to taxation cost. Maybe you're just transferring your money from CRA, to which it is normally owed, to Mr McLay?

January 26, 2019
9:08 am
Norman1
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martik777 said
I don't mind paying 20% marginal on RIF withdrawals. As a couple we only would need to pay any excess over 40k per year since this is our personal + age exemption.

After all, I got 40+ yrs tax free growth and was in a 45% marginal when contributing.

What I think is very unfair is the 50% they will be taking from my estate

It won't be as bad as it looks.

If one had claimed the RRSP contributions deductions and got 45% back from the government, then 45% of the RRSP's value is from the taxes saved and the growth on those saved taxes.

If the government takes back 50% in the end, then they are taking back the original 45% plus 5%. Your estate would end up with 50% instead of 55% or about 9.1% less than with a TFSA.

In the meantime, you are paying just 20% on the RIF withdrawals. Government is only receiving 20% back of the 45% in taxes saved through the RRSP deductions. You are now receiving 80% instead of 55%. That works out to be about 80 / 55 - 1 = 45.45% more than with a TFSA! sf-laugh

January 26, 2019
9:28 am
Norman1
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Loonie said
And it might be rather difficult to transfer this complicated scenario to another "advisor", particularly if you chose one with a higher ethical bar who didn't want to be involved in these shenanigans, so you'd be stuck paying this fee for a long time.

If he gets enough of these deals lined up, he doesn't have to do any more work, just collect the annual fees! sf-wink

So, taking this a step further, if the client has to pay 2% on the relatively modest situation just described, with 600K registered, working out to 1.2m., that's 24K/yr for the advisor.
But, from what the video said, it's going to take 34 years (even at 15% on 2nd mortgage) to complete the transfer.
So, is that 24K x 34? (and, if RSP is larger and/or 2nd mtg rate lower, it will take even longer, I presume). That would come out to $816,000. There must be something wrong with my math. sf-confused

It's 1% of the amplified $1.2 million or 2% of the original $600,000. That works out be $12,000 per year.

In any event, the cost needs to be compared to taxation cost. Maybe you're just transferring your money from CRA, to which it is normally owed, to Mr McLay?

That's the challenge with some of these schemes. They can end up costing more in fees than the taxes saved. I guess there are people out there who don't mind paying more if the charge is labelled "admin fee" instead of "tax".

I remember reading years ago that resource exploration flow-through shares were quite popular with the medical doctors crowd. 100% of purchase price worth of deductions after purchase!

Problem was that the purchasers didn't get much of their original investment back later. So, one ends up losing close to $1 for each 50¢ of income taxes saved. sf-frown

January 26, 2019
2:05 pm
Loonie
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OK, so 12K x 34 years = only $408,000!
That would make a 50% tax rate look pretty good.

January 26, 2019
2:40 pm
Norman1
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Loonie said
OK, so 12K x 34 years = only $408,000!
That would make a 50% tax rate look pretty good.

One can also look at it on an annual basis.

Suppose one invests the unregistered $600,000 in GIC's. Best five-year GIC rate is now around 3.5%. 2% management fee means one will be handing over 2%/3.5% = 57.1% of the interest!

Suppose one invests the unregistered $600,000 in stocks. Expected long-term return is around 7%. 2% management fee means one will be handing over 2%/7% =28.6% of the expected gains. That's quite hefty if most of the gains are capital gains. One won't need to pay 28.6% on capital gains unless one is in a 2 x 28.6% = 57.2% tax bracket.

January 27, 2019
12:53 am
Loonie
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All in all, it sounds like another one of those schemes where the main benefit is to the "advisor", who does not have fiduciary responsibility to the client - at least as far as I can tell.

January 27, 2019
10:01 am
Norman1
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Loonie said
All in all, it sounds like another one of those schemes where the main benefit is to the "advisor", who does not have fiduciary responsibility to the client - at least as far as I can tell.

That's what it looks like to me as well. Lots of associated people would be "dining well" off of that:

  • Lawyer to register four mortgages.
  • Mortgage insurer to insure those four mortgages.
  • Mortgage administrator to administer non-arms length mortgages.
  • Trustee for the special TFSA and RRSP accounts that can hold non-arms length mortgages.
  • Tax lawyer to defend when CRA assesses a 100% advantage tax on the interest difference for all those years because CRA doesn't feel 15% per year was the going rate for an insured mortgage.

Reminds me of the subtitle to John Reynolds' book The Naked Investor: Why Almost Everybody but You Gets Rich on Your RRSP.

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