Borrowing from your RRSP, part 2

Lifelong learning, RRSP mortgage strategy

Borrowing from your RRSP using the Home Buyers’ Plan (HBP) can be an effective strategy for adding to the down payment of your first home. I detailed this in my previous article. But RRSPs can also be used for other borrowing strategies, including the Lifelong Learning Plan and the RRSP mortgage strategy.

The Lifelong Learning Plan

In additon to the Home Buyers’ Plan, tax-free withdrawals from RRSPs are also allowed to support what the government calls “lifelong learning.” Taking a page from the HBP, you can withdraw up to $10,000 per year from your RRSP – to a maximum of $20,000 over a four-year period – if you are enrolled in a qualifying educational or training program (normally full-time for at least three months during the year).

Withdrawals are repayable to the RRSP over a period of 10 years in equal installments; otherwise there will be a taxable benefit. Repayments must normally commence in the year following the last year of full-time enrolment, or in the sixth year after the first withdrawal, if earlier.

If you do not have an RRSP, you can’t set one up and then immediately make a withdrawal under the lifelong learning plan. The contribution must be in the RRSP for at least 90 days before you can deduct it from your income. If you already have an RRSP, you must also wait 90 days from the date of any contribution before you can get the deduction and withdraw the funds.

Is a Lifelong Learning withdrawal a good idea? The answer is fairly similar to the Home Buyer’s Plan. Having to fund RRSP repayments will, no doubt, interfere with your ability to make regular, tax-deductible RRSP contributions. This problem could come at a time when you’re in a higher tax bracket than when the RRSP withdrawal was made. If this is the case, it may often make sense to pass up the “lifelong learning” opportunity and make an ordinary taxable withdrawal from your RRSP to fund education. You can then make a regular tax-deductible contribution when you re-enter the workforce. The basic personal exemption will now cover off $15,000 of taxable income (for 2023), not to mention tuition and education tax credits, which may also be available to shelter the withdrawal.

The RRSP mortgage manoeuvre

The Home Buyers’ and Lifelong Learning Plans are not true loans (instead, tax penalties apply if you don’t restore the funds to your RRSP within applicable time limits). However, the RRSP mortgage is a true loan. You can take out a loan from your RRSP provided that it is insured by a mortgagor insurer. Canada Mortgage Housing Corporation (CMHC) is the main one, but two others that I am aware of are Sagen (formerly Genworth Canada) and Canada Guaranty Mortgage Insurance Company. This is an exception to the rule that an RRSP cannot hold the mortgage of the planholder or a family member.

You might use your loan to pay down your mortgage. So, instead of paying mortgage interest to the bank, you pay yourself. 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 issue is a non-tax one, though you need to make sure that the mortgage insurance company will consent to the use of the borrowed funds. For example, the CMHC does not allow these “equity take out” loans. It will also have restrictions on the type of real estate being purchased as well as the total purchase price. So, it might be worth speaking to the other companies.

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

You might be thinking that this is a great idea and wondering whether to sign up? Well, a word of caution. Obtaining an RRSP mortgage is not as easy as it may seem. For one thing, the insurance providers tend to be very particular about when they would provide insurance, especially, as some believe, that when you borrow form 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, CRA would also have an issue here since you would effectively be taking money tax-free from your RRSP without repaying it. So, I cannot stress that while this loan is possible, in practice it may be harder to achieve than you would initially think.

Tax Tip #1. 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: Your RRSP makes a mortgage loan to you. Then, you put the proceeds right back into your RRSP – as a catch-up contribution – and you get a tax deduction based on the amount of your catch-up contribution.

Tax Tip #2. 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).

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, 3^rd Edition. She is also co-editor of various Wolters Kluwer Ltd. tax publications. A version of this article first appeared in The TaxLetter, © 2023 by MPL Communications Ltd. Used with permission.

Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.