You Can Have Your Cake & Eat It Too, Says the Canada Revenue Agency (CRA).
Many clients want to use their own Registered Retirement Savings Plans (RRSP) to help them buy Canadian investment property. Previously, it hasn’t worked because you can’t do a ‘non-arm’s length’ mortgage. In other words, you can’t lend to yourself. The exception was for a personal residence—but not allowed for an investment property.
News Flash! According to the National Post’s tax expert Jamie Golombek, a CRA technical interpretation says this can sometimes happen.
Here’s the set-up. If you already own a rental property and, like most of us, you used a mortgage to help buy, then you are paying interest on your mortgage. That interest is deductible because you borrowed the money to earn income. In the recent CRA interpretation, a taxpayer wanted to repay his original loan by taking out a non-arm’s length mortgage from his own RRSP. And, most importantly he wanted, on his tax return, to be able to deduct the interest paid to his RRSP.
The CRA Interpretation Bulletin dealt with the question of whether the taxpayer could deduct the interest paid to his RRSP as an expense on his tax return. The Tax Act says you can deduct interest paid on borrowed money because you intend to earn income from your investment property. Here’s the nugget: The Tax Act also says if you borrow money to pay back money you previously borrowed (the original mortgage), the newly borrowed money (the RRSP mortgage) is treated the same as the old borrowed money. Since the original mortgage interest was deductible, the RRSP mortgage interest is also deductible.
This CRA interpretation addresses two exciting points for investors. Yes, there is now a process where you can use your own RRSP to help buy investment property. And, you can deduct the interest paid to your RRSP.
How about replacing your under-performing mutual funds with an RRSP mortgage that pays you, say 5%? Are your mutual funds earning you that much? That interest income ought to be tax free in your RRSP. Better yet, any interest paid ought to be deductible on your tax return!! That’s a 3 bagger all day long and worth investigating further.
I’m not a tax expert but that’s my take on a first read of Jamie Golombek’s column. Stay tuned for more discussion of this in my next post!
Contact Barry McGuire now for legal aid with RRSP mortgages.