Paul E. Croy
Some years back, while working as a Branch Manager for a Canadian Trust Company, I was given an opportunity to gain experience in the area of using your own RRSP to fund a “Non Arm’s Length” Mortgage. Proceeding to then give several seminars on the topic, I went a long way to establish myself as somewhat of a local expert. Recently however, while having coffee with a close friend, it came to my attention that to this date the general public still knows very little about what is required in order to lend your own RRSP funds as a mortgage. Over coffee, my friend claimed that he had just finished a long discussion with a client who was 100% convinced, after listening to a local radio talk show, that he could borrow from his RRSP without being required to even have the funds in his RRSP. Something had been definitely lost in translation.
Just to set the record straight, yes, you have to have the funds in your RRSP in order to fund the mortgage. What you will also find out is that due to the “Non Arm’s Length” relationship between the Mortgagee (your RRSP) and the Mortgagor (yourself), the mortgage will have to be insured by Canada Mortgage & Housing Corporation in order to become a qualified asset for your RRSP to hold. The main focus of all the administrative rules and conditions that apply is to insure that both you and your RRSP are not gaining an advantage or being put at a disadvantage when compared to rates and terms available in the “open mortgage market”. In addition, your RRSP funds would have to be transferred to a self directed RRSP (SDRRSP) account administrated by a Trustee who is an approved National Housing Act lender and who is also willing to administrate this type of RRSP asset. You will quickly find that not every SDRRSP Trustee wants to undertake the task of administrating this type of asset.
When doing your research you will soon become very aware of the many costs and fees. There are one-time set up costs plus ongoing annual SDRRSP Trustee administrative fees. For some clients, once a careful review of the costs is done, lending RRSP funds to yourself can make sense. Prior to 1984, it was commonly thought that Canadians could not use their RRSP funds for such a transaction. In 1984, a tax lawyer based in Toronto obtained a tax ruling establishing that, provided a mortgage met the strict lending guidelines established for an RRSP “Non Arm’s Length” transaction, it could qualify as an asset held in a SDRRSP plan.
Based on my calculations and due to the many costs and fees involved, I found that it was important to have a minimum mortgage amount of at least $50,000.00 available in your RRSP plus a minimum of a 6 – 7 year time horizon before even considering any economic or emotional benefits that might be derived from lending yourself your own RRSP money. The first SDRRSP funded mortgage that I helped set up was in 1984 for a client who was an accountant. Years later, I had the opportunity to ask this client if, in his opinion, it had been worth all the effort and expense. After a long pause, his answer was simply, “It sure just felt good to be paying myself”.