week of Jan 17 2005...... the following article is written by Garth Turner
January 16, 2004
Last time, I wrote about some cool things that you can do with your home equity and mortgages, like creating an RRSP mortgage. This is a way of actually putting the mortgage on your home inside your own retirement plan, so you end up making mortgage payments to yourself, instead of the bank.
This is a bit complicated, and requires that you first have a whack of cash inside your RRSP big enough to pay off all, or a portion of, your existing mortgage. For people who want a safe, predictable and yet relatively high-yield asset inside their RRSP, it's definitely a winning strategy.
But this reader from London, Ontario, has a question: "I read your column regarding holding a mortgage in an RRSP. I am very interested in doing this, have quotes from all parties involved about set up costs etc. What I have not been able to determine, is whether the interest portion of the payment would be tax deductible if the principal and interest are being paid into our own RRSP."
"My husband and I have a line of credit on our personal residence, the credit line was established to invest in income properties, and the interest paid has always been deductible. If we switch that line of credit to a mortgage, held in our own RRSP, can we continue deducting the interest? Our accountant doesn't know, our banker doesn't think so, and our lawyer said he's 99 per cent sure we can't deduct it. What do you say?"
I say your lawyer and banker are right, and you should fire your accountant. There is no deductibility of interest surrounding any RRSP borrowings anymore, sadly. In this case, if you want a tax-deductible mortgage, then you will have to employ another strategy. For example, cash in investments, then use the money to pay off your mortgage, then take a new mortgage and use the money to buy back your investments - then your mortgage interest would be fully deductible.
However, the advantage of the RRSP mortgage is still clear - you harness the power of amortization to maximize growth inside your RRSP. Make your RRSP mortgage really long, and then apply the highest possible interest rate to it. If the RRSP mortgage is a second or third borrowing against your home, then it can have a much stiffer rate. Remember - unlike a mortgage held outside your retirement plan, you want the RRSP mortgage to be completely outrageous.
Another reader asks about the wisdom of the Home Buyers Plan - is it worth doing? The answer is a fat yes, completely. You are allowed to suck up to $20,000 out of your RRSP to buy a home, if you're a first time buyer, or up to $40,000 between you and your spouse. The money has to be paid pack within 15 years, with payments starting in the second year after you took the cash, tax-free, from your RRSP.
So, here's a strategy: Take your $40,000 house downpayment, between spouses, and put it into your RRSPs (assuming you have the contribution room). Wait 90 days and then take the money out and use it to buy a house. By having made the RRSP contribution, you are then eligible for a tax refund - which would likely amount to about $12,000 in this case. Yes, enough money from the government to buy all new appliances, drapes and a puppy!
If you had just used the money to make the downpayment, and not employed the Home Buyers Plan, all that stuff would have to be financed by you, instead of Ottawa. So, is this a great country, or what? READ GARTH'S PREVIOUS NEWSPAPER COLUMNS


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