One of the few tax benefits still available to Canadians is the Registered Retirement Savings Plan, or RRSP. Unfortunately, many are ill-informed with respect to maximizing the full benefits of this savings instrument. Many investors believe that by simply contributing into a registered account such as an RRSP, that they are ‘investing’ towards their retirement.

Every year near tax time, Canadians are bombarded with massive marketing campaigns encouraging them to run down to their local financial institution to contribute to their RRSP and “save tax.” The fact of the matter is that when this occurs, many people have no idea what they are contributing towards, and end up placing their hard earned dollars into mutual funds or GICs by default, because they feel these are the only options available to them.

Sadly, many investors don’t realize that many mutual funds underperform the stock market due to the heavy management fees associated to them, which can erode their investment returns over the long term.

What is an RRSP Self-Directed Mortgage

An RRSP is not legally allowed to own a piece of real estate directly. However, an RRSP is able to lend money secured on title by a mortgage on a property. This is really no different than the big banks lending money as a mortgage on a property. There is a reason the banks typically provide very low interest rates on mortgages, because they know mortgage lending can be a very safe and secure long term investment when it’s done correctly.

An RRSP Self-Directed Mortgage, is a type of mortgage that can be held within your RRSP account, to lend money on a specific property that you are considered ‘arms-length’ to, or have no direct ownership in the property through blood, marriage or adoption.

The Process

Once you find a property (for example, if you are a lender) or if you have a property that you want to find an RRSP mortgage for (as a real estate investor), then it is a relatively easy process to set it up.

RRSP mortgages can be placed on the property in a first, second or even third position, which is simply the order that the mortgages are paid off when the property is sold. Many RRSP mortgages are loaned in the second position, which means it is secured after the first mortgage financing on the title of the property. This is why the total Loan-To-Value (LTV) of all mortgage balances must be adhered to as this is your largest factor of risk.

What’s The Benefit?

The reason for doing this is simple— because it gives you a steady return at a much better rate.

Better still, these mortgage payments don’t count towards your annual RRSP contribution limits while the mortgage interest paid is considered a tax deduction. That means you not only get a tax deduction each year, while getting a steady return in your RRSP, but you can still make annual tax-sheltered contributions that further help to reduce the annual income tax you pay.

Where Do I Start?

Having worked with RRSP Self-Directed Mortgages for years, I definitely know and understand the benefits they offer.  If this is something that might interest you, I’d be more than happy to talk more about them.

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