Article

Options for Your RRSP

Home Buyers Plan

Planholders who have not owned a house in the current or preceding four years may tap into their RRSPs for up to $20,000 to help buy or build a principal residence for themselves or a disabled relative. The withdrawals are tax-free but the money must be repaid over a maximum of fifteen years, beginning with the second year after the withdrawal.

For example, if you withdraw $15,000 in 2001, you first minimum annual payment of $1,000 will not be required until 2003. Amounts that are not repaid when due are added to your taxable income for that year.

This strategy is particularly good for married couples who, if they qualify, can each borrow from their own individual plans and thus accumulate the cash that is needed for a down payment on the purchase of a home.

Lifelong Learning Plan

Planholders are allowed to withdraw up to $10,000 a year or a maximum of $20,000 over a four-year period, to finance training or education for themselves or their spouses. The courses must be a minimum of ten hours per week for a period of three months and the educational institution must provide a bona fide tuition and education tax credit receipt for the course attended.

The withdrawals are tax-free but the money must be repaid over a maximum of ten years, commencing with the fifth year after the initial withdrawal or immediately if the student fails to claim the education amount on his income tax return.

Investing in Mortgages

A practice that was common in the 1980’s is still available today. Planholders with sizeable RRSP balances and outstanding mortgages may decide to discharge their existing mortgages with RRSP funds and then pay the plan rather than the bank. The arrangements must adhere to all legal formalities of a mortgage, including the obligation of making timely monthly payments. The rule of thumb is that these transactions should not be undertaken for less than $50,000 otherwise the savings would be cancelled out by the added expenses.

Business Loans

A variant of the above option is available for planholders with a home and little or no mortgage. They may choose to invest in shares of a small business by mortgaging their home within the RRSP and using the cash for the investment. The principal repayments of the mortgage will be made to the plan and the interest will be tax-deductible because the loan was made for investment purposes.

If you own less than ten percent of the company in which you are investing, there are no restrictions as to the amount that you can borrow/invest. If you own between ten and fifty percent, the maximum is $25,000, and any percentage ownership greater than 50% precludes you from participating in this arrangement.

Cash-Flow Assistance

From time to time, planholders may become unemployed or have occasion to be in need of cash. RRSPs may represent the only source of funds on these “rainy days.” Such withdrawals are taxable upon receipt and of course do not require repayment.

While cashing out early may be attractive in the circumstances, it is not without its dangers. If you start withdrawing money, even if you pay it back, you lose the tax-free accumulation that would have been available in the meantime. As Kenny Rogers so aptly put it in his song “The Gambler,” you’ve got to know when to hold them and know when to fold them. There may be situations where early withdrawals make sense, but generally you want to leave your money in the RRSP to achieve what it was set out to do – maximize tax-deferred growth for retirement.

Article ©2001 The Quarterly Dividend
Reprinted with permission