Generally a mortgage secured against real estate in Canada is a qualified investment for an RRSP. An annuitant may even choose to hold a mortgage on his or her own property, though the qualification criteria are more stringent in such situations.
Essentially, where annuitant and debtor are not at arm’s length, the Income Tax Act requires that the mortgage be administered by an approved lender and that it must carry mortgage insurance. While there are costs associated with these requirements, in a high interest rate environment a RRSP mortgage may be preferable to making payments to a commercial lender, as the interest contributes to the RRSP’s investment return.
Of value to those with rental properties, in the right circumstances it is possible to also deduct interest charges on those mortgage payments made into one’s own RRSP.
CRA 1999-9926175E – Mortgage as a Qualified Investment
The CRA author provides a rundown of the principal sections in the Income Tax Regulations under which a mortgage may be a qualified investment for a RRSP. Though the relevant sections have since been amended and consolidated, the substance remains effectively the same today.
Included is an admonition that an annuitant cannot benefit from the existence of the mortgage. In support, the letter goes on to state that “the mortgage interest and other terms must reflect normal commercial practices.”
In context, this reinforces the purpose of the lender and insurance rules, and should not be taken to suggest that there can be no other benefits whatsoever, such as, for example, potential interest deductibility where a rental property is involved.
CRA 2011-0413761E5 – Interest
This CRA letter comments on a hypothetical scenario whereby a taxpayer’s RRSP uses a non-arm’s length mortgage to retire an original loan from an arm’s length bank used to purchase some rental properties. It confirms that “as long as the rental properties continue to be held by the taxpayer for the purpose of earning income from a business or property”, interest on this second loan – now held by the RRSP – will indeed continue to be deductible.
Duxbury v. The Queen, 2006 TCC 688
To invest in a business, the taxpayer borrowed from a commercial lender by mortgaging his jointly-held home. Some years later as part of a creditor protection exercise, his RRSP used a mortgage to retire the arm’s length mortgage. At the same time, the house was transferred into his wife’s name alone.
In a subsequent year, the taxpayer sought to deduct the annual mortgage payment as an RRSP contribution for that year. CRA denied this claimed deduction, and its position was upheld in this taxpayer appeal.
Given that the original borrowing had been for a business purpose, the interest would have originally been deductible. Depending on how the RRSP acquired its mortgage from the commercial lender, some or all of that deductibility could potentially have carried through to the RRSP mortgage. Unfortunately, there is no mention in the judgment of the interest component as distinct from the full mortgage payment, so it is not clear whether the taxpayer could not advance this argument based on the facts, or if the issue was simply not raised.
- The cost of non-arm’s length RRSP mortgages becomes more palatable in higher interest rate environments.2
- One is not precluded from deducting interest where a rental property or underlying business purpose can be shown.3
- Good recordkeeping will assist in tracing the use of funds, particularly where a substitute loan is employed.