Refinancing to pay the house

[toblake75]

Hello,

It's my first post here... I lookied for my answer on the site, and I could not find it.

I have a triplex, fully rented. And i live in a house
The triplex's 5 years term is ending shortly, i need to renegociate
I would like to refinance that triplex, to get an extra 50000$ (should not be a problem, that would make a total of 30% of the value)
The mortage on the house is much higher, with higher interest rate as well.

I was about to take the 50000$ and make it as a payment on the house (I can put up to 50000$/year on the house)
But I was told that is not well seen by the tax guy. In fact, not tolerated.

What about if my wife still has unused RRSP contribution of 50000$? Could I use the 50000$ from the refinancing, place it in my wife RRSP, get a return of 22000$, and put that money on the house? Is that ok? Get no problem with the tax guy?

Thanks (and sorry for the english, not my first language...)

Rik

[Just a Guy]

The problem that I see is you are not using the "borrowed" money for an investment. How did you come up with the downpayment originally? Perhaps you could justify repaying that to yourself...

[Sampson]

What about if my wife still has unused RRSP contribution of 50000$? Could I use the 50000$ from the refinancing, place it in my wife RRSP, get a return of 22000$, and put that money on the house? Is that ok? Get no problem with the tax guy?

You can't do this and continue to deduct the interest from the loan.

Interest paid on borrrowed money to invest into registered accounts (RRSP and TFSA) are not eligible for tax deduction.

[andrewf]

I don't know if you are currently doing this, but an option is to use all the rent income you receive to accelerate paydown of your home's mortgage, then pay the mortgage/taxes/insurance/maintenance/etc. out of a line of credit on your triplex. Periodically, you can refinance the triplex mortgage to advance the money required to pay off the LOC. This way the entire mortgage of the triplex will be an investment loan and the interest fully tax deductible. This is called 'cash damming' if you want to do some more research.

As a consequence, you may want to look for shorter terms on the triplex (1 year or 2 year mortgage), so you can refinance to repay the LOC, which will likely be at a higher interest rate.

[cardhu]

But I was told that is not well seen by the tax guy. In fact, not tolerated.

There are two separate issues here ...
1. Can you do what you propose to do?
2. Can you deduct the resulting interest, if you do what you propose to do?

The answer to #1 is ... of course ... you can arrange your finances however you want to, and CRA tolerates all of it just fine.

The answer to #2 is ... no ... the test for interest deductibility is what you do with the money that you borrowed... if you use the money for an eligible purpose (generally speaking, to earn income) then the interest is deductible ... otherwise it isn’t ... two (of many) things that are not eligible are paying down a non-deductible debt, and contributing to an RRSP, so if that’s what you did, the interest on the “extra” $50k you plan to extract from the triplex would not be deductible.

Short of selling the triplex to release its equity, about the only thing you can do to accelerate payment of the principal residence mortgage would be the cash damming suggested by andrew. It’s a slow process, though, you’re not going to be dropping $50k lump sums onto that mortgage every year.

[toblake75]

Thanks everyone

Too bad I cant use the refinancing in my RSSP...
I had never heard of cash damming... So, I started reading about it.
Seems a bit complicated, bit i'll read more about it, and try to consult

thanks again

[cardhu]

Too bad I cant use the refinancing in my RSSP...

As discussed, you CAN use the refinancing in your RRSP ... you can use it for any purpose you want to ... borrowing to make an RRSP contribution doesn’t always make sense, financially, but sometimes it does ... so the question is not whether you CAN do what you propose, but whether it makes sense to do so.

Cash damming may seem complicated at first, but its actually very simple, and everyone who owns both a rental property and a personal residence, and who has mortgages against both, should be doing it as a matter of routine.