# Tax-deductible mortgage



## Joeschmo39 (Apr 26, 2011)

Hi,

I have recently paid off my house and am mortgage free. I understand that if I now get a new mortgage and invest the funds that I can deduct the interest portion of my payments off my taxes. I also understand that it is possible for me to get a Non-Arm's Length mortgage from my own SD-RRSP using TDCandadaTrust.

My first question is can I do both? Ie. Can I give myself a mortgage from my SDRRSP and then deduct the interest payment that I make to my SD-RRSP off my taxes? It seems like a long shot, but you never know.

My second question is can I use my SD-RRSP to give myself an Arm's Length Mortgage or does it have to be a Non-Arm's Length Mortgage?

Thanks.


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## Potato (Apr 3, 2009)

Joeschmo39 said:


> My first question is can I do both? Ie. Can I give myself a mortgage from my SDRRSP and then deduct the interest payment that I make to my SD-RRSP off my taxes? It seems like a long shot, but you never know.



I'm not sure, but I think you could. The better question though is why you'd want to: you'd basically be taking the money that's sheltered in your RRSP and investing it in a taxable account instead. Why not just invest directly in whatever you're going to invest in within your RRSP? If you want to use leverage, you have to actually borrow it from someone else: "borrowing" from your RRSP to invest in a non-registered account isn't going to give you the magnification effect of leverage.


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## andrewf (Mar 1, 2010)

Agreed. It's possible, but I'm not sure it makes sense. Such mortgages are costly to set up and administer.


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## HaroldCrump (Jun 10, 2009)

Joeschmo39 said:


> My first question is can I do both? Ie. Can I give myself a mortgage from my SDRRSP and then deduct the interest payment that I make to my SD-RRSP off my taxes? It seems like a long shot, but you never know.


I believe you can, but it doesn't make too much sense, IMO.
If your RRSP is loaning you money, then you are either getting poor returns on your RRSP (if you set the interest rate too low) or you are getting poor returns on your unregistered investments (if you set the interest rate higher).

It would be far simpler to set up an HELOC and do leveraged investing.
That is, if you are really intent upon doing this.

Or you can simply kick back and bask in the glory of having paid off your mortgage


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## Joeschmo39 (Apr 26, 2011)

Would the fact that I'm also getting a tax deduction not cancel out most of these concerns? Ive assumed that this deduction is off of my gross income. Is that not correct?


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## Potato (Apr 3, 2009)

Joeschmo39 said:


> Would the fact that I'm also getting a tax deduction not cancel out most of these concerns? Ive assumed that this deduction is off of my gross income. Is that not correct?


Tax deductions aren't magic.

Here are some basic scenarios:

Let's say you loan yourself money at 5%, and make 10% in capital gains.

At the end of the year, you have:
Outside RRSP: 110, a 5 taxable gain, and a 5 deduction, so no tax on the gain. Then, you repay the "loan" with interest, so you're left with 5 outside your RRSP. Inside RRSP: 105.

If you had just invested in something that had the 10% return directly in the RRSP, you'd have 110 in your RRSP, nothing outside.

--

If your investment does even better: 5% "loan", 20% capital gains:
Outside RRSP: 20 gain, of which 10 is taxable, with a 5 deduction, for 5 taxable -- pay say 2.5 in tax. Repay the loan, you're left with 12.5 outside your RRSP. Inside RRSP: 105.

If you had just invested in something that had the 20% directly in the RRSP, you'd have 120 in your RRSP, nothing outside.

--

If your investment goes nowhere (still 100), you get a 5 deduction on your other income, which is worth say 2.5 to you in taxes. But you have to repay the RRSP "loan", which now is 105, and your investment is only 100, so you have to come up with 5 in cash from elsewhere. So you have 105 in your RRSP again, and -5 outside (with a tax benefit worth 2.5). That's no different than if you had just invested and got nothing (100) in your RRSP, and then made an additional contribution out of other cash (which got you a deduction worth 2.5).

--

So the only benefit I see is if your investments do poorly, and that benefit is just to let you slightly exceed what your RRSP contributions would be otherwise. I guess if you want to get your money out of your RRSP it makes a little bit of sense. There are of course more complicated tax issues (what about dividend income, what about capital gains that get deferred), but I think this is pretty close. Plus, I'm not even sure the interest would be deductible (my point being that it doesn't really matter since the scheme doesn't have a whole lot going for it even in the case that it is).

Especially since these RRSP mortgages are expensive to set up (high admin fees and you have to pay CMHC insurance premiums) it doesn't seem to make enough sense to even try.

Now, I'm not sure if you had an interest in leverage or not with the "loan", but you can compare to a 3rd party HELOC: leverage increases your return in the first two scenarios (but at the usual cost of magnifying risk -- compare what happens in the case where your investment is flat or loses money).

*Edit to add*: it looks like from the OP you _were _interested in borrowing to invest, so let's look at the scenarios with a 3rd party HELOC (also at 5%):

Investment goes up 10%: Outside RRSP you have your investment go to 110, 5 of which is a taxable gain, and you get a deduction for the 5 in interest, so no net taxes. You repay the loan (now 105), and are left with 5 outside your RRSP. Inside your RRSP, the investment also went to 110. So you have 115 total (note the magnifying effects of leverage present this time around).

--

Investment goes up 20%: Outside the RRSP, as before you have a 10 taxable gain, with 5 deduction from the loan, for a net 5 taxable gain, on which let's say you owe 2.5 in taxes. You pay the tax, repay the loan, and are left with 12.5 outside your RRSP. Inside your RRSP, you now have 120. Leverage really paid off here.

--

Investment is flat: Now outside the RRSP, you get a tax deduction of 5 (worth say 2.5 to you), but have to repay the loan of 105. So you have -5 (with a tax benefit of 2.5), and inside your RRSP you have 100. Here leverage has worked against you (as expected: the increased risk).


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## andrewf (Mar 1, 2010)

^ It is, however, better to have $5 outside an RRSP and $105 in vs $110 in an RRSP due to before/after tax considerations. 5$ outside an RRSP is worth perhaps $8 inside, depending on your marginal rate.


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## cardhu (May 26, 2009)

Regarding the question of deductibility ... Yes, of course the interest would be deductible ... the test for interest deductibility is what you do with the money that you borrowed ... the source of the borrowed money has nothing to do with it, as long as it is a legitimate and verifiable loan. 

Regarding the arm’s-length/non-arms-length question ... Yes, you can make an arm’s-length mortgage loan from your RRSP ... but you cannot make one to yourself, because YOU are not “arm’s-length” from your RRSP ... if the borrower is yourself or any other non-arm’s-length person, then the mortgage loan is, by default, a non-arm’s-length loan. 

Regarding whether it’s a good plan ... taking an RRSP self-mortgage is almost always a bad idea ... some people swear by it, on the principle that paying interest to oneself is preferable to paying it to the bank ... but that premise is entirely emotional ... if you leave emotions at the door, and look at it from a facts/math/logic point of view, it rarely makes sense. There can be exceptions, but they are just that ... exceptions. 


Potato ... you’re not taking into account the inherent tax liability in the RRSP ... when those liabilities are factored in, your examples could (depending on the tax rate used) appear to favour the scheme. I say “appear” because its still not an attractive scheme, for a variety of other reasons.


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## Joeschmo39 (Apr 26, 2011)

Thanks to everyone for responding. As I said, it was an idea that I had that I thought had some logic to it. Now I see that things aren't so simple.


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