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Owners of self-directed RRSPs should use caution with tax-free withdrawal schemes.
Owners of financing schemes promise registered retirement savings plan owners that they
can make tax-free withdrawals from their RRSPs. Typically, the arrangement involved
using individuals self-directed RRSPs to purchase shares of private company. The
funds used to purchase the shares are then loaned back to the owner of the self-directed
RRSP at low or no interest. Marketers of these schemes promote them with claims such
as "Take advantage of your RRSP now-no tax to pay!", or "I will loan you
$5000 to $250,000 over five years if your RRSP is locked in." Taxpayers who
respond to these kinds of advertisements risk losing retirement savings and the tax
benefit of those claims. If an RRSP is used as security for a loan, the value of the
RRSP will be added to the taxpayer's taxable income. Similarly, if an RRSP is used
to purchase shares of a private corporation, and the shares are not a qualified investment
under the rules, then the value of the shares will be added to the RRSP holder's taxable
income in the year of the purchase. The rules are available at Revenue Canada's Web
Site: www.ccra-ardc.gc.ca .
Taxpayers should consult with knowledgeable tax advisers before taking part in any scheme
that promises a tax free withdrawal of RRSPs funds. Administrators and trustees are asked
by Revenue Canada to advise clients that there may be tax consequences if
non-qualified investments or loans are secured within an RRSP. The reason I've
mentioned in this particular RRSP fact is that some of my investors had indeed purchased
some of these shares and got stuck paying income tax on the full amount of the share
purchase, even though they had been guaranteed safety from tax.
RRSPs can still be used for mortgage purposes, both lending to yourself, and/or to
others. If you are lending to yourself (except in as a first time buyer) you must
have the loan insured against default though Canada Mortgage and Housing Corp (CMHC).
This is defined as a "non-arm's length" transaction. You must
charge yourself an interest rate that is defined as "market rate." If your
intention is to lend your RRSP money to some unrelated party, again the RRSP money can be
utilized as a qualified (mortgage) investment, this time without the mandatory use of
CMHC.
If you are a first time buyer (within the last five years), you may borrow up to
$20,000 per qualified purchaser to add to your down payment on a house, or for any other
purpose you deem necessary within 30 days of actually buying the home. The repayment
of this loan must commence within 2 years, at 0%, amortized over a maximum period of 15
years. Schemes abound so be careful that your RRSP money is being used legally, and
as a qualified investment.
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