Use RRSP funds for a mortgage

When you withdraw money from your RRSPs or RRIFs, you pay tax at your marginal tax rates on the money withdrawn. The only exceptions are when funds are withdrawn under the Home Buyers’ Plan to purchase a first home or under the Lifelong Learning Plan to attend post-secondary education.

However, you may not know that you can also use the funds in your RRSP to invest in a mortgage on Canadian real estate.

Under the Income Tax Act, there are strict rules for how you can fund a mortgage if you, or someone related to you, owns the property being mortgaged (i.e. your own home). Such a mortgage, known as a “non-arm’s length mortgage,” must be administered by an approved lender under the National Housing Act. The interest rate and other terms and conditions must reflect normal commercial practices and you must purchase private or CMHC mortgage insurance.

A recent case involving a woman who was appealing her 2009 tax assessment could have gone a lot differently if she’d known about this option. The issue was whether she should have included a $105,000 RRSP withdrawal in her 2009 income.

She withdrew the funds from her RRSP to pay for a back surgery performed outside Canada. She felt that the “Canadian health system failed [her]…as she was unable to find a qualified surgeon to perform the surgery in Quebec, her province of residence.”

In 2006, the woman suffered a herniated disk and consulted with a number of doctors. She was ultimately referred to a pain clinic where she was prescribed painkillers. Both the neurosurgeon and orthopaedic surgeon who looked at her concluded that surgery wasn’t viable.

Her condition rapidly deteriorated and she suffered from chronic pain and a loss of mobility. Having been denied surgery at home, she sought a second opinion from a former Canadian surgeon practising in Switzerland.

This surgeon felt that she would benefit from surgery and unsuccessfully tried to convince the Quebec surgeon, a former colleague. Ultimately, the woman went to Switzerland to have the surgery performed at her own, considerable, expense.

Before pulling the money out of her RRSP, she applied to get a mortgage on her home but was turned down. She then approached the administrator of her self-directed RRSP who told her there was no way to withdraw from her RRSP on a tax-deferred basis.

Later on, after she’d already withdrawn, the woman learned that she could have withdrawn the money as a mortgage loan. She testified that if she had known this at the time, she would have done so.

But because she didn’t structure the withdrawal as a mortgage investment made by her RRSP, she had to pay tax on the RRSP withdrawal. She asked the Judge to waive the tax obligation on the withdrawal since she used the funds to pay for medical services “that should have been covered under Canada’s health plan. In so doing, she saved Canadian taxpayers the cost of her treatment, which was greater than the income tax on her RRSP withdrawal.”

Unfortunately, the Judge couldn’t make an exception to the law and found that the woman was required to include the RRSP withdrawal in her income. On a positive note, though, the Judge did confirm that she was able to receive full tax relief for the medical expenses she paid through the medical expense tax credit.

This is just one example that shows it pays to not only have good medical advice, but also good financial advice.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.