What are RRSP-Eligible Investments?  

What investments are RRSP-eligible? 

RRSP-eligible investments are investments you can hold within your Registered Retirement Savings Plan (RRSP). 

An RRSP is a type of personal savings plan registered with the Canadian federal government. You can contribute to this throughout your working years and accumulate funds to be used when you retire. 

By placing your income in investments within your RRSP, you invite the potential for it to grow. 

One of the benefits of doing this through an RRSP account is that these investments are tax deferred. You don’t pay tax on income earned through your RRSP investments until you retire or withdraw funds from the RRSP account, the taxes payable are then calculated based upon your current marginal tax rate at time of withdrawal.  

For individuals earning an income during their working years, you will likely be in a higher marginal tax bracket, so it makes sense to set aside savings in your RRSP account, invest it on a tax deferred basis, then withdraw it in your later years (such as when you have retired) in a lower tax bracket. 

Introduction to the Exempt Market Dealer

Many Canadians are keen to invest in real estate-backed securities. 

After all, Louis Glickman, the renowned American investor and philanthropist famously said: 

“The best investment on earth is earth.” 

Yet often all the bureaucratic and complicated legal protocols hold us back. 

This article intentionally avoids arcane legalese and references to specific provisions of statutes and regulations, policies, bulletins and adjudicated cases. That’s right, there will be no long explanations of what a national instrument 45-106 prospectus, national instrument 31-103 or 45-106 prospectus and registration is.

Instead, the intent is to explain in understandable language how a layperson can best participate in real estate investing using an Exempt Market Dealer (“EMD”) to a meaningful advantage.

A Background on Exempt Market Dealers

It’s important to understand the basic background related to the regulated Canadian securities investment landscape. 

Start with the fact that interests in real estate are considered “securities”. 

Securities legislation and regulators across Canada are increasingly looking to implement appropriate levels of consumer protection measures, especially since the financial crisis of 2007-2008. 

Typically, companies who offer stocks, bonds, mutual bonds and the like in the publicly traded capital market are required to prepare a disclosure document called a “prospectus” and have it precleared by a securities regulator like the Ontario Securities Commission (the “OSC”) before going public. 

However, there are some important prospectus and registration exemptions, one of which is where there is an offering memorandum (“OM”) detailing all the material facts to assist prospective purchasers in their decision whether to invest in the securities being offered by an issuer. An OM is similar to a prospectus but need not have the regulator’s prior sign-off.  

Having the funds you need to support yourself in retirement is key to sustaining your quality of life after work. There are various ways you can fund your retirement in Canada, one of them being via a LIF. 

But what is a LIF? How does a LIF work, what can be placed in it, and how are funds taken out?

In this article, we will answer all of those questions and more.

What is a LIF? (LIF Meaning) 

A Life Income Fund (LIF) is a type of registered retirement income fund (RRIF) available in Canada. This type of fund can be used to hold locked-in pension funds and other assets for retirement. 

Some important characteristics of a LIF include the fact that:

• LIF funds CANNOT be withdrawn in one lump sum
• LIF funds ARE creditor-protected
• In many cases, you MUST be of early retirement age to begin receiving LIF funds (55 years old)
• You CAN choose your LIF investments
• LIF contributions grow TAX-DEFERRED
• There ARE legal limits to how much you can contribute/withdraw
• You MUST start receiving LIF payments AFTER you turn 71
• You NEED your spouse’s consent to set up a LIF as per pension legislation

LIFs are offered by institutions across Canada. Once funds are withdrawn from a LIF, they are subject to income tax. 

The Meaning of LIF in the Investment Context 

The meaning of a LIF in an investment context is broad. 

Many jobs in Canada include a registered pension plan. Once you reach retirement, the lump sum value of your vested contributions to your pension plan, plus interest, must be unlocked in order to access the funds. 

How can you do this? Each province has an age at which you can begin to withdraw money from your pension. You can unlock your pension by converting the funds into a LIF, a locked-in retirement income fund (LRIF), a Locked-in Retirement Account (LIRA) also known as a locked-in Registered Retirement Savings Plan (locked-in RRSP), a Locked-in Retirement Savings Plan (RSP) or a Restricted Life Income Fund (RLIF). 

You may also unlock your pension by purchasing a life annuity. 

Your LIF can hold many types of investments including:

• Cash
• Securities listed on a designated stock exchange
• Mutual funds
• Corporate bonds
• Government bonds
• ETFs

Put your registered funds to work for you. Our team put together a complete guide to funding your mortgage with RRSPs, including step-by-step lists, answers to all your tax questions, and real-life examples of how much you could be making.

Key Points

• What Are Registered Funds?
• How to Use Your Registered Funds to Fund Your Mortgage
• Pros of Using Your Registered Funds to Fund Your Mortgage
• Cons of Using Your Registered Funds to Fund Your Mortgage
• Important Considerations for Using Your Registered Funds to Fund Your Mortgage
• 5 Steps to Using Your Big Bank RRSP to Buy Non-Bank Products
• How Do I Get Started?

Most people don’t realize they can invest in private mortgage investment entities like mortgage investment corporations and mortgage trusts, as well as mortgages directly, with their RRSPs. Interested in learning how to invest with your registered funds? We’ll walk you through it.

What Are Registered Funds?

A registered retirement savings plan (RRSP) is a type of Canadian account for holding savings and investment assets. RRSPs are the most popular and well-known registered plans in Canada. They’re established by individuals or often by individuals together with their employers.

RRSPs must comply with a variety of restrictions stipulated in the Canadian Income Tax Act. Approved assets include savings accounts, guaranteed investment certificates (GICs), bonds, mortgage loans, mutual funds, income trusts, corporate shares, exchange-traded funds, foreign currency, and labour-sponsored funds.

These are all called “registered” plans, meaning that they are recognized by our revenue authorities as tax-incentivised wealth management accounts. All of these plans are registered with the Canada Revenue Authority and are provided by approved service providers like banks, trust companies, and insurance companies. Contributions can be made on your own behalf or on behalf of your spouse up to and including the year you and your spouse turn 71.

Once money is deposited into an RRSP, the tax payable on that money (and any money that is earned by investing that money!) is deferred until it is withdrawn.

RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. To encourage people to save for retirement, the Canadian government allows us to contribute a certain fraction of our yearly salary every year without taxing us on it today. Once money is deposited into an RRSP, the tax payable on that money (and any money that is earned by investing that money!) is deferred until it is withdrawn. You pay tax on it when you withdraw – either in a moment of need or at the time you retire. If you withdraw it before your retirement, then you will pay all the tax at once on the amount withdrawn. If you wait until you retire, you pay tax on it (and whatever has accumulated on it) gradually over a period of time until the funds are exhausted.

This applies to Registered Retirement Income Funds (RRIFs) and Tax-Free Savings Accounts (TFSAs) as well.

Did you know you can use registered funds to fund your own mortgage?

If you are making $100,000, the government will allow you to contribute 18% of your earned income (or a maximum of $27,230 for the 2019 tax year). If you make the maximum contribution, the government would only tax you on $72,770!

How to Use Your Registered Funds to Fund Your Mortgage

To become both the lender and the borrower, you have to set money aside in RRSP accounts. The larger the RRSP, the more mortgage you can create. First, figure out how much of a mortgage loan you can create with the RRSPs you have on hand. (Your monthly RRSP statements will provide that number. Not sure? We can help!)

Those RRSP funds are likely tied up in mutual funds, exchange-traded funds, and other pooled RRSP eligible accounts. To fund a mortgage, these RRSP accounts have to be reduced to cash. Once you have made the decision to fund your mortgage with your own RRSP funds, you will instruct whoever has custody of your RRSPs to sell everything in the account so that the only thing that remains in the account is cash. If you remember one thing, make it this: IT IS IMPERATIVE THE CASH STAYS IN THE ACCOUNT. You are not withdrawing the cash; you are simply reducing whatever is in the account to cash.

When you reduce your RRSP account to cash to fund a mortgage, it is imperative the cash stays in the account. You are not withdrawing the cash; you are simply reducing whatever is in the account to cash.

Next, you will instruct your financial institution to open up a “self-directed RRSP.” It may be most expedient to work with the approved lender required in this transaction. The lender will require you to open an account, which will take very little time.

Once the account is established, you have to fill up your newly created self-directed RRSP account. You will do that with the assistance of the lender who has helped you set up the account. You will complete a “transfer instruction” whereby your lender will request all the other institutions who currently hold your RRSP accounts (that now hold nothing but cash) to transfer all the cash that is in those accounts to your newly created self-directed RRSP account. Once all the forms are completed, the transfer can take up to four weeks.

To maintain RRSP eligibility, funds must move directly from one RRSP account to another – regrettably, you cannot simply withdraw the funds and walk them across the street and deposit them.

Once the funds arrive in your self-directed RRSP account, it’s time for the fun part: telling the self-directed RRSP account to fund a mortgage! You do that by way of delivering to the lender a “payment direction,” which tells the lender to buy the mortgage from you on behalf of the RRSP account for the amount set out in the direction. The lender then forwards the cash to your lawyer, who will now register the loan against the land title to create the mortgage – the mortgage, now registered in the name of the self-directed RRSP and administered by the lender. The mortgage will have the benefit of insurance, most likely arranged by the lender approved to administer the mortgage.

Now you are set and you begin making payments on the mortgage as you would under any other mortgage arrangement.

Pros of Using Your Registered Funds to Fund Your Mortgage

• You make interest payments to yourself instead of a financial institution, creating immediate cash flow.
• The RRSP benefits from the interest costs. The longer the amortization period of the mortgage, the more RRSP you create.
• Monthly mortgage payments that repay the RRSP loan with interest do not count as contributions and you can still take advantage of maximum contribution room.
• It provides a low-risk investment with a predictable return.

Cons of Using Your Registered Funds to Fund Your Mortgage

• Setting up and administering the RRSP is complex.
• Insurance, legal and start-up costs, and administrative fees are high.
• RRSP funds are tied up at the cost of other investment opportunities.
• It may inadvertently over-concentrate your retirement portfolio in one investment product.

If your self-directed RRSP account buys from you a $200,000 mortgage that has a 25 year amortization period at a commercial rate of interest, you double it over the period without ever encroaching your contribution room!

Important Considerations for Using Your Registered Funds to Fund Your Mortgage

The mortgage, notwithstanding it is from you to you, has to be legitimate.

Many Canadians hold their RRSPs through “client-held accounts” at various investment and/or fund companies. Every time one opens an account with a different investment company or fund manager, a new account is created. These accounts are generally specific to the investment product being subscribed for at the time. It is not uncommon for Canadians to have several of these kinds of accounts.

The other popular form of account is a “nominee account”. Essentially this is one account held by a “custodian” or “trustee” that holds several different kinds of investments on your behalf. You need to employ a special kind of RRSP nominee account when you want to use your RRSP funds to finance your own mortgage – that account is called a “self-directed RRSP” and they are widely offered by financial institutions in Canada.

Two main takeaways:
1. The mortgage has to be insured by either CMHC or a private insurer. 2. The mortgage has to be administered by a lender approved by the National Housing Act.

5 Steps to Using Your Big Bank RRSP to Buy Non-Bank Products

1. Confirm the non-bank product is RRSP eligible with the help of a licensed advisor like Fundscraper.
2. Identify how much you want to invest in the non-bank product.
3. Instruct your bank to reduce to cash that amount WITHIN your RRSP account – your account will thereafter have a component of bank product and cash!
4. Open up a self-directed RRSP account.
5. Transfer the cash component to the self-directed RRSP.
6. Issue a payment instruction telling the self-directed RRSP what to buy.

How do I get started?

This investment strategy is less common, as only a very few can take full advantage of the substantial benefits it offers. Nevertheless, mortgage investment is an imperative in anyone’s portfolio. If you’re looking to engage in this strategy, it’s critical that you speak to a qualified financial advisor — like us! — before moving any money. Fundscraper can help you do an appropriate assessment of the risks and costs associated with this investment approach.

If funding your own mortgage is not an option available to you today, you still have other options. Join our community of investors to learn more about private property and mortgage investment, and how it fits into your portfolio and investment strategy.

It’s never too early to start saving for retirement. Investing in private real estate is an excellent way to diversify your portfolio and start thinking about your financial future. To help you understand all of the options in front of you, we put together a guide to the types of retirement savings plans (RSPs) you should know about.

Key Points

• RSPs are registered through Canada Revenue Agency (CRA) and are designed to encourage us to save for retirement. 
• Contributions are tax-deductible based on your marginal tax rate when you put the money in.
• If you’re interested in investing your RSPs in private mortgages or opening an RRSP, the first thing you should do is seek expert advice. The process isn’t difficult, but if you’ve never done it before, you’ll need an expert to walk you through it.
• Investing in private real estate is an excellent way to diversify your portfolio. Savvy investors know not to put all of their eggs in one basket, and private real estate helps minimize risk of loss. It also helps generate return and preserve capital.

Regardless of the time of year, it’s important that you have a solid understanding of the basics of registered Retirement Savings Plans (RSP). RSPs are registered through Canada Revenue Agency (CRA) and are designed to encourage us to save for retirement. But don’t wait until retirement is on the horizon to start saving for it! Read on to learn more about your options with RSPs.

What is an RSP?

What does RSP stand for? What is a RSP? An RSP, meaning Retirement Savings Plan, encourages saving for retirement. They can contain investments such as stocks, bonds, mutual funds, ETFs, GICs, and savings accounts.

Contributions are tax-deductible based on your marginal tax rate when you put the money in. If you make $100,000 a year, your marginal tax rate is 43.41%. If you put $1,000 in an RSP, you’ll get about $430 “back.” Your RSP deduction limit for 2021 is 18% of earned income reported on your tax return in the previous year, up to a maximum of $27,830.

You defer paying tax on the money and interest gained until you withdraw it. At that time, it’s considered taxable income, and you pay taxes on it according to your marginal tax rate at that time.  Generally, your income during retirement is lower than the income you earn during your active working years, so withdrawing your funds from your RSP account later will allow you to pay taxes at a lower marginal tax rate.

How do I Get an RSP?

There are many different types of RSPs that come with tax benefits! Here are the three most common:

Registered Retirement Savings Plan (RRSP)
Often, when a financial institution refers to an RSP, they mean RRSP. The RSP definition can get confused with the RRSP definition. An RRSP can only be sold by financial institutions approved by the Canada Revenue Agency (CRA). You can hold many types of assets within an RRSP, including savings accounts, GICs, stocks, bonds, mutual funds, ETFs, and real estate. RRSP contributions are accepted until December 31 of the year one turns 71. You’re penalized with heavy withholding taxes if you withdraw the funds before you retire.

Tax-Free Savings Account (TFSA)
TFSAs can hold any type of RSP-eligible investment, including stocks, bonds, mutual funds, real estate, ETFs, or cash deposits. Any Canadian who is over the age of 18 and has filed a tax return can open a TFSA. Unlike RSPs, contributions are not tax-deductible. When you withdraw money from your TFSA, you don’t have to pay income tax on it.

Registered Pension Plans
Many employers set up pension plans for their employees. There are two types: Defined Benefit (DB) and Defined Contribution (DC). DB plans promise to pay a set pension amount based on a formula including age, years of service, and earnings history; DC plans provide pension benefits based solely on the contributions and investment earnings.

What’s the Difference Between an RSP and an RRSP?

In conversation, people often use “RSP” when referring to an RRSP because it’s shorter and easier to say. And it’s not inaccurate: an RRSP is a type of RSP, which is an umbrella term that refers to any Retirement Savings Plan. An RRSP is a specific type of account with two stand out characteristics. The first — it has tax advantages in that any contributions can be deducted from your income. The second — there are yearly RRSP contribution limits. While an RSP can refer to a number of retirement accounts, an RRSP refers to one type of account specifically. Sometimes people will refer to an RRSP as an RSP (because it is) but so too are many other retirement accounts.

What are the Benefits of Using an RSP to Invest in Real Estate?

Investing in private real estate is an excellent way to diversify your portfolio. Savvy investors know not to put all of their eggs in one basket, and private real estate helps minimize risk of loss. It also helps generate return and preserve capital.

Most people think mortgages or mortgage backed investments are a financial instrument reserved only for banks and hedge funds. A mortgage does not have to be hundreds of thousands of dollars. Individuals such as yourself can execute mortgages against properties or participate in mortgage backed offerings as investments, and you’re able to earn returns through RSPs described above.

Investment advisors commonly recommend that a person’s portfolio have between 10% and 20% in real estate. It is generally thought that investors who are risk-averse tend to limit their investments to stocks and bonds, while investors who are less risk-averse hold a mix with more alternative investments like real estate. What is evolving today is that investors who want more diversification should actually be weighing more of their portfolio towards alternative assets like real estate than otherwise. This is because real estate is a strong non-correlated asset class, which many risk-averse investors are attracted.

How do I Invest in Real Estate Using an RSP?

If you’re interested in investing your RSPs in private mortgages or opening an RRSP, the first thing you should do is seek expert advice. The process isn’t difficult, but if you’ve never done it before, you’ll need an expert to walk you through it. That’s what we’re here for!

Your advisor should be a registered mortgage broker, dealing representative, financial advisor, accountant or an exempt market dealer focused on real estate and mortgages. At Fundscraper, we’re both a mortgage broker and exempt market dealer. We begin by asking about your investing experience, investment portfolio to date, risk appetite, expectations, current needs, and future needs. This is called a suitability assessment, and it helps us determine whether private real estate is an appropriate investment for you at this juncture of your life. If yes, the next step is identifying a mortgage backed investment product that would be suitable for you.

Once we have found something that is suitable for you, the next steps are setting up how you can acquire the private mortgage backed investment security with your current RRSP funds that are held by your bank or financial advisor. Those RRSP funds are likely tied up in mutual funds, exchange traded funds, and other RRSP eligible securities. We’ll help you with this process as much or as little as you need.

Fundscraper Capital Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.