Not happy with your Registered Retirement Savings Plan (RRSP) investment returns? Consider using your self-directed RRSP portfolio to invest in private mortgages backed by Canadian real estate. With a self-directed mortgage, the RRSP becomes the mortgage holder. Each monthly payment is a fixed income payment that goes directly back to your RRSP account tax-free. This creates a regular source of funds for you to reinvest, without taking your savings out you can lend on single-family homes, multi-family properties and commercial real estate.
No, mortgages can be funded wholly or in part from the annuitant’s RRSP. Thus, if your RRSP was not large enough to fund the entire mortgage, the mortgage could be split between you and other RRSP funds holders.
No, you can lend on single-family homes, multi-family properties and commercial real estate.
No, the same principles apply to: Registered Retirement Income Funds (RRIFs) and Locked in Retirement Accounts (LIRAs).
The Canadian Revenue Agency (CRA) allows a wide range of investments to be held within registered retirement accounts. Most people are familiar with holding stocks or mutual funds, but few realize that investments may also include: u Bonds and Debentures u Term deposits and Guaranteed Income Certificates (GICs) u Equity linked notes u Rights and warrants u Covered calls, long calls and puts, and LEAPS u Gold and silver certificates u And mortgages secured by real property See: Income Tax Interpretation Bulletin No: IT-320R3 found on www.cra-arc.gc.ca.
According to CRA...
“A mortgage, or an interest therein, in respect of real property situated in Canada is a
qualified investment for a plan trust. There is no requirement that the mortgage be a
first mortgage or a residential mortgage”
If the annuitant is unable to make his or her monthly mortgage payments, the financial institution administering the mortgage will place the mortgage in default. It will then attempt to collect the proceeds upon a power of sale of the property.
If the proceeds from the mortgage are being used on an investment property, the cost to set up the mortgage as well as the mortgage interest may be considered tax-deductible expenses. CRA requires a clear audit trail of the investment and the mortgage.
WHY SHOULD YOU INVEST IN MORTGAGES?
￡ Mortgage interest payment is a fixed income payment; it is consistent, paid every month.
￡ Investing in mortgages is often less risky than mutual funds and stocks, because you are secure in both the borrower and the property.
￡ The lender has control over choosing the property and the borrower to invest in.
￡ The lender has the freedom to negotiate the interest rates and terms with the borrower.
￡ An opportunity to invest in real estate without becoming the landlord and running after tenants.
￡ Earn passive income while staying tax-sheltered.
￡ No time and no real estate expertise is required.
You can absolutely use cash to invest in mortgages, or you could learn how to invest in real estate yourself, or if you prefer a hands-off approach, invest with a partner via Joint Ventures.
A STEP-BY-STEP GUIDE
1) Contact us to open a self administered RRSP account.
2) Transfer your RRSP or RRIF or LIRA funds to your self administered account.
3) Determine whom you are lending money to. Do your due diligence on the borrower and the property.
4) Determine the type of mortgage (is it a first or second mortgage?) and negotiate the terms, conditions and interest rate.
5) Take the mortgage commitment to a lawyer. If the funds are less than $50K, one lawyer may represent both parties, otherwise, legally two lawyers have to be involved.
6) Complete and sign the mortgage commitment. The lawyer will register the mortgage on title. 7) Fill out and sign an Arm’s Length Mortgage Package with your Trustee of choice.
8) Set up an automatic payment system with the borrower, and watch the monthly returns go into your account.
Give us a call to discuss in person or email us for any query