There are two types of mortgages that can be held within retirement accounts such as RRSPs and RRIFs:
- Arms length
- Non-arms length
The term ‘arms length’ is used by CRA and refers to how closely or distant the borrower / property owner and the lender are in relation to each other.
For example, for a borrower, the following people are considered
- Non-arms length – brother, sister, parents, spouse (either common law or by marriage), your own children (including adopted)
- Arms length – friends, strangers, uncles, aunts, cousins
This means that for a mortgage to be classified by CRA as arms length, an individual could borrow mortgage funds from the RRSPs of their friends, strangers, uncles, aunts, and cousins, but not a brother, sister, parent, spouse or child.
For a detailed description of CRA’s definition of ‘arms length’, please refer to interpretation bulletin # IT-419R2 at
All investments within retirement accounts, including arms-length mortgages, must be managed by financial institutions. For RRSP Mortgages, the financial institution acts as a trustee for the account holder and manages the mortgage on the private lender’s behalf.
- Tim has a self-directed RRSP account with TD Waterhouse
- Tony wants to borrow her RRSP money in the form of a mortgage
- Tim’s financial institution acts as her trustee for the transaction
Private RRSP Mortgage lenders are an excellent way to finance a property with little to no hassle, and with terms and conditions favorable to the borrower. Anyone who doesn’t want to deal with banks, has lost their job, or needs down payment money should consider using them to finance property.
The following list is a brief overview of some ways RRSP Mortgages can be used to finance property:
- Buying property – reduce or eliminate the need for bank financing, as a substitute for a down payment, mortgage insurance, or a joint venture partner
- Refinancing – pay for renovations, buy more property, buy out any partners
- Selling property – make your property easy for people to buy with no qualifying mortgages
As with any mortgage financing, great care must be taken to ensure the investor can afford to make the payments as well as, at the end of the term, repay the original amount borrowed.
In addition, investors should also know:
- exactly how mortgages work
- how to structure RRSP Mortgages to their advantage
- what to do when the mortgage term has ended, and exactly how to fill out the trustee paperwork
What steps are involved in getting it going?
After reviewing a potential RRSP investment lender’s current situation, via the interview information gathering process, and after they have reviewed your proposal with their team of advisors and are ready to go, the next 7 simple steps are all that is required. The steps are:
- Open a Self-Directed RRSP account that MUST be able to deal in “Arms-length” mortgages
- Put contribution in place or transfer funds
- Prepare instructions to place mortgage Including (independent legal advice letter)
- Wait for the funds to be forwarded to the lawyer
- Register the mortgage and close on the property
- Watch your RRSP account grow
- Repeat the process.
Producing consistent, predictable RRSP returns through this Self Directed RRSP strategy allows investors the opportunity to take advantage of superior tax sheltered R.O.I. results, and cash in on Canadian real estate. They get a great return on a great property and you get the property! Win/Win
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