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3 little-known ways to invest in real
estate using your RRSPs or TFSAs

(or any registered funds)

by Sam Perren -(with italicized musings by Thomas Beyer)
5268 words, 21 minute read

Disclaimer: Thomas Beyer and Sam Perren are not licensed and are not financial advisors. This article contains the (sometime differing) opinions of Thomas and Sam and should not be relied upon as financial advice.

Do not take any actions without consulting professional tax and legal advisors.


There is a deadline looming for people who want to contribute to RRSPs. March 1, 2019 at midnight is the deadline to have your RRSP contribution reduce your 2018 taxes.

When I had a job, this was my favorite time of year to make RRSP contributions because soon after (usually in April) I would file my taxes and get a refund on payroll taxes I paid the year before.

What is an RRSP anyway?

An RRSP is simply an investment account that is registered with the government. You get tax benefits when you contribute. Your taxable income is reduced by the amount you contribute in that year. Also, any investment gains are non-taxable.

TB: While these two facts seem light they are actually HUGE

  • a) First of all, if you are in the 40% tax bracket, and you stick $10,000 into your RRSP you really pay only $6000 as you get a $4000 rebate. This is similar to a 66% ROI as you have $10,000 in your RRSP but put in only $6000.
  • b) Plus, the $10,000 is now compounding for perhaps 10, 20 or over 30 years TAX FREE. That is HUGE.

When you take out money, you pay income tax on the amount you take out.

The only problem with RRSPs I find is that contributing only makes sense if you plan to earn less money when you cash them out them than when you contribute to them. Also we don't know future tax rates (probably higher), and when we turn 71 we are forced to withdraw 5% per year.I know I plan to earn more money in the future, not less, so an RRSP only made sense for me in limited circumstances:

a) I knew my income would be less when I left my job to focus on my business and spend more time with my family. Cashing out some RRSPs during these low income years allowed us to maintain our lifestyle. Cashing out RRSP savings to live on might seem risky to most people, but as a real estate investor, I have so much equity building up in my properties that my 10, 20 and 30 year incomes and net worth will be far higher than they are now.

b) I knew most of my future income would be within corporations, and now I can choose when I take dividends and make income. In the years I choose not to take any salary or dividends from my corporations, I can cash out my RRSPs and pay virtually no taxes.

TB: This is a minor problem. You pay less taxes when you take them out on your future income when you earn less, because you are older. While “retirement” is not necessarily a passive phase in your life it usually is associated with an older age and less active income. Ergo the second R in RRSP. The assumption is you have reduced your income in retirement as you need less, less skis, your house has been paid off, less new clothing, less fancy cars perhaps.

How much can you contribute to your RSP?

For 2019, any Canadian under 71 is free to contribute as much as 18% of her prior year’s income, up to a maximum of $26,500. You can calculate your maximum contribution limits by looking at your previous Notice of Assessment, or by logging into your account on the Canada Revenue Agency website (it’s easy to get on if you have online banking set up).

1. Your most important RRSP investment: a principal residence.

One of the best tax havens for Canadians is the tax free status on the increasing value of a principal residence. What about the home that was purchased by a home owner in Toronto or Vancouver for $300,000 decades ago that is now worth $3,000,000? All that money is tax free! TB: [ Prepare yourself though that this will likely be capped at some future point from our ever growing government reach into your pockets ] - (lol Thomas you are so jaded :D)

Even with the more modest increases in value of 2-6% per year in the smaller Canadian markets, this still represents hundreds of thousands of dollars of tax free gains over a homeowners' lifetime. This is the reason in Thomas Beyer’s book "80 Lessons Learned" he recommends buying the largest home you can afford as your principal residence!

With that in mind, take a look at two scenarios, the second is very similar to how my family purchased our first home.

Scenario 1: Use Cash

The setup: You are a first time homebuyer. You’ve never contributed to your RRSP before. You earned $100,000 in 2018. You have about $40,000 cash saved up, and you’re looking forward to buying your first home in 2019, for a purchase price of $400,000.

The result: You buy the home and have a $360,000 mortgage.

Scenario 2: Use RRSPs

The setup (same as above): You are a first time homebuyer. You’ve never contributed to your RRSP before. You earned $100,000 in 2018. You have about $40,000 cash saved up, and you’re looking forward to buying your first home in 2019, for a purchase price of $400,000.

Extra move: You check your RRSP contribution limit and see you have plenty of room. You contribute your $40,000 cash into an RRSP account.

The result: You buy the home using your RRSP account as a downpayment though the Home Buyers Plan, and have a $360,000 mortgage PLUS an extra $10,000 (or more) in cash.

You also get a refund of the income taxes that you prepaid through your employer the previous year of about $14,000, presuming a 40% tax bracket!

That’s enough to buy furniture for the house, go on a nice vacation, or (if you’re feeling super responsible after buying your first home) make a meaningfully larger downpayment. A larger downpayment saves many tens of thousands of dollars in interest over the life of the mortgage.

This move does add some complexity* to your finances, for instance you need to repay the Home Buyer Plan over 15 years, in this case $223/mo. If you don’t, you’ll need to report as income of the amount you didn’t repay in that tax year. To me, this isn’t a big deal because you could choose to pay the tax over 15 years, or you can make the contributions and remove the money from the registered account later when you're in a lower income year. You can also use the RRSPs in other ways as detailed below.

*Complexity is usually worth the effort, and it’s though many little moves like this that you get the cumulative effect of becoming financially free!

2. Using your RRSP like a bank.

Most people don’t know they can lend their registered funds on any Canadian property (and earn between 6-8% interest or more). Remember, it’s your responsibility to ensure the investment is prudent (you are your own underwriter). This means you want to ensure the property is worth a lot more than the total debt (your lending value plus any that of any other lenders). This way if the borrower defaults on payments, you have the right to foreclose and sell the property to get all your money back, plus any interest owed and other costs associated to the foreclosure (legal fees, etc..). Your interest is registered on title by a lawyer at the time you advance the money, so no one will purchase the property without making sure your money is paid back first. Different trust companies administer these "RRSP mortgages" and each have their own rules about what position they will allow your mortgage to be in, and how much loan-to-value they will allow you lend on. The trust companies I know of are Western Pacific Trust, B2B Bank, Computershare, Questrade (doesn't seem to offer self directed mortgages), and my favorite, Olympia Trust. Trust companies that no longer provide this services are Canadian Western Trust (sold to Computershare) and TD Waterhouse. This is a constantly evolving landscape, so do your research to find the service provider that meets your needs.

TB: You are now the lender. Besides being the sole lender on a property there are two other options:

a) you co-own a mortgage with others, also called a syndicated mortgage, or

b) you co-own a pool of several mortgages via a mortgage investment corporation

More on Mortgage Investment Corporations here:

Quest for Yield – Canadian Mortgage Investment Corporation Universe

Quest for Yield – How to evaluate a Mortgage Investment Corporation

3. Buy shares of certain Real Estate companies (securities).

You can use your RRSPs.to buy shares of an active company, like Oliver Landing Phase 2 & 3 Development Corporation (OLP2&3). Typically these development companies will pay a preferred dividend of between 8% to 15% (1.25% per month in the case of OLP2&3), and the risk of the investment varies deal by deal. It’s very similar to doing your own underwriting as described in #2 above. You need to make sure the management has a good reputation, integrity, and a track record in the industry. You also need to ensure the deal is feasible with a good business plan, and lots of equity (the property is worth more than the amount invested). Even with a thoroughly vetted deal, there is always uncertainty with the economy and other uncontrollable factors, so a good “rule of thumb” is not to invest any more than 10% of your net worth in a company like this, unless you can tolerate the loss should things go badly.

TB: Of course you can also buy REITs or Mortgage Investment Corps (see above). Both exist as private corporations (less volatile but far less liquid) or publicly traded. More on this in Thomas’ book.

TB: Bonus #4. Get a tax credit if you invest in an "EBC": the cash-back RRSP

You can use your RRSPs to buy shares of certain companies, and get a refundable tax credit of 30% in BC and Alberta, and some Eastern provinces (you must be a resident of that province, the company must be headquartered in that province, and 75% of the workforce must be in that province). Let’s say you buy 1000,000 shares of a certain company at 10 cents a share, for $10,000, in cash. A year later this firm issues more shares at 20 cents a share and it has build some revenue and a new version. It is now less risky. You may buy more, or you may transfer these shares in kind into your RRSP. Since they are now worth $20,000 you get a $8000 tax credit assuming you are in a 40% tax bracket. You now have received a $3000 credit from the BC government and a $8000 credit from Revenue Canada, but paid only 10,000 for those 100,000 shares. The company may go bust, or it may go public at $10 and becomes the next Microsoft or Facebook. You never know. In any case you have little to lose. Consider that too for apportion of your money. For 2018 the max refundable tax credit is $60,000 with a $200,000 invested. The next year (2019) its increased to a maximum of $400,000 invested for a $120,000 tax credit. It's a true cash-back RSP.

More on this here.

SP comments: Not quite, but almost. As my astute financially literate friend pointed out to me, the cash investment gain in this example ($10,000) would be taxable. If in a 40% tax bracket, you'd have an additional $2,000 (capital gain) taxes owing. This is an example why we all need to use professionals (such as accountants, tax lawyers, and independent fee-for-service licensed financial advisors - more rare than the commission based sales people advisors most financial institutions employ).

What about my TFSA?

We recently got a question:

Hi Thomas, I was doing some research on how to invest in real estate using my TFSA and I landed on your website. I have money to invest in real estate and I know other investors as well here in Montreal. However, I need to understand first how is it possible to transfer the funds from a TFSA, LIRA, or RRSP to you.

The neat thing about TFSAs is that you can take out your profits tax free. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) can be tax-free, even when it is withdrawn!

You can actually increase your TFSA limits with smart planning! If you're expecting a quick gain on an investment, it might be better to put the money you plan to invest into your Tax Free Savings Account first. This will increase your TFSA limit, and with a large enough limit you can have substantial tax free income. The TFSA contribution limit for 2019 is $6,000, up from $5,500 in 2018. With the TFSA limit at $6,000 for next year, the total room available in 2019 for someone who has never contributed and has had eligibility for the TFSA since its introduction in 2009 is $63,500.

Example:
If you have never before used your TFSA, and want to invest in a mortgage at 10% interest (say a generic MIC), here is what would happen if you moved the cash into your TFSA first:

This is how you earn tax free income while increasing your TFSA limit. You never pay tax on that money earned in your TFSA even when you take it out! After 8 years, you would have grown your savings enough to earn $1000/mo tax free. You could then use the gains to earn income, or continue to snowball the value if you don't yet need the income. You should ensure you are using your TFSA according to the rules (same as any registered funds), which means engaging a trust company and verifying the eligibility of the investments, such at mortgages or stocks.

For exact details of how this works, read more about it on the Canada Revenue Agency website.

TB: Combining TFSA and RRSP in pre-IPO firms

You can also combine the above RRSP startup strategy with a TFSA. You buy the shares with your TFSA, not in cash outside the TFSA. After a year, say, you move these 100,000 shares worth $20,000 in kind out of your TFSA, creating $20,000 more contribution room in your TFSA. Then you transfer these shares in kind to your RRSP and get a tax rebate. Not all shares provide eligibility. Check with the pre-IPO firm and the latest rules.

Ok, so how do I invest in real estate with my RRSP / TFSA?

There are many types of government registered plans, and they have different names depending on their function (TFSAs, RIFs, LIRAs, RESPs, etc...). All registered plans are treated in the same manner as RRSPS when used to invest in real estate. First you open a self-directed account (ie with Olympia Trust), then you use the self-directed account to buy shares of active companies, or use the self-directed account to lend your registered funds out as mortgages.

The types of investment accounts within registered plans are as varied as those outside of them. You can have savings accounts, stocks, bonds, mutual funds, mortgages, and even shares of development companies within your RRSP. If you don’t want to use your registered funds for the crappy retail products most financial institutions offer (many mutual funds have low returns and high fees), you will likely open a self directed account with a trust company like Olympia Trust, and go looking for a suitable investment. Here are some documents you may be looking for if you wish to open your own self directed accout:
- application form (a simple form, the salesperson selling you securities should be able to assist you with this)
- fee schedule (best not to pay fees from registered account, rather use a credit card)
- transfer (if moving registered funds from a different financial institution to Olympia Trust)
- contact list (Olympia Trust Company Contact List)

IMPORTANT

DO NOT WITHDRAW YOUR REGISTERED FUNDS. This could have unintended tax consequences. What you should do instead is transfer your funds to a self directed account, such as the ones Olympia Trust offers. OLP2&3 shares have received an independent legal assessment for their eligibility for registered funds, and they are approved for sale with Olympia Trust.

If you want to learn more about how to use your RSPs to invest in OLP2&3 to earn a projected 15% or more per year, click here.

Learn More About OLP2&3

Until next time!

- Sam (and Thomas)