USING RRSP to make Canadian Mortgage tax deductible -

My question is: Canadian-specific
QUESTION: I recently came across an interesting tax avoidance scheme/loop
hole which merits some discussion. The idea is to cash in your RRSPs in
favor of paying off/down your mortgage. You would then get a secured line of
credit against your mortgage (home equity loan) for the purchase of income
producing investments. The benefit being that the interest on the line of
credit used to purchase the investments is now tax deductible. Effectively
giving you a tax deductible mortgage. True or not?
I suppose the downside is the tax payment required on the redemption of
RRSPs.
Thanks in advance for your advice.
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david ingram replies;
I have long being an advocate of paying down your mortgage "instead" of
buying an RRSP and in terms of guaranteed returns, think it is a far better
use of your money.  I am NOT an advocate of most people cashing an RRSP in
to pay down the mortgage although if you are disabled or retired at a lower
tax rate, it can definitely make sense but not likely all at once.
If you are looking for alternatives,
Using a Seg fund borrowing program should also return more money with more
control than a regular contribution to the same product in an RRSP.
In other words, if you decided to buy "XXX FUND" as a $5,000 a year
contribution to an RRSP, you would have done better 10 years later if you
had borrowed $100,000, bought the same fund and paid $5,000 a year of tax
deductible interest to pay the loan.
If  you also used $5,000 to $8,000 per year return from the investment to
pay down your non-deductible present mortgage and than use the new equity in
your home to borrow more money each year to buy what "would have been"
reinvested dividends.
Let me try that again.
When you buy an income Mutual Fund, it will pay you a dividend every year.
If we assumed you had a $100,000 fund, it should pay you dividends each year
and most people will check off the box that asks the fund to "reinvest" the
dividends in the same fund.
In short, if the dividend were to pay you 8% a year (for simplicity sake),
the result would look something like this.   (the formatting is not perfect
but at this time of the morning??)
$100,000 	per	year at	0.08
pay	$5000 per year return	yield	 	new
year	paid						balance
2005	5000	100000	0.08	8000		108000
2006	5000	108000	0.08	8640		116640
2007	5000	116640	0.08	9331		125971
2008	5000	125971	0.08	10078	136049
2009	5000	136049	0.08	10884	146933
2010	5000	146933	0.08	11755	158687
2011	5000	158687	0.08	12695	171382
2012	5000	171382	0.08	13711	185093
2013	5000	185093	0.08	14807	199900
2014	5000	199900	0.08	15992	215892
				Pay 	Back		100000
				Left	Over		115892
Taxable	if	capital	gains		 57946
	Tax	at	0.4				 23178
Yield	ten	years	after	tax			 92714
Money into Same product as an RRSP at same yield
pay	$5000	per 	year
year
2005	5000	5000		0.08	400	5400
2006	5000	10400	0.08	832	11232
2007	5000	16232	0.08	1299	17531
2008	5000	22531	0.08	1802	24333
2009	5000	29333	0.08	2347	31680
2010	5000	36680	0.08	2934	39614
2011	5000	44614	0.08	3569	48183
2012	5000	53183	0.08	4255	57438
2013	5000	62438	0.08	4995	67433
2014	5000	72433	0.08	5795	78227
Less	tax at	0.4				31291
Yield	ten	years	after	tax		46936
"In this example, the leveraged investment returned almost"
exactly Two times the yield.
"The following shows a ""break even"" at 4%"
			0.04
pay	$5000				new
year			percent	yield	balance
2005	5000	100000	0.04	4000	104000
2006	5000	104000	0.04	4160	108160
2007	5000	108160	0.04	4326	112486
2008	5000	112486	0.04	4499	116986
2009	5000	116986	0.04	4679	121665
2010	5000	121665	0.04	4867	126532
2011	5000	126532	0.04	5061	131593
2012	5000	131593	0.04	5264	136857
2013	5000	136857	0.04	5474	142331
2014	5000	142331	0.04	5693	148024
				pay	back	100000
				Left	over	48024
Taxable if	capital gains		24012
	Tax	at	0.4			9605
Yield	ten	years	after	tax		38420
Money into Same product as an RRSP at same
pay	$5000	per	year
2005	5000	5000		0.04	200	5200
2006	5000	10200	0.04	408	10608
2007	5000	15608	0.04	624	16232
2008	5000	21232	0.04	849	22082
2009	5000	27082	0.04	1083	28165
2010	5000	33165	0.04	1327	34491
2011	5000	39491	0.04	1580	41071
2012	5000	46071	0.04	1843	47914
2013	5000	52914	0.04	2117	55031
2014	5000	60031	0.04	2401	62432
			Less	tax at	0.4	24973
Yield	ten	years	after	tax		37459
Just a little ahead of break even
If you then use the annual returns to pay down the non-deductible part of
your mortgage and borrow the money to buy what would be the reinvested
dividends, you can make your mortgage deductible over time.
goto www.centa.com and read the November 2001 newsletter for some more
ideas.
If you are coming to Vancouver in the near future, you can attend a free
seminar on the subject.
Every Thursday evening Fred Snyder and I hold a free seminar at Fred's
office at 1764 West 7th (corner of Burrard in the Spence Diamond building)
in Vancouver.
The topics are:
  Seg funds and an alternative to the traditional RRSP.
   Making your mortgage income tax deductible
  Critical Care insurance for disasters.
coffee and cookies of course.
Phone 604-731-8900 to reserve your seat -and, you are welcome to bring your
brother, your sister, your mother or father, your children, your best
friend, your worst enemy or your own financial advisor who hasn't explained
how to make your mortgage deductible.
Another Seminar is now starting in Vancouver at 2 PM on Saturdays and yet
another in Victoria at 7 PM on Tuesday Nights.
Answers to this and other similar  questions can be obtained free on Air
every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Dundee Wealth
Management and I, David Ingram  will be hosting an INFOMERCIAL but LIVE talk
show called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the internet
at
www.600AM.com <http://www.600am.com/>
Local calls are taken at (604) 280-0600 and Long Distance calls are taken at
1( 866) 778-0600
I do not know how far the LD line reaches.
=========================================
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321 Fax (604) 980-0325
Email to taxman at centa.com <mailto:taxman at centa.com>
www.centa.com <http://www.centa.com>  www.david-ingram.com
<http://www.david-ingram.com/>
Disclaimer:  This question has been answered without detailed information or
consultation and is to be regarded only as general comment.   Nothing in
this message is or should be construed as advice in any particular
circumstances. No contract exists between the reader and the author and any
and all non-contractual duties are expressly denied. All readers should
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Be ALERT,  the world needs more "lerts"
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