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An RRSP, or Registered Retirement Savings Plan is a type of financial account in that holds savings and investment assets in Canada. These savings plans are registered with the Canadian federal government and are available to contribute to for retirement purposes. RRSPs are considered a tax preferred accounts, and have numerous tax advantages compared to investing outside of tax-preferred accounts:
1) RRSP’s allow you to keep more of your hard earned money in your pocket today by lowering the current income tax that you pay.
2) RRSP savings grow faster than other types of savings because you only pay tax when you take money out.
3) There are even additional supporting programs offered by the government like the Home Buyers Plan that allow for tax-free withdrawals, providing you repay the money within a certain timeframe, and that you meet certain criteria laid out within the plan details. Home Buyers Plan Withdrawals
4) Similar to the Home Buyer’s Plan, you can make an RRSP withdrawal for education purposes. You can withdrawwithdrawlup to $10,000 per year from your RRSP account to pay for full-time education or training – for you or your spouse. *** Starting the year after your first withdrawal, to escape tax penalties, you’ll have to pay these funds back in equal increments over the next 10 years. Lifelong Learning Plan Withdrawals
5) RRSP purchasing can lower the income tax you pay now, and can also contribute to potential income tax returns at the end of the year.
Technically as long as your RRSP contributions are not locked in (depending how you choose to invest within the RRSP investment vehicle), you can use the money whenever you want, for whatever you want. But remember, there’s a caveat. Under most circumstances, withdrawing before retirement means the money you take out will be subject to taxation. You can check out taxation rates HERE
Due to compound interest, the earlier you start contributing to an RRSP the better. If you invest money at age 20 versus age 30 for example, your sum has the potential to grow much larger starting younger. That being said, you are never too old to start contributing (almost). You are allowed to contribute to your RRSP up to Dec 31st of the year you turn 71 years old. It is still beneficial to start contributing even when you are 40 or 50 years old… and if you have the right strategies in place for investing (which is why you are here!), there is potential to really make a splash with your RRSPs.
Now, combining RRSP investments with TFSA investments and maxing those out can be life changing if you are investing properly. We will dive into TFSA’s in the next tab.
Contribution limits for RRSP’s can be a bit confusing, and so its best to leave it to the government professionals to go a bit deeper into that with you. For all things RRSP related you can use the following direct link to the CRA website HERE
In order to view your exact contribution and education limits, it is always best to visit your personal online CRA account. I’ve added a link to a download at the end of the tab labeled Tips For Success and it will walk you through accessing your site.
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A TFSA, or Tax-Free Savings Account is a relatively newer type of savings account available in Canada that provides tax benefits for saving without being registered. Any investment income, including capital gains or dividends that are earned within a TFSA account is not subject to tax even when withdrawn from the account.
A TFSA account can hold many different types of investments such as mutual funds, bonds, or cash savings.
As with most government programs, it does have limits when contributing, however the limits are cumulative, which means the sum is based on all of the allowable max contribution limits since you turned 18 years, dating back to 2009. As of 2023, this means that if you don’t have a TFSA account and have never contributed you could contribute up to $88,000 to catch up on your contribution limits!
TFSA’s are really a fantastic program available to Canadians. You can put a ton of money away into these accounts with a bit of planning and strategy.
The system behind the TFSA accounts lets you play catch up if you've missed past contributions. I do caution being careful here, as it can be a little bit confusing when determining how your withdrawals affect your contribution room for the next year.
When maxing out each years contribution, and then potentialling wanting to withdraw… not a problem, but be sure that you do not reinvest any of the withdrawn amounts in that same calendar year. Even if you withdrawal, the fact that you already maxed out your contribution limit for that year means you’d be subject to a penalty from CRA. You need to wait to recontribute that money in the following calendar year.
Below you will find the direct link to the CRA website for all things TFSA. I recommend setting aside some additional time to do a full and comprehensive review of the program, its rules and limitations so that you understand it inside and out before beginning to invest your TFSA funds in mortgages.
TFSA's for Individuals- Direct CRA Link
So, how do you figure out your TFSA contribution limits?
Its easy enough to figure out your contribution limits by some simple math using the following TFSA DOWNLOAD but in erring on the side of caution it is always best to check your own official CRA income tax information. You can do so by following the steps in the tips for success download at the bottom of this tab.
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Self-directed RRSP’s and TFSA’s is a type of savings plan, whose owner (you) determines the mix of assets and investments that you hold. Your funds are then held in your RRSP or TFSA vehicle in trust with a self directed company or trustee.
Most Canadians hold their RRSP or TFSA funds within traditional banks or investment companies and have investment advisors or financial planners that manage their funds. In a self directed style account, you as the owner manage your own portfolio of funds within.
This doesn’t mean that you can’t have it both ways, you are more than able to have some funds in traditional institutions with a financial planner or investment manager that runs the show based on your needs, and some funds within self directed accounts as well.
For the purposes of private mortgage lending on arm’s length mortgages your RRSP and TFSA funds must be contained within a self directed account to be utilized in this way. Self-directed RRSPs give you more investment freedom and control. . Although you may like the idea of using a self-directed RRSP, you can also have a financial advisor help you manage your self-directed RRSP or TFSA.
Typically, self directed accounts come with fees attached. You will want to ensure you understand the fees associated with opening they account, holding it on a monthly basis and making changes, adjustments or withdrawals. When beginning your journey as a private lender in arm’s length mortgages it is important to keep in mind that when you lend your money out you will be earning high interest rates, and likely charging fees to your borrowers, the fees you are charged to maintain your self directed accounts and to facilitate the process of setting up and managing the mortgage will need to be addressed in the overall cost of borrowing to ensure the deal meets your return on investment requirements.
Head to WORKBOOK ONE from your download package now.
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An Arm's Length Mortgage is an alternative investment vehicle in which you lend out your own investment funds from a registered account to a borrower in the form of a mortgage loan.
Registered accounts can be Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFS), or Tax Free Savings Accounts (TFSAs).
You as the "lender" and your client as the "borrower", must meet certain basic criteria as set out within the Canadian Income Tax Act, and providing the two parties are considered arm's length for the transaction the Canada Revenue Agency (CRA) permits you to offer an "investor" mortgage through this process.
In short, an Arm's Length Mortgage allows you to use your RRSP, RRIF and/or TFSA funds to lend to other parties as a mortgage registered against real property in Canada providing certain criteria are met and adhered to.
Within this process your funds remain within the registered account (RRSP/RRFI/TFSA), and are invested into the mortgage. Your registered funds must be moved from a traditional bank to a Self Directed investment company in order to participate in Arm's Length Mortgage lending.
Typically this investment vehicle will offer a significantly higher rate of return than a standard style bank investment, however it is important to keep in mind that as a lender/investor you choose the rate of return that you want based on the overall strength of the opportunity as presented to you- we will dive into this much more in later chapters.
CRA Definition of Arm’s Length
Arm's length – refers to a relationship or transaction between persons who act in their separate interests. An arm's length transaction is generally a transaction that reflects ordinary commercial dealings between parties acting in their separate interests
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You might be asking, "How do I know if this type of investment is right for me?"
This is a fantastic question, and one that can truly only be answered by you after learning how this type of investing works, and assessing your own level of risk versus reward.
It's definitely not for everyone, but for those that feel it is a good fit financially it is possible to earn significant rates of return on your investment funds.
What exactly is Private Lending?
Private lending on mortgages is just as it sounds. A private mortgage is a type of mortgage loan whereby funds can be sourced from another person or business rather than borrowing from a bank or other finance provider. The private lender could be family, friends or others with personal relationships to the borrower, and private lending doesn’t just happen with mortgages, however for the purposes of this program we are always referring to private mortgage lending.
Where typically Canadians look to a traditional bank, or monoline lender for financing when they purchase or refinance a property, in the realm of private lending, you as the person holding the investment within your RRSP, TFSA or elsewhere now become an option for those seeking funding on their mortgage.
For the most part, this lending is utilized for mortgages held in second position against title of a property, and sometimes for those with credit issues, or alternative sources of income that arent looked at as favourably by traditional lenders. That said, sometimes golden unicorn deals come along and allow an opportunity to lend your funds in first position which is significantly less riskier to lend on.
Don’t let my mention of “risk” scare you off just yet… all investing has risk involved. Hell, daily life has a certain level of risk involved… its all about mitigating the risk and deciding if its a smart investment for you based on the information presented to you, and verified.. which is exactly why you are here!
Head to WORKBOOK TWO from your download package now.