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Use Your RRSPs for U.S. Real Estate Investments

A Canadian Financial Revolution.

In recent times, a growing fascination has emerged among Canadians for U.S. single-family rental properties, driven by the allure of stable rental income and the potential for property appreciation. Savvy investors north of the border have been captivated by the prospect. However, unlike in the U.S., where registered funds can be tapped for real estate investments, this remains an unattainable dream for Canadians due to real estate's ineligibility as a direct investment in a Registered Retirement Savings Plan ("RRSP") investment.

But what if we told you there is a way to use your RRSPs to invest in American real estate? In this article, we'll explore the increasing Canadian interest in U.S. single-family rental properties, the typical restrictions on RRSPs for this purpose, and the innovative techniques some bold investors are exploring.

Join us on a journey to uncover a potential financial revolution that could reshape how Canadians invest in the U.S. rental market.

A Tax-Savings Blueprint for Building U.S. Rental Assets through RRSP Drawdown

SHARE's Cross-Border Real Estate Strategy:

Canadian investors are enticed by the idea of investing in U.S. real estate, particularly in single-family rental properties. Yet, financing these investments has been a challenge for Canadians, whose largest asset accumulations often reside in RRSPs.

Some investors have explored a creative approach – a financial workaround that could revolutionize cross-border Single Family Rental (“SFR”) investments using an RRSP drawdown strategy. The concept involves leveraging a Home Equity Line of Credit (“HELOC”) secured by Canadian property to fund the purchase of a U.S. rental property, with RRSP withdrawals covering the monthly interest payments on the HELOC.

Understanding RRSPs:

The Registered Retirement Savings Plan (“RRSP”) is a retirement savings plan established by Canadians through financial institutions, registered with the Canadian government. Contributions are tax-deductible in the year made, and investment income within the RRSP is usually tax-deferred until withdrawals are made. 

The RRSP Drawdown Strategy:

This involves using deregistered funds from a registered plan to pay the interest on a non-registered investment loan, offsetting the income inclusion of the RRSP withdrawal with a deduction for interest expenses.

What is an RRSP Drawdown Strategy?

The objective is to replace registered assets with non-registered assets using an investment loan, paying the interest on the loan with deregistered assets from the RRSP. The aim is to offset the income tax liability of RRSP withdrawals with a tax deduction from the interest portion of the investment loan.

In theory, registered funds are replaced with non-registered funds tax-free.

How It Works:

Involving three steps, illustrated by a Canadian homeowner with a primary residence in Canada and significant home equity:

1. Take a $100,000 investment loan (HELCO) at a 5% interest rate, requiring a $5,000 annual payment for loan interest only. 

2. Directly invest loan proceeds into a non-registered asset, in this scenario, a rental property in the U.S.

3. Withdraw $5,000 annually from an RRSP to pay for the interest payments on HELOC. 

The primary idea is to offset the $5,000 RRSP income inclusion with a $5,000 interest-cost tax reduction.

Understanding the Tax-Deductibility of Interest Cost:

This strategy relies on the tax-deductibility of the interest cost of an investment loan, which is currently deductible if the proceeds fund an investment with a reasonable expectation of profits. The interest cost of a loan for a U.S. rental property qualifies as a tax deduction.

While often resulting in no tax on RRSP withdrawals, various factors should be considered before implementation, as outlined below. 

Principal Repayment:

With an interest-only loan, you are paying borrowing costs with registered assets, not the principal.
Solution: If borrowed funds outperform the borrowing rate, you can pay down principal or maintain cash flow for future asset purchases by intentionally avoiding  paying down the principal.

Sufficient RRSP to cover interest payments: 

Your Registered Assets may not be enough to cover the payments if the loan goes on long enough, you may exhaust your registered assets and still have an investment loan outstanding.
Solution: Ensure sufficient RRSP assets are available before implementing this strategy

Annual tax liability: 

Rental property income can create a tax liability 
Solution: Reduce the tax income and therefore the tax liability with depreciation expense
80% value of the rental property (Building Value) ÷ 21.5 years = depreciation annually for the first 21.5 years in the U.S. 
4% of Building Value in Canada based on Capital Cost Allowance (CCA) tax rules..

If your property is still cash flow positive even after management fees, insurance, property tax, and depreciation, you can always add this net income to RRSPs by February of the following year to offset any tax liability (if you still have RRSP contribution room).

Cost to Cash Out RRSP Investments for Interest Payments:

Calculate costs, considering deferred sales charges for RRSP withdrawal.
Solution: Utilize the 10% free allowance annually for mutual funds, avoiding fees.

RRSP Withholding Tax Issue:

The strategy overlooks withholding tax on RRSP withdrawals.
Solution: Partially fund the investment loan cost personally until returned by the following April. Minimize withholdings by limiting RRSP withdrawals to a maximum of $5,000 per withdrawal.

In conclusion, this strategy presents an opportunity for Canadians to draw down their RRSPs and build a portfolio of U.S. rental homes. It suits those with substantial RRSPs, a medium to high-risk tolerance, and the capacity to use a HELOC for U.S. property purchases.

Emphasizing the strategy's complexity and potential risks, individual circumstances, HELOC and RRSP terms, and applicable tax laws in both Canada and the U.S. vary. Given the intricate nature of tax laws and unique challenges in foreign property investment, careful planning is crucial. Consult with financial and tax professionals well-versed in both Canadian and U.S. tax laws for proper execution. 

Unlock the potential of your RRSPs with SHARE today - book a call to start your personalized investment journey.