Q&A: Confused about RRSP mortgages?

Question: In all the articles I have read on the subject of holding one’s residential mortgage inside an RRSP, one point has never been clarified. Suppose my self-directed RRSP holds various investments together with my residential mortgage. Can my tax-deductible RRSP contributions pay down the mortgage component of this RRSP, or must the mortgage-component be paid off only with after-tax dollars? I have received a mixture of conflicting advice and ignorance from accountants and bankers on this subject and would appreciate your opinion. – B.P.

Gordon Pape’s answer: The mortgage is an asset of the RRSP. This asset forms part of the plan’s capital. The plan invested a large portion of its principal in this asset and it generates income (interest) within the plan. When you retire, the value represented by the mortgage will form part of the capital base of the RRIF you eventually create.

You are making payments to the RRSP mortgage from outside the plan as required by the terms of the contract. You as the borrower are the mortgagor; you are giving the lender (your RRSP) your pledge of payment and a claim against the title of your property in the evt of default. So the RRSP becomes the mortgagee. This means you can’t pay off the mortgage from inside the RRSP as this would be a case of the RRSP paying itself (the mortgagee paying the mortgagee) and there would be no viable investment arrangement. So you must pay off the mortgage from outside the plan in order for the contract to make any legal sense.