Repaying an RRSP mortgage
Question: -Last month, my company ran out of work and I was terminated and given an 8-month severance package. I was allowed to defer the payment of the severance to next year and maximize my RRSP contribution for the 2001 tax year.
I also have a self-directed RRSP in which I have a mortgage on our home with $85,000 still owing to myself (i.e., via the self-directed RRSP). The mortgage has a five-year fixed term at 6.3% amortized over 230 months, with the option of paying down 20% per year. The house is held in joint tenancy.
Since I’m currently not working and will be receiving CPP plus a small pension, I would like to know how to utilize the cash in the RRSP which has accumulated from the interest in payments made against the mortgage to pay down the loan at a faster rate. If I withdraw the cash from the RRSP, it will be deregistered and treated as taxable income. Is there any way in which this mortgage can be closed out within 5 years and avoid making withdrawals from the RRSP which would be taxed as income?
I also have a spousal RRSP. Since my wife has not been working and she becomes eligible to receive CPP in January 2002, is it possib to withdraw funds from her RRSP to pay down the mortgage? Since my pension will be larger and I have an 8-month severance package in 2002, how much of my income can I split with her to minimize our combined tax load?
Also should I change the terms of my mortgage and pay a penalty (to my RRSP)? – J.R.
Gordon Pape’s answer: This is one of the problems with RRSP mortgages – they can be very complex, especially in situations like this.
Try to think of it this way. Your RRSP is essentially your bank in this situation. Anything you can do with a bank mortgage, you should be able to do with an RRSP mortgage. There should be some type of written document that details the terms of your RRSP mortgage so refer to that.
If this were a bank mortgage, you could not use other money that belonged to the bank to pay it off. Similarly, you can’t use other money within your RRSP to pay it off. The mortgage is an asset to the RRSP. The RRSP can’t use other assets to liquidate its own asset.
You can, however, reduce the mortgage principal by repaying it to the RRSP, under whatever terms the agreement allows (in this case 20% annually). Of course there is no tax deduction for such repayment.
Therefore, your wife could withdraw money from her plan and the proceeds could be used to pay down the principal within your RRSP.
I presume your income-splitting question refers to CPP. This is a complex calculation and I suggest you visit the CCRA Web site for information.
Regarding changing the terms of your mortgage and paying a penalty, that is also a complex calculation and I cannot answer the question. However, you might be better off directing any penalty that you might incur towards repaying principal instead.
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