Get interest free loans from RRSPs

Need money? Don’t want to take out a bank loan? You can use your RRSP as your banker. All you need is a self-directed plan and some non-registered assets, like a GIC.

The process is called substitution and it is exactly what it sounds like — you simply exchange one asset for another.

For example:
Suppose, for example, you were in need of cash. Your RRSP has some, but if you withdraw the money, you’ll have to pay tax on it. If you have qualified securities available, you can simply put them into your retirement plan at fair market value and withdraw the equivalent amount of cash. This allows you to have your cake and eat it too — you don’t have to sell any of your securities and you have the cash you require.

Tax rules
For tax purposes, substitutions are treated the same way as a contribution in kind. That means the security is deemed to have been sold when it went into the plan, triggering any capital gains that may apply.

Under law, you can’t make direct use of the securities in your RRSP as collateral for a loan. But, through substitution, you can go one better.

Suppose you have securities outside e RRSP and you need money. Instead of putting up those securities as collateral for a loan, make your RRSP your banker. By substituting the securities for cash in your RRSP, you are, in effect, providing yourself with an interest-free loan.

Investment switch
Another substitution strategy that can be useful is to switch interest-bearing investments for stocks or equity funds. Stocks held in an RRSP can’t benefit from the dividend tax credit or the lower capital gains tax rate. If you are holding securities that pay interest outside your RRSP, you’d be better off from a tax point of view swapping them for any equities inside the plan.

Substitutions don’t affect your normal contribution limit in any way, nor do they produce a tax-deductible contribution. So there are no restrictions on the value of these exchanges or how frequently you can do them, other than those that may be imposed by the trustee of your plan. Just remember to stay within the rules.