Truth or urban legend?

Question: I have heard (whether urban folklore or not?) that you can take your RRSP and give it to a discount broker who will set it up as a sort of “fund”. Then you would borrow that money from the fund and repay it with a market rate interest for a mortgage. Is this true? Are parts of this true? Is it totally false? – P.S., Toronto


I have never heard of this, and it seems to me the concept would be Illegal for a couple of reasons.

First, you cannot borrow money from an RRSP except under two special programs: The Lifelong Learning Plan and the Home Buyers’ Plan. Any other withdrawal would be considered income in your hands and therefore taxable.

Second, an RRSP cannot be used as security for a loan. If this is done, the amount pledged as collateral is supposed to be included in your taxable income for the year. You don’t have to take the money out of the plan but for tax purposes it amounts to the same thing.

Perhaps you are referring to holding a mortgage within your RRSP, which is a perfectly legal practice as long as the terms are not more favourable than a conventional mortgage would offer. You would need a self-direct plan with a financial institution that accepts such mortgages. Note that there are extra costs involved in doing this, so I recommend that any such mortgage be for a minimum of $50,000. There is a full chapter on this subject in my 2003 Buyer’s Guide to RRSPs. – G.P.