How to transfer an RRSP to a TFSA WITHOUT tax consequences

How to transfer an RRSP to a TFSA WITHOUT tax consequences

How to transfer an RRSP to a TFSA WITHOUT tax consequences

There are some things in life that we all love to hate and tax time is one of those but it is  always good practice to look at any advantageous way there are out there to reduce your taxes and make your money work for you. This is always dry stuff to look at and it’s a long read but if you want to be in the best position at retirement, you just have to research ways that will leave you in the best possible position down the road while not breaking any rules.  As tax time is just around the corner, I thought I would veer off the usual things that I like to write and talk about and show you something that I found that may work for some of you out there, and knowing that it won’t work for everyone. I thought it was rather ingenious and I could see the possibilities for my wife and I using this scenario.

It involves using your RRSP’s and your TFSA to move some of your dormant money around and if you have properties with no mortgages on them, you can use those funds to put a self directed mortgage on your investment property with you as the mortgagor and the mortgagee.

There are several steps and requirements that you must adhere to, so you stay legal while protecting your savings from the brunt of the tax burden later and leaving yourself or your estate with less severe tax consequences.

Personally, I glaze over whenever I have to look at these things which is why I defer to the professionals I use whenever I see something like this so I can get an opinion of a professional that actually knows what he is doing. Real Estate is my thing but outside that I defer to the professionals on anything else.

When you make a withdrawal from a registered account, the entire amount is taxable that year. And when you reach age 71, you are required to begin making withdrawals whether you need the cash or not. This can lead to some nasty tax bills. Seniors, in particular, can find themselves facing significant pension and benefit claw backs. Not ideal. And, most people have no idea the size of the tax bill their estate will face if they continue to hold all their assets in registered accounts.

Therefore, taking steps to ensure your retirement income is as tax efficient as possible can significantly increase both your annual income and the ultimate value of your estate when you pass away.  With this in mind,  it is wise to create a method  to convert your fully taxable registered assets to more tax-friendly alternatives, reducing your tax liability and increasing your overall net worth.

In very basic terms, you borrow against the equity you have in assets outside your TFSA to create loans that allow you to eventually transfer these assets into your TFSA. These assets can be regular investments or even property, such as a home or cottage. Not only does this conversion mean you will pay far less tax in retirement and in your estate, but you will also continue to benefit from the immediate tax deductions on contributions to your pension or RRSP.

Now, as you might expect, finding a way around all these long-established CRA tax pitfalls can be a bit complicated.

In basic terms, this is how the process works:

  1. Liquidate the investments held within both your RRSP and TFSA to cash. This takes place entirely within the accounts and does not involve any withdrawals, taxable or otherwise.
  2. Your advisor will set up a Mortgage Investment Corporation (MIC). Your RRSP and TFSA are each named as shareholders, holding different classes of shares which pay different distribution amounts.
  3. All the cash from step one is now lent out to you to be invested personally in non-registered investments. This can then be re-invested in exactly the same holdings as before or put into something entirely different.
  4. Your advisor will calculate the interest payments required by the MIC based on the established distribution rates. Then they will make RRIF withdrawals in the exact amount needed to cover these “mortgage” payments – typically 3% back to the RRIF and 15% to the TFSA.

Why does this work? Because these payments are classified as interest payments on the outstanding loan, they qualify as income earned within the RRIF and TFSA. This means they are tax-sheltered just like any normal investment income earned within these accounts.

Your registered investments ultimately end up moving into your TFSA – providing tax-free withdrawals – because of the large difference in distribution rates. This is clearly justified and completely legal based on the TFSA shares being classified as “second position” holdings. Which means that, in the case of a loan default, the RRSP would receive its outstanding assets first, and the TFSA would only receive the leftovers. Of course, you are obviously not about to default on a loan to yourself, so that scenario is merely hypothetical. Nonetheless, legally it justifies the difference in interest rates.

And, for those concerned about how CRA will view this strategy, well, every Mortgage Investment Corporation created within an RRSP, RRIF or pension account must be registered with them, guaranteeing their approval before implementation. So, no worries on that front. The main restriction is that this approach is only available to “accredited investors,” those with $1 million of investable assets, or $200,000 earned personal income, or $300,000 earned family income.

Below is a You tube video that goes over all this


Hope you all have an awesome weekend and if you know someone looking to sell or buy, I always appreciate your referrals and will look after them with the utmost care and attension.

Brian McCullough, RE/MAX of Nanaimo

#1-5140 Metral Drive

Nanaimo, BC V9T 2K8

Office: (250) -751 – 1223


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