With joint ventures on the rise, “RRSP swaps” – little-known JV structures – are technically an option for many investors looking to withdraw funds, without penalty, from those tax-exempt accounts.
As explained by B.C.-based financial expert Tom Napiontek, an RRSP sway is where two parties trade second mortgages using their respective RRSP savings in order to gain access to cash.
“One party places a second mortgage on the property of the other party, while the other party, in turn, places the mortgage back on the first party’s property,” writes Napiontek, a real estate investor. “The funds that are then available can be used for almost anything, including real estate or investments.”
Potentially, it’s a way of complying with laws on real-estate eligible RRSP investments. Still, there are limitations and, indeed, real concerns about the strategy.
Finding a partner for this kind of transaction can be difficult, caution industry veterans, pointing to the need to team up with somebody who has both a successful portfolio and a proven track record.
Also important to note is that borrowing from a source other than an accredited financial institution could put the investor at higher risk of foreclosure. That’s because the partner technically has a mortgage against your property and can seize or sell it in cases of default.
Real estate financing expert Marcel Greaux believes RRSP swaps offer investors zero net gain.
“The risks involved with this strategy are directly related to Revenue Canada’s interpretation of the action,” he says. “It’s like you borrowing your own money and hence considered an improper arm’s length transaction. If (Revenue Canada) declares the transaction illegal you will be charged interest and penalties and you will have to pay the tax in the year you took it out.”