How to Transfer an RRSP to a TFSA without Tax Consequences | RRSPs and RRIFs | Discussion forum

Their annual management fees are 1% to 2% of account size.

If one had a $500,000 RRSP, lent it out to oneself as mortgages, and invested the $500,000 proceeds, won't one have total account size of $1 million?

• $500,000 of mortgages between the RRSP and TFSA accounts
• $500,000 of investments in a taxable account

Consequently, fees would be 1% to 2% of $1 million! That would be 2% to 4% each year of the $500,000!

Maybe one partner gets the first mortgage and the other one gets the second?
I thought the idea of a 15% second mortgage was out of line, but I've never dealt with one. I just can't imagine such a large spread between the two on the same house when the lender's credit is good.

I decided not to post anything until someone else who is better with these complicated things than I am had ventured an opinion, but it seemed to me that there was a problem in the fact that there was no real accounting provided in this example, which was mostly about selling a concept.

I would have found it a lot more credible if a complete breakdown of costs and fees and timelines were provided. (He suggests the person is 56 and will live to 90 in order to complete the strategy.)
Among other things, it sounds like there would be four mortgages to set up and later to discharge, each of which involves lawyer's fees. (Two for each partner in a couple).

My conclusion was that, if it works at all (which I can't say for sure), it would likely only work for someone with large RSPs, maximum TFSAs, fully paid off house of high value (compared to average house price across the country), in good health and probably no older than 50 (preferably younger) in order to have enough years left (34 appear to be required) to bring this strategy to fruition, considering that average life expectancy is now in the mid-80s as I understand it.. I am reminded that the vast majority of people choose to take their OAS and CPP at 65 or younger because they report that they're not sure they'll have average life expectancy. So, suddenly they are going to live a lot longer?

I also noted that he admitted that CRA would be watching you carefully. Who wants that?

It's worth bearing in mind that RSPs were intended to provide tax-deferral, not tax avoidance. While this manoeuvre may be legal according to the letter of the law (I can't say), it is not in the spirit of the law, so one can expect that in due course it will be blocked. And when that happens, they won't care that you are only part-way through your plan. You could be stuck with trying to discharge the four mortgages quite early, and total fees etc would outweigh usefulness.

There is no good reason why such a person should get their RSP proceeds without being subject to income tax when everyone else is paying.

He has another video explaining it which has a bit more detail in some areas. He seems to be looking at people who have RSPs that are worth several million dollars.
https://www.youtube.com/channel/UCIstqTVJYHwiolPcyrJckQg

Married couple, 56 years old, with cash assets of $600,000 (RRSP+TFSA), own fully paid house, employed, and no other debt to worry about.

Canadian dream came true.

Find these people and tell them not to be greedy.

This strategy can work if you buy a property in Vancouver or Toronto very early on and have huge equity on it as a result. You will also need to be a avid saver and have massive RRSP (as other members have mention), especially if you are someone that have contribute too much into RRSP (Marginal tax rate at withdrawal >>>> Average marginal tax rate at contributions).

But regulatory risk is the problem here. What if the government cancel or significantly reduce or eliminate the tax credit on interest pay for investment? With if the government disallow non - arms-length mortgages in register account? Can this scheme be take apart quickly? Most importantly, what if your investment is underwater (the mortgage in you RRSP and TFSA is higher that the total balance of your investment) when you need to ger rid of this scheme?

martik777 said

What I think is very unfair is the 50% they will be taking from my estate  

I agree. But there are ways to reduce this if you plan ahead so that you don't have a whopping amount left when last spouse dies. McLay makes it sound like it's inevitable and that what he is proposing is the only alternative. There is a middle ground where the government still gets a reasonable share. Even that can be messed up by early deaths, but so can McLay's plan.

RSPs have risks, and one of them is that your estate might get stuck with a huge bill which your heirs did not anticipate. Nobody ever tells you that when you buy into them though. I have complained elsewhere on this forum that the promotional material on RSPs is not comprehensive enough. Some people would be better off without them - me included!

Further,
if, as I suspect and Norman1 seems to agree, the second mortgage rate will be less than 15% (I'm guessing significantly less), then the strategy will take even longer to complete. McLay said (90-56) = 34 years, but the speed of asset transfer is related to the interest rate.
So perhaps you should start at 30-35 with your fully paid off house, topped-up TFSA and multi-million-dollar RSP.

And it might be rather difficult to transfer this complicated scenario to another "advisor", particularly if you chose one with a higher ethical bar who didn't want to be involved in these shenanigans, so you'd be stuck paying this fee for a long time.

If he gets enough of these deals lined up, he doesn't have to do any more work, just collect the annual fees!

So, taking this a step further, if the client has to pay 2% on the relatively modest situation just described, with 600K registered, working out to 1.2m., that's 24K/yr for the advisor.
But, from what the video said, it's going to take 34 years (even at 15% on 2nd mortgage) to complete the transfer.
So, is that 24K x 34? (and, if RSP is larger and/or 2nd mtg rate lower, it will take even longer, I presume). That would come out to $816,000. There must be something wrong with my math.
In any event, the cost needs to be compared to taxation cost. Maybe you're just transferring your money from CRA, to which it is normally owed, to Mr McLay?

Loonie said
And it might be rather difficult to transfer this complicated scenario to another "advisor", particularly if you chose one with a higher ethical bar who didn't want to be involved in these shenanigans, so you'd be stuck paying this fee for a long time.

If he gets enough of these deals lined up, he doesn't have to do any more work, just collect the annual fees!

So, taking this a step further, if the client has to pay 2% on the relatively modest situation just described, with 600K registered, working out to 1.2m., that's 24K/yr for the advisor.
But, from what the video said, it's going to take 34 years (even at 15% on 2nd mortgage) to complete the transfer.
So, is that 24K x 34? (and, if RSP is larger and/or 2nd mtg rate lower, it will take even longer, I presume). That would come out to $816,000. There must be something wrong with my math.

It's 1% of the amplified $1.2 million or 2% of the original $600,000. That works out be $12,000 per year.

In any event, the cost needs to be compared to taxation cost. Maybe you're just transferring your money from CRA, to which it is normally owed, to Mr McLay?

That's the challenge with some of these schemes. They can end up costing more in fees than the taxes saved. I guess there are people out there who don't mind paying more if the charge is labelled "admin fee" instead of "tax".

I remember reading years ago that resource exploration flow-through shares were quite popular with the medical doctors crowd. 100% of purchase price worth of deductions after purchase!

Problem was that the purchasers didn't get much of their original investment back later. So, one ends up losing close to $1 for each 50¢ of income taxes saved.

Loonie said
OK, so 12K x 34 years = only $408,000!
That would make a 50% tax rate look pretty good.

One can also look at it on an annual basis.

Suppose one invests the unregistered $600,000 in GIC's. Best five-year GIC rate is now around 3.5%. 2% management fee means one will be handing over 2%/3.5% = 57.1% of the interest!

Suppose one invests the unregistered $600,000 in stocks. Expected long-term return is around 7%. 2% management fee means one will be handing over 2%/7% =28.6% of the expected gains. That's quite hefty if most of the gains are capital gains. One won't need to pay 28.6% on capital gains unless one is in a 2 x 28.6% = 57.2% tax bracket.

Loonie said
All in all, it sounds like another one of those schemes where the main benefit is to the "advisor", who does not have fiduciary responsibility to the client - at least as far as I can tell.

That's what it looks like to me as well. Lots of associated people would be "dining well" off of that:

• Lawyer to register four mortgages.
• Mortgage insurer to insure those four mortgages.
• Mortgage administrator to administer non-arms length mortgages.
• Trustee for the special TFSA and RRSP accounts that can hold non-arms length mortgages.
• Tax lawyer to defend when CRA assesses a 100% advantage tax on the interest difference for all those years because CRA doesn't feel 15% per year was the going rate for an insured mortgage.

Reminds me of the subtitle to John Reynolds' book The Naked Investor: Why Almost Everybody but You Gets Rich on Your RRSP.