Dear Expert:
We have been thinking about purchasing some vacation property and splitting the investment costs with another couple. We have about $74,000 in RRSPs and the vacation property will cost about $225,000. I also have a company pension plan and some other RRSPs ($50,000) which are not in mutual funds. How much of the $74,000 will we lose to the tax man, and does this seem like the best way to go about achieving our goal? Expert Answer:
Withdrawing a lump sum from an RRSP for the purchase of a property such as this is probably one of the worst ways of financing the property. You have a full tax hit on the $74,000 for the year of the withdrawal; this could chop as much as 46% from the funds, depending on the other income you have for the year.
A better way to arrange the purchase would be to use a line of credit secured by your city property (you would find this financing method more obtainable) and plan your budget to permit you to pay this down in an appropriate period of time. You could accomplish the same end by arranging with your partners on the cottage deal to take out a mortgage to purchase the cottage property and again make an effort to pay your share of this debt off over a comfortable period of time.
The other side of all this is that if you cannot afford a mortgage to purchase the property, you may find that the cost of the property is really beyond your means and draining your RRSP could only result in you becoming "property rich and retirement asset poor." Finally, if you do withdraw from the RRSPs, you must be sure all potential tax is accounted for or you could find that you own the property and have a large unpaid tax bill due to Canada Customs and Revenue Agency.
No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
To find out how much an RRSP contribution may save you, try Morningstar's RRSP Calculator.
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No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
