Can I use my RRSP as security for a loan?

Gena Katz, a chartered accountant and principal with Ernst and Young, has the answer.

Gena Katz 10 January, 2003 | 2:00PM

Dear Expert:

Would a financial institution that has approximately $200,000 of our RRSPs on deposit be able to use this retirement investment as the only security for a loan? Obviously under a worst-case scenario, the RRSPs would have to be cashed in (with a tax liability) to pay back the loan if it were granted in the first place.

Expert Opinion:

Although it is technically possible to use RRSP assets as security for a loan, the tax consequences are quite severe. If the RRSP in question is a trust, the fair market value of the property used as security for the loan will be included in the plan-holder's income and taxed in the year the loan is taken out.

In the year that the property ceases to be used as security, the plan-holder will be able to claim a deduction equal to the amount that was reported as income in the year the amount was first used as loan security, less any loss sustained by the trust in using these assets as security. For example, if the property used as security is used to repay the loan, a loss results.

If the RRSP is simply a deposit with a bank or other financial institution and the owner of the account is the plan-holder under the RRSP, this entire account becomes deregistered with the result that the fair market value of all the property in the RRSP at the time would be included in the plan-holder's income.

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Gena Katz

Gena Katz