RRSP qualified investments are a great way to put your retirement funds to work in the Canadian real estate market. But it is important to know what constitutes a qualified investment before you act on your decision.
RRSP qualified investments include both residential and commercial real estate. Mortgages on Canadian real estate qualify as RRSP investments if certain conditions are met.
Rrsp qualified mortgages are investments that can be held within a Registered Retirement Savings Plan (RRSP). They’re a great way to diversify your portfolio and build up your equity in the process.
These types of loans are based on the fair market value (FMV) of a property, which is set by the CRA. This can make them a little riskier than other types of real estate investments, but they’re also tax-effective.
It’s important to note that mortgages are subject to CRA audits and may be challenged if the value is higher than what the CRA determines. Therefore, it’s important to know what your risk appetite is and be very careful with your lending decisions.
In addition to mortgages, there are a number of other investment products that qualify as Rrsp qualified investments in real estate. These include Real Estate Investment Trusts, or REITs, which trade on designated stock exchanges.
REITs are a popular way to invest in Canadian real estate. They pay income to their shareholders, which is then taxed at a lower rate than conventional interest-bearing investments.
There are many REITs listed on the Toronto Stock Exchange and other stock exchanges worldwide. REITs are structured so that the investors’ capital is protected in case of a failure.
However, there are some pitfalls to buying REITs using your RRSP funds. Some REITs have high dividend payout ratios and a low return on investment (ROI).
These factors can result in an inefficient return, which isn’t a good thing for an RRSP.
As well, REITs can be complex to understand and a lot of research is necessary before deciding to invest in them. Moreover, they aren’t available in all provinces.
Another type of RRSP investment that’s considered Rrsp qualified is mortgage insurance. This is a policy that’s issued by an approved insurer and protects the investor from losses on certain debt obligations, including real estate.
This is a very valuable service and one that most consumers don’t have access to. It’s also a fantastic way to build up your equity in the real estate market without having to worry about paying taxes on it.
Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are tax-advantaged investments that pool capital to invest in different kinds of real estate. They can be either equity REITs or mortgage REITs, depending on how they invest their assets.
REITs can be a great way to diversify your portfolio by adding real estate exposure without the volatility and risk of owning property directly. And with a little investment, you can build your own portfolio of REITs that can include a wide variety of properties across many different sectors.
When investing in REITs, it is important to carefully consider your goals and objectives, as well as your risk tolerance. You will also need to consult with your financial advisor to determine whether REITs make sense in your portfolio and how much you should invest in them.
Generally speaking, REITs are a good option for investors looking for high dividend yields. But keep in mind that they can be volatile and prone to losses during downturns.
You should conduct thorough due diligence on any REIT you are considering investing in, including its property values, debt, geography, and changing tax laws. You should also look at management teams, their track record and guidance.
As a general rule, a REIT with lower debt-to-equity ratios and higher price to adjusted funds from operations (AFFO) will be a better value. It is also a good idea to check on how long the REIT has been around and how often it buys properties, as those two factors can significantly impact its return.
Some REITs also charge a lot of fees, so it is wise to read through the fine print on each investment offering to find out exactly what they are paying for their property management and acquisition costs.
Finally, public REITs have a 90 percent dividend requirement, meaning they must funnel all of their profits immediately back to shareholders. This can limit the growth of their funds, leaving them with little money to invest in new properties.
Alternatively, you can invest in private REITs, which don’t have the same regulatory requirements. These funds usually pay higher dividends than publicly traded REITs, and are more flexible in reinvesting their money. However, they do have a lower profit margin than public REITs, which can lead to lower share prices.
Mortgage Investment Corporations (MICs)
Mortgage Investment Corporations (MIC) offer investors the opportunity to invest in a pool of mortgages secured against real estate. These mortgages are loaned to borrowers who may not be eligible for financing from conventional banks. This type of real estate financing allows borrowers to make monthly payments at a lower interest rate than they would with a bank.
MICs are special companies created under Section 130.1 of the Income Tax Act to allow investors to invest in a mortgage portfolio. They borrow money from a bank or other lender and use both the shareholders’ capital and the proceeds from repaid, discharged and new mortgages to fund their mortgage portfolio.
The MIC pools shareholder capital and lends out the money as mortgages on residential and commercial property, with the MIC able to earn income from these investments in the form of interest charges and general fees. This type of real estate investing can provide excellent returns, which are typically higher than those from government bonds and GICs, but with less volatility.
A Mortgage Investment Corporation is a flow-through investment vehicle and must distribute 100% of its net income to its shareholders. MICs must have at least 20 shareholders and no shareholder can own more than 25% of the outstanding shares in the MIC.
MIC shares are a qualified investment for registered plans including RRSPs, RRIFs, LIRAs, TFSAs and RESPs. They are also a qualified investment in Deferred Plan accounts, which are used by some investors to save for retirement.
However, there are some downsides to MIC investments. First, the quality of credit that a MIC can provide to a borrower is often questionable. This can lead to a high risk of mortgage default and a decline in the market value of the property. Secondly, there is a lack of liquidity in the fund and it can be gated when investor sentiment changes.
This can cause redemption requests and lock ups in the fund. This is a common problem in private MICs which can impact the entire sector of this asset class.
Fortunately, there are some MICs that have been able to find ways to manage this liquidity problem. These funds have diversified their mortgage portfolios to include smaller second mortgages on residential properties and commercial and development mortgages on new projects. They also have access to a network of experts in this area and are able to manage the risk associated with this type of real estate lending.
Commercial Real Estate
RRSP qualified investments in real estate can be a very useful tool to help you maximize your retirement wealth. But, you have to be very careful about what you invest in, and make sure it is eligible under the CRA’s rules.
A reputable investment advisor should be able to tell you whether an investment is a qualified investment or not. You can also check with a tax accountant who has experience in the area.
When it comes to investing in commercial real estate, you have a few options. You can buy shares in a real estate investment trust (REIT) or income trust, or you can invest in mortgages. You can even buy shares in a mortgage investment corporation (MIC).
REITs are Canadian corporations that have ownership interests in property or assets. They pay tax on their profits and then distribute them to shareholders. They are usually taxed at a lower rate than conventional corporation dividends. They also have the ability to deduct interest expenses from their taxable income, which reduces their taxable income.
They are generally very popular with investors. They have the added benefit of allowing you to diversify your investments, and they can offer higher apparent yields than traditional interest-bearing investments such as stocks or bonds.
You can also invest in real estate through a limited partnership or a small business investment trust (SSBC). These types of corporations are controlled by one or more Canadian residents, and their assets are used to carry on business actively in Canada.
As a result, SSBCs are considered Rrsp qualified investments in commercial real estate, and the income they generate can be taxed at a lower rate than that of other corporations. Similarly, an SSBC’s assets can be depreciated and taxed at a lower rate than those of other corporations that sell their properties.
If you are considering investing in a SSBC, you should seek advice from a tax attorney who has extensive experience in the subject matter. You should also consult with an experienced real estate professional to make sure that your SSBC will be eligible for RRSP qualification and taxation benefits.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.