The tax benefits of RRSP loans
March 31, 2011 10:43 AM Subscribe
Canada Tax Filter: Since interest on investment loans is tax deductible, does that mean you could deduct the interest on an RRSP loan as well?
Example: (Assume a marginal rate of 40%, plus several years of accumulated RRSP contribution room)
1. Borrow $50,000 @ 5% for 10 years, deposit into RRSP
2. Receive $20,000 tax deduction (40% of $50k)
3. Over the next ten years receive approx $5455 in tax deductions (based on $13639.31 interest paid over the life of the loan)
Meaning that you would receive approximately 50% of the loan principle from tax deductions, plus whatever interest you earned in your RRSP?
Example: (Assume a marginal rate of 40%, plus several years of accumulated RRSP contribution room)
1. Borrow $50,000 @ 5% for 10 years, deposit into RRSP
2. Receive $20,000 tax deduction (40% of $50k)
3. Over the next ten years receive approx $5455 in tax deductions (based on $13639.31 interest paid over the life of the loan)
Meaning that you would receive approximately 50% of the loan principle from tax deductions, plus whatever interest you earned in your RRSP?
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The general principle (and IANAtaxaccountant) is that you deduct expenses required for income. So if you had a business, say, that required leasing an office, that expense is deducted from the business' income for tax purposes. Similarly for interest on an investment loan. You can deduct loan interest if you use it to buy stock or financial instruments that aren't registered. Since the RRSP is tax sheltered, gains realized within it are not income and therefore there is nothing for the tax deduction to offset.
That said, it might be a good idea to borrow to contribute to an RRSP, but the calculation is a lot less straightforward than it seems. A good calculator for this is found here.
posted by bumpkin at 12:01 PM on March 31, 2011 [1 favorite]