Like most Canadians, you probably hold a mix of mutual funds, ETFs, stocks
and bonds in your RRSP. The Income Tax Act, however, has a much broader list of
other "qualified investments," each with its own set of rules.
Here's a quick review of some alternative RRSP investments.
GOLD AND SILVER
The 2005 federal budget opened the door to holding gold and silver bullion in
a RRSP. Coins, bars and certificates qualify, provided the minimum purity of
gold is 99.5%, and for silver 99.9%.
The gold or silver must have been produced by the Royal Canadian Mint and
purchased directly from the Mint or from a regulated financial institution such
as a bank, credit union or registered securities dealer.
To prevent you from contributing your silver dollar collection, the rules
also state that the coins must have a fair market value less than 110% of the
actual gold or silver making up the coin or bar. According to the Tax Act, the
condition is "designed to ensure that the coin is not held by the plan for its
numismatic value."
CALL AND PUT OPTIONS
A call option is an agreement under which the option writer agrees to sell a
property at an established price should the option holder choose to purchase the
property. By contrast, a put option is an agreement under which the option
writer agrees to purchase a property at an established price should the option
holder choose to sell the property.
In 2004, the tax rules were amended to permit an RRSP to invest in any option
(or warrant or right) provided that such options are listed on a prescribed
exchange.
Note that the writing of "naked call options" (i.e. selling a call option on
a property that your RRSP doesn't own) as well as short-selling is considered by
the Canada Revenue Agency as "carrying on a business" -- something an RRSP is
prohibited from doing.
MORTGAGES
While your RRSP can invest in a mortgage for either commercial or residential
Canadian real estate, there are strict rules in place if you, or someone related
to you, personally owns the property being mortgaged (i.e. your own home). Such
"nonarm's- length mortgages" must be administered by an approved lender under
the National Housing Act. The mortgage interest rate and other terms and
conditions must reflect normal commercial practices. Finally, there must be
private or CMHC mortgage insurance.
The advantages of investing in a mortgage through your RRSP should be weighed
against the costs involved. In addition to the typical one-time mortgage
expenses (set-up, appraisal and legal fees), most financial institutions charge
a mortgage administration fee each year for monitoring the account.
By far the biggest upfront cost -- and the show-stopper for many -- is the
mortgage insurance premium, which can range from 0.5% to 3.1% of the amount of
the mortgage. - Jamie Golombek, CA, CPA, CFP, CLU, TEP is vice-president,
taxation and estate planning at AIM Trimark Investments in Toronto.
jamie.golombek@aimtrimark.com