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Seeking potential investors? You may find an opportunity in Retirement Saving Plans (“RSP”). Currently, real estate backed investments are a sought-after commodity, but many investors are unable to directly invest. It may not be possible for an investor with low liquid cash to, say, use funds from their RSP to directly purchase a rental property. This is because RSPs such as RRSPs, RESPs, RRIFs, RDSPs, and TFSAs are limited to “qualified investments”.
RSPs are allowed to invest in shares of corporations, warrants and options, units of exchange-traded funds, and real estate investment trusts. This list extends to several real estate related structures that are considered “qualified investments” for RSPs. Let’s take a closer look at some of these additional options.
Mortgage Investment Corporations (MICs)
An MIC is a lending and investment company that is designed for primarily residential mortgage lending in Canada. When an investor owns shares in the MIC, they are invested in a company that manages a secure and diversified group of mortgages. MICs can issue preferred and common shares. These shares would be considered “qualified investments” for many Retirement Saving Plans.
An MIC gathers capital from shareholders and lends it out as mortgages- generally residential but sometimes commercial as well. Interest charges and general fees are what will provide the income on investment. By investing in an MIC, individual investors can directly invest in the Canadian mortgage market.
MICs do not pay income tax due to their corporate structure. The Canadian Income Tax Act (ITA) mandates that MICs cannot retain any earnings and must instead distribute all their earnings to investors. If MIC investment is held through RSPs, then are no immediate taxes to be paid on these distributions.
Specified Small Business Corporation (SSBC)
SSBCs are Canadian corporations controlled by one or more Canadian residents, with at least 90% of fair market value of their assets are used to carry out business actively in Canada.
Qualifying active business includes any business in Canada except that which earns income from property in the form of interest, rent, dividends, royalties or gains from property dispositions. Qualifying businesses can include leasing property (other than real property), or wholesale/retail business.
The corporation must be a “Small Business Corporation” when the RSP acquires the share, or at the end of the tax year of the corporation ending prior to the time of share acquisition.
Furthermore, Investors cannot invest in an SSBC through their RRSP if they own 10% or more of any class of issued shares of that SSBC, or if they do not deal at arm’s length with that company.
SSBC are subject to taxes and can only distribute post tax profit to their shareholders.
Mutual Fund Trust (MFT)
MFTs are a conventional, inter vivo trust that meets certain conditions laid out in the ITA. The trust must be a unit trust resident in Canada, must meet the requirements for public distribution, and must comply with restrictions on investment. MFTs cannot issue 50% or more of the units to non-residents, and must limit activities to investment in property, whether acquiring, holding, managing, or maintaining real capital property of the trust. Trust units must be redeemable upon demand by the holder.
A MFT also needs to comply with minimum distribution requirements and must have at least 150-unit holders, each holding units of $500 or more. No more than 10% of the trust funds can be invested in securities of any one entity other than the Crown corporations. These requirements are relatively easy to meet but do require consistent monitoring to maintain compliance.
MFTs are not subject to tax as long as they distribute all of their profit to the unitholders. This makes MFTs a very attractive investment for RSPs, due to the tax deferred nature of RSPs.
Learn more about RSP eligibility
Investment eligibility through Registered Savings Plans opens up a new stream of opportunity for real estate professionals. To ensure that your real estate business is structured to allow this type of investment, it’s wise to consult with a professional who has taxation and compliance subject matter expertise.
The team at Zeifmans has over 6 decades of experience assisting real estate professionals in growing their business and increasing their wealth. To learn more, contact our team today and start a conversation.
