The loan is contingent on the borrower contributing to their RRSP, usually with the same financial institution
With RRSP season in full swing, some Canadians may be seeing promotions for specialized loans or lines of credit for catching up on unused contribution room in a bid to drive down their tax burden. But should you borrow to contribute?
RRSP lines of credit, meanwhile, operate in the same way as other revolving lines of credit, also usually with more favourable interest rates.Ms. Simmons said that before she would recommend one for a client, she would want to see a very high income, which would translate to a higher rate of tax savings from an RRSP contribution and enough free cash flow to repay the loan.
Aravind Sithamparapillai, an associate with Ironwood Wealth Management Group in Fonthill, Ont., said one question people should ask themselves before borrowing to contribute is why they didn’t or couldn’t make the contribution they’re trying to make up for. “For many people … if you couldn’t actually put that money away on a monthly basis, is adding a loan the best choice?”
Borrowing a small amount that can be quickly paid off is also one way for young people to build up their credit score, he added. He said that while Scotiabank also has an RRSP loan, he thinks the line of credit is better given its payback flexibility and ability to borrow year after year without having to reapply.
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