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Self-Directed RRIF (SDRIF) Accounts

A Self-Directed RRIF (SDRIF) account is one of two options you have when deciding to convert your RRSP into an RRIF, as the figure below illustrates:

 

 

A Self-Directed RRIF (SDRIF) account provides the greatest number of investment options for your retirement savings. Unlike a Regular RRIF account, a Self-Directed account enables you to invest your retirement savings in any of the qualifying investments set out in the Canada Revenue Agency (CRA) guidelines including the following:

  • Mutual Funds
  • Segregated Mutual Funds
  • Publicly traded shares (common and preferred shares)
  • Shares of a small business corporation
  • Shares of a Mortgage Investment Corporation
  • Shares of eligible corporation
  • Guaranteed Investment Certificates (GICs)
  • Bonds, debentures, notes mortgages guaranteed by the Federal, Provincial, Municipal or Crown corporation
  • Bonds debentures, notes issued by a corporation whose shares are listed on an organized stock exchange in Canada
  • Debt obligations of corporations whose shares are listed and trade on an organized stock exchange outside of Canada
  • Debt obligations of a publicly listed corporation other than mortgage investment corporations
  • Debt obligations issued by an authorized foreign bank and payable at a branch in Canada of the bank
  • Debt obligations of a Mutual Fund Trust the units of which trade on an organized stock exchange in Canada
  • Debt obligations issued by a government of a country other than Canada provided the obligation had, at the time of purchase, an investment grade credit rating from a recognized bond credit rating agency
  • Mortgages
  • Installment Receipts
  • Cash deposits in any currency is a qualified investment, except where the money is held as a collectible for its collectible value and this value exceeds the stated face value as legal tender
  • Exchange Traded Funds
  • Annuity Contracts
  • Warrants, Rights and Options
  • Royalty Units
  • Partnership Units
  • Depository Receipts

According to the CRA, if a registered account acquires a non-qualifying investment, the fair market value of the non-qualifying investment will be added to the income of the annuitant of the SDRIF.

This treatment does not apply to an investment that was a qualified investment at the time of purchase and subsequently became a non-qualified investment.

SDRIF planning options

In addition to a greater selection of investment options, a SDRIF account offers additional planning options such as the ones listed below:

  • A SDRIF account also offers greater flexibility when making withdrawals. For example, with a Self-Directed account you can make withdrawals in kind. This means that, in addition to cash, you can withdrawal property from the account.  For example, if you do not have sufficient cash within your SDRIF account to make your annual minimum RRIF payment, but you hold investments (such as a mutual fund, common shares or a bond, in a non-registered account), a Self-Directed account enables you to withdraw the shares from your SDRIF instead of cash.
  • With a Self-Directed account you can also swap investments between a Self-Directed RRIF account with a non-registered investment account, provided that both accounts are registered to the same owner and the accounts involved are held at the same financial institution. This can be beneficial if, for example, your Self-Directed RRIF has a cash balance and your non-registered investment account holds investments but no cash, then you can have your SDRIF account purchase an investment from the non-registered account at the investment’s fair market value. This swap effectively moves cash out of the SDRIF account into the non-registered account, and the SDRIF account receives the investment from the non-registered account. If the swap is priced at the investment’s fair market value, there is no resulting income tax impact, as you are not withdrawing anything from the SDRIF account. For SDRIF swaps in kind there are important income tax considerations that should be understood.
  • Swap Update: In the 2011 Budget, CRA updated the rules governing Swap transactions between registered and non-registered investment accounts. The new rules do not ban Swap transactions, but rather clarify the rules governing these types of transaction. (See RRSPs – Anti-Avoidance Rules). Swap transactions are still permitted under CRA's rules, but some financial institutions have decided to stop offering clients this type of transaction reasoning they are protecting their clients from the new CRA rules.

Keep in mind that the CRA has certain guidelines governing assets deposited into a registered account. In general, if the investment deposited into an SDRIF has a capital gain associated with it, then even though the investment is now owned by your SDRIF, it will deem to have been sold thereby triggering a taxable capital gain. If on the other hand the deposited/transferred asset has a capital loss associated with it, the loss will not be recognized by the CRA and it cannot be used to offset past, current nor future taxable capital gains. The tax benefit of a capital loss will be lost if the loss results from the deposit of the investment into an SDRIF account.

A Self-Directed RRIF provides a greater variety of investment options and greater control over your investment portfolio and investing success.

Due to the increased flexibility offered by Self-Directed RRIF accounts many individuals choose to hold their mortgages within their SDRIF accounts, thereby using their retirement savings to finance their home, as mortgages are considered to be qualified investments for registered plans. This can be a complex purchase and you should first check with your financial institution to see if they will administer a mortgage within your SDRIF account. They may accept your mortgage, but charge a set-up fee and an annual mortgage administration fee. An important consideration is the mortgage held by an SDRIF must be insured under the national Housing Act and the interest rate set at a commercial rate.

Genworth Canada is one of Canada’s largest mortgage insurance providers. Below is a link to their site dealing with insurance for mortgages held within an  RRIF account. www.genworth.ca

  • Because of the investment flexibility that Self-Directed accounts provide, these accounts can be a useful portfolio and income tax planning tool.

Example:  If your total investment portfolio asset allocation (registered, non-registered and corporate investment accounts), is to include investments that distribute interest income, then these investments are best held within your registered account. Because interest income attracts the highest level of income tax, by holding these investments in the registered account you can defer the tax until a future date when the funds are withdrawn. At the time the interest income is withdrawn from the registered account it will be taxed at the same level as it would if earned outside the registered account. In addition, by holding your interest earning investments in your registered account, you have greater room to hold investments within your taxable accounts that attract a lower level of income tax – (dividend income, capital gains and losses).

Example: Let’s assume you have a total investment portfolio of $100,000, which is comprised of an SDRIF account with $50,000 and a taxable investment account with $50,000. Let’s assume that your Investment Policy Statement (IPS) states that your asset allocation is to be 50% to interest earning GICs and bonds, and 50% to dividend-paying stock market investments.

So if you tell yourself that your SDRIF is your long-term investments and you decide to hold the dividend-paying investments in your SDRIF and your interest earning GICs and bonds in the taxable account, this will substantially reduce your overall after-tax investment returns. The dividends will accumulate sheltered inside the SDRIF thereby losing the dividend tax credit and the dividends will eventually be withdrawn and taxed at the highest income tax rate. In addition, any future capital gains will lose their income tax advantage when occurring inside the SDRIF and any capital losses will not be eligible to reduce future capital gains income tax. At the same time, your interest earning investments will have you paying the highest rate of income tax because they are held outside the registered account and subject to full taxation.

The best solution would be to use the investment and income tax planning benefits of the registered account by holding the $50,000 of interest earning GICs and bonds within the SDRIF, thereby sheltering them from income tax at the highest rate and hold the dividend-paying stock market investments in the taxable account thereby benefiting from the dividend income tax credit and the preferential income tax treatment of capital gains and losses.

Note:  While seemingly more complicated Self-Directed RRIF accounts can provide tremendous flexibility in the management and investment performance of your retirement savings.

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