Using an RRSP to invest in a business

If you are wondering whether it's possible to use your RRSP to invest in a Canadian-controlled private corporation (CCPC), the short answer is yes - but there are plenty of restrictions to consider on who qualifies.

"There are a lot of details to consider for the worthiness of using cash within your RRSP to buy the shares of a privately held company," says Teresa Black Hughes, a certified financial planner at Rogers Group Financial in Vancouver.

"In the end, it may be more of a headache than it's worth."

If you, together with anyone related to you, own 10 per cent or more of the shares of the CCPC, the investment may not be a qualifying RRSP asset.

If you deal at arm's length with the CCPC and the cost of the shares you hold in the CCPC or a related corporation is less than $25,000, you can invest your RRSP in shares of the company.

If you own less than 10 per cent of the shares, there are generally no restrictions on the amount you can invest.

In determining the amount and cost of the shares that you own, you have to consider shares owned by individuals related to you, both inside and outside their RRSPs.

Also, all of almost all of the company's assets must be business assets at the time the shares are purchased by your RRSP.

If as a contributing member to the company you plan to develop the value of the company with a direct effect on the shares, the future taxable sum for redemption might be more onerous than having grown the value outside of an RRSP, where the potential sale of shares will only be partially taxable due to capital gains treatment.

"In addition, any distributions flowed out of the shares can be treated more favourably with the dividend tax credit," says Black Hughes.

If all of that sounds too confusing and complicated, there's another more straightforward option.

"Borrowing money to invest in a business is tax deductible," says Black Hughes.

"It's a much cleaner way to invest and repay in the future."

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