Personal Finance

Forgoing DC/RRSP plans for real-estate

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  • Apr 18th, 2018 5:38 pm
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Nov 15, 2016
245 posts

Forgoing DC/RRSP plans for real-estate

The cheapest form of taxation is Capital Gains. This sparked an interesting conversation with my family recently regarding DC plans, RRSPs, and real estate, specifically related to my brother whose working towards completing his CPA. The general premise of conversation was forgoing his DC/RRSP contributions to buy investment properties. He argued that given the fact you are contributing into a DC plan or RRSP, it's a government created investment vehicle to allow people to save money for retirement then becomes highly taxed at your marginal rate. This is a money forum, I'm sure we all know how the taxation, investment, and dipping into these investment vehicles work, so I will not go into that (my knowledge is limited). From a taxation perspective, he argued that when your RRSP is to be used for retirement, there are multiple taxes involved to convert it into a Annuity or whichever method you choose, in addition to being taxed at your marginal rate. Any income you take out during your retirement is taxed at your marginal rates. The income bracket has a lot of flex room to the next bracket, so he has taken the supposed DC/RRSP investments and added them to his pay cheque to use as property investment.

He's forgone his RRSP/DC contributions to invest into properties, as his argument is its the cheapest form of taxation (Capital gains). The longterm plan is to buy investment properties, re-invest and buy a few more, so in 20years he'll be sitting on roughly 5 houses or so. Mortgages would be paid off due to the houses being rented, amortization of expenses can outweigh the cost depending on the location he purchases the home in. I am not as well versed in taxation, but this really got me thinking heavily. We both manage our investments fairly well, manage our own funds and create our own portfolios, i'd love to know your thoughts on this approach of forgoing DC/RRSP plans for real-estate. What are some things he may not be seeing?

edit** the argument I had made against his method, was the amortization of expenses for owning a home (something I think a lot of homeowners forget to factor in when realizing the perceived profits of selling a home). Over the course of 20years, he'd have to factor in mortgage, interest payments, property taxes, and other costs to maintaining the home. I was trying to run a large calculation on owning a home vs. investment funds with MER % in the long term, and it was proving to be a bit difficult.
4 replies
Sep 14, 2004
70 posts
Sounds like your friend just finished reading rich dad poor dad.

I can see a competent investor make better returns outside of RRSP, but giving up the security of a DC may need some very high confidence, most DC plans are subsidize by the company, so he would be giving up free $$ in the process.

In your calculations, be sure to include the income earned from the real-estate is taxable, and project that over 20 yrs, you will see that probaly 30-40% of the value of the house has been paid out in taxes due the income it generates even if it has zero cash flow.

I see RRSP as a tax trap the government has setup to encourge people to save, and pay for it later.. By operating outside of RRSP you can control your post retirement cash flow much better, and more tax efficient. and you won't be forced to convert RRSP to RRIF.
Deal Fanatic
Nov 24, 2013
5527 posts
Kingston, ON
People can definitely make money buying an investment property. People can lose money too. DC/RRSP is a weird thing to compare it to though,

-DC/RRSP plans through work can be funded each paycheque, building up your investments a little at a time. Investment properties require a large (20%+) down payment as startup capital
-As mentioned above, you could be forgoing matching funds from your employer
-Rental income is taxable as you go, where DC or RRSP contributions are tax-deferred until retirement
-Investments in your RPP or RRSP are passive, where an investment property requires you to be a landlord (else hire a property manager)
-Spending time interviewing tenants / dealing with issues / risks involved, versus confidence in investing in going-concern equities

To some degree, investing is investing, and on a long enough time horizon either option is going to make you money. There's just so many variables here, and I think a better either/or question is non-registered investing vs. investment properties, not opting out of a tax-deferred, employer-matched, contribute-as-you-go, retirement savings (if you even can) to be a landlord.
Sep 20, 2006
242 posts
It could be better to go the investment property route but you need to consider the risks. We had the same logic you described in mind when we tried that route 10-15 years ago and had 3 properties. We chose lower priced ones so we could buy more of them and diversify geographically within the city. We were not willing to take on all the headaches and stress of managing them so we used a management firm. (Good thing too cause some of the tenants were nightmares it seems). So then over the time we owned them a few things happened: rent rose very slowly, property values actually declined in nominal terms, and condo fees rose far more quickly than rent. As a result we had negative cash flow on each of them and they were worth less than we paid. Pretty terrible investment but fortunately we're young enough to recover from the losses.

When some cities are seeing crazy housing values it's easy to think it's a sure thing. To me you either a) pay someone to manage and bank on capital appreciation; or b) take on the stresses of managing everything in exchange for positive cash flow without having to rely on too much appreciation to earn a decent return.
Jan 14, 2013
63 posts
I'd always take the matching money from a DC RRSP. It's a no brainer to me. Even the most bullish RE guys I know would do that. It's a minimal amount of diversification over a 100% RE portfolio.
Real estate can outperform an RRSP if you do it right, but it's hard to beat an immediate 100% return that matching gives, even if it under performs real estate in subsequent years. The post about paying tax while you are barely cash flowing is misleading because you will defer taxes through depreciation (and then pay recapture later).

Real estate is also more work, so make sure you value your time and energy for something.

I own both. I don't think there is a right choice but diversification is the only free lunch.