Personal Finance

Taking out RRSP for building a laneway house

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  • Nov 19th, 2017 8:13 pm
Sr. Member
User avatar
Jul 29, 2007
904 posts
674 upvotes
Pacific Northwest

Taking out RRSP for building a laneway house

Hey, I contribute to my RRSP's and have about 40 grand in there right now. However, I am short cash for building a laneway in Vancouver. I think if I take them all out, the government would take at least 25%, that would leave me with roughly $30 grand to place into the laneway.

Should I take "chunks" out/year? Or the whole thing? Would this affect my future savings if I wanted to retire 30 years from now or so? Would that be a good idea? Or should I borrow from bank? Anyone have any better ideas? I would appreciate the help... Thank you!
Thank you RFD community for helping me with spending money!
7 replies
Deal Fanatic
Jul 1, 2007
8569 posts
1763 upvotes
This is an incredibly terrible idea.

I have no idea what a "laneway" is but you're saying you want to take out retirement funds, pay the tax on them (ultimately at your marginal tax rate, not the withholding rate), permanently lose that contribution space, only to waste it on real estate.

If you're retiring in 30 years, look at the RRSP withdrawal this way. If it grows at 5% net of inflation, that $40K today is costing you $172K (in today's dollars) of retirement income. Multiple years of retirement income.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Fanatic
Nov 22, 2015
7847 posts
8794 upvotes
I must agree.... really, really bad idea.
Deal Addict
Jan 1, 2017
1826 posts
1876 upvotes
Is this your first home? You can use a first time home buyer redemption probably to pull $25k tax free from the rrsp.
Deal Fanatic
Apr 20, 2011
7747 posts
2750 upvotes
ON
If it doesn't qualify for home buyer's or life-long learning programs, leave RRSP money where it's at.
Terrible idea to pull it out if you're not yet retired.

At the most basic level, your own numbers say paying 10k in tax.
10k interest on a 40k bank loan is going to take a while to rack up.
Leave the RRSP money where it's at until you can withdraw tax free (I.e. retired)

And use a loan today if you really need the 40k.
Sr. Member
Jan 15, 2015
643 posts
410 upvotes
Thalo wrote: I have no idea what a "laneway" is but you're saying you want to take out retirement funds, pay the tax on them (ultimately at your marginal tax rate, not the withholding rate), permanently lose that contribution space, only to waste it on real estate.
Saltywetguy comes from "saltwater city" which is the old Chinese name for Vancouver. Laneway houses are allowed on existing property; they must meet city guidelines based on total area of the lot and must be spaced properly away from the main dwelling. If one has a small lot, it limits the size of laneway home and that in turn limits the rental income. Vancouver allows laneway houses in certain zones, but this may spread throughout the city to help address the housing shortage and high cost of home ownership. I recall reading something about the city allowing homeowners to subdivide and sell off the laneway (or main residence). This would benefit Saltywetguy as he would likely get a premium for the portion that is sold off.
ProductGuy wrote: Is this your first home? You can use a first time home buyer redemption probably to pull $25k tax free from the rrsp.
If OP is already considering a laneway house, he most likely owns property with detached house already on it. Unless, of course, he has 1.7 - 2 million cash to put down on an empty Vancouver lot.

Last time I checked (2014), it costs a minimum of $200K to build a basic 2-storey laneway with 2 bedrooms, 1 bathroom, and one-car garage attached to the house occupying half the lower floor. That lowball figure is only possible when dealing with "cash under the table" using small unincorporated contractors who all claim to have lots of laneway experience (but don't believe it, they invariably cut corners on quality). If there is a problem with not building according to blueprints approved by city hall, you are stuck with a huge loss if the city makes you tear it down. Going with a qualified builder nowadays might run $300K to $500K. And that probably doesn't include permits for sewer hookup and power. The building contractor will quote on the cost of bulldozing part of your lot and completion of the laneway home. You most likely have to pay for power hook up, elecbtrical meter installation, and outside plumbing connections to city water and sewer mains.

To get 8% gross return on a laneway investment (say you paid all cash) you would need to charge $24K - $40K rent per year. Net income after deducting property taxes and paying income taxes might return only 5% and you can get that by investing long-term in the stock market. So if OP is banking on a huge windfall from a laneway, that's not going to happen if the present status quo holds where you can't sell a portion of your property. Wealthy investors will buy an older house on a huge lot, demolish it, and build a monster 3-storey house with 2 kitchens, 5-7 bedrooms, 4 bathrooms, and a 2-storey, 3 bedroom 2 bathroom laneway the size of an older Vancouver home from the 60's. Your average buyer can't even afford an older Vancouver detached (and tiny) home for $1.7 million, let alone one plus laneway for $2.4 million. In other words, building a brand new laneway on a lot and keeping the older main house is not a wise investment IMHO.
Deal Addict
Jan 1, 2009
1066 posts
460 upvotes
Vancouver
Also a major factor is that the home owner must self-supply the GST/HST on the new laneway house that is used to rent/lease to unrelated individuals. In Canada, new residential real property is always taxable for GST/HST purposes. This includes laneway houses constructed by homeowners. The exemption to self-supplying the GST/HST is when you allow a family member to live in the new dwelling (which I am sure the OP is not aiming to do).

https://www.canada.ca/en/revenue-agency ... using.html

GST/HST rebates usually for 36% of the GST/HST paid are available to home owners who have to self supply and then use the property for rental to unrelated third parties, or keep the property for family members (new housing rebate). Anyway, it gets pretty messy.

http://www.vancourier.com/opinion/new-r ... 1.21204991
Deal Addict
Jan 2, 2015
1633 posts
639 upvotes
Toronto, ON
Saltywetguy wrote: Hey, I contribute to my RRSP's and have about 40 grand in there right now. However, I am short cash for building a laneway in Vancouver. I think if I take them all out, the government would take at least 25%, that would leave me with roughly $30 grand to place into the laneway.

Should I take "chunks" out/year? Or the whole thing?
Chunks per year. Keep your marginal tax rate as low as possible.
Would this affect my future savings if I wanted to retire 30 years from now or so? Would that be a good idea?
Yes. How can you spend money for a house and yet save it for retirement? Perhaps if you rent it out for a profit and can sell that laneway house later on for a lot of profit it will work out, but housing gains aren't all that predictable plus tenants are ... variable. Most people who buy condos to rent out have negative cashflow, and I suspect something similar when it comes to a laneway house.
Or should I borrow from bank?
If you borrow from the bank you will have to pay it back, with interest... and you will probably have to pay it back with money that could have been invested for your retirement. Furthermore I doubt $30,000 is an adequate down payment unless laneway houses are much cheaper than I think they are.

It boils down to...

Why do you want a laneway house? As an income property? To live in? To sell? To give to family?

People who want to live in a big city have to choose:
Raise a family
Buy/build a house
Save for retirement.

Choose two. You usually can't have it all.

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