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Lake Muskoka

Fred Lum/Fred Lum/The Globe and Mail

There's camping. And then there's Camping, with a capital "C."

Not everyone likes roughing it. Take my friend, Jake. He bought a camper with hardwood floors, high ceilings, closets and a wine cooler. It's a 146-square-foot room nicer than many hotels I've seen. He saw the thing on the Mother Nature Network website.

For Jake, even these luxuries weren't comfort enough. So, last fall he bought a timeshare unit in Muskoka where he and the family can relax in luxury and not have to worry about hiding behind a tree when nature calls. Jake was surprised when we talked last weekend about what the taxman might think of his timeshare investment. Let me explain.

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Using RRSP dollars

When Jake purchased his timeshare unit last October, he wanted to use money inside his RRSP to do it. Now, he could have simply withdrawn the $100,000 from his plan to make the purchase, but it's no surprise he didn't want to pay the tax that would arise, so he considered other options. He thought about taking out a mortgage secured by his city home, but this mortgage would be different. The funds would not be provided by his bank, but by his RRSP. It's possible to set up this type of mortgage (and to use the proceeds for anything you want), but the cost and paperwork involved was not something Jake liked.

So, Jake considered having his RRSP purchase the timeshare directly. The problem? Our tax law defines "qualified investments" for RRSPs, and a timeshare isn't on the list. If you want to read up on qualified RRSP investments, check out subsection 146(1) and Regulation 4900 of the Income Tax Act (warning: this is only for insomniacs), or you can read through Canada Revenue Agency's Interpretation Bulletin IT-320R3 (find it online at cra.gc.ca).

Now, if you happen to use your RRSP dollars to make a non-qualified investment, what happens? In this case, the fair market value of the non-qualified investment at the time you make the investment is added to your income. If you happen to dispose of the non-qualified investment later, you'll be allowed a deduction for the amount you had to include in your income earlier (or for the amount of your sale proceeds if this is less).

Making it work

The good news for Jake is that he learned that a timeshare is not a qualified investment in an RRSP, and avoided the non-qualified investment problem. But Jake did manage to buy the timeshare with his RRSP dollars another way: He purchased shares in the private company that is in the business of selling the timeshare units. Part of the deal is that he's provided with certain timeshare benefits each year.

It's a well-known fact that shares in publicly traded companies are generally eligible investments for an RRSP. But what about private company shares? Our tax law will allow an investment in a privately owned small-business corporation where you own less than 10 per cent of the issued shares of any class or, if you own more than 10 per cent, you're still arm's-length to the corporation and your total cost of the shares you own is less than $25,000. The rules are complex, so visit a tax pro if you're thinking of making an investment in a private company with dollars from a registered plan.

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Jake's surprise

The timeshare seems to be working well for Jake – or so he thinks. "Jake, you may have a tax problem," I said. "You could face tax on the value of the timeshare benefits you're receiving."

"But Tim," he said, "I'm not making withdrawals from my RRSP and that stock in the timeshare company is an allowable investment in my RRSP. So what's the deal?"

I explained that our tax law causes RRSP annuitants to pay tax on any benefits received from an RRSP each year. This obviously includes any withdrawals, but also can include any benefit received by virtue of the assets held in the RRSP. This would include the timeshare benefits received by Jake by virtue of his shares held in the RRSP.

The moral

What can be learned from Jake's story? This is not really a story about timeshares per se. It's about RRSP investments.

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  • Make sure you avoid non-qualified investments in your RRSP.
  • Your RRSP can be used to hold some interesting investments – including shares in private companies.
  • Finally, if you’re going to invest in a private company, beware of receiving personal benefits by virtue of your RRSP being the shareholder; it could lead to a tax hit.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.

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