Help clients access RRSP funds and save tax

By Dean DiSpalatro | October 26, 2011 | Last updated on October 26, 2011
3 min read

The expert

David Friesen, director of wealth management and portfolio manager with Friesen | Rebec & Associates at Richardson GMP.


  • Howard, 53, an Albertan executive of three private oil and gas start-ups. He has $10 million trapped in his RRSP thanks to liquidity events at each company.
  • One company IPO’d, bringing shares into his RRSP; the others sold for cash.


    Any amount withdrawn from an RRSP is taxed like interest income. So, if Howard withdraws $300,000 to make an investment outside the account, he’s subject to a 39% tax rate since he’s at the highest marginal rate.


    Howard needs permanent insurance protection for estate planning purposes. He also wants a vehicle to generate income down the road. Friesen worked with high-net-worth-focused insurance firm PPI Advisory to build a leveraged investment structure solution, based on a universal life (UL) insurance policy.

    A UL policy lets Howard make additional deposits—up to an annual limit—into the cash value of the policy. The limit is a function of a number of variables, including Howard’s age and gender, and amount of insurance purchased.


    A $5-million UL policy on Howard has a deposit limit of $350,000, assuming a level cost of insurance. The policy’s annual charges are $280,000, so Howard can deposit the additional $70,000 in investment accounts under the insurance policy. Earnings accumulate tax-deferred.

    Once insurance is placed, Howard makes additional deposits to the policy. The next step is to pledge the policy as security for a loan from the insurer. RBC Insurance and Industrial Alliance, for example, offer collateral loans for up to 100% of the cash value of the policy. These insurers also provide guarantees relating to the loan’s interest rate and the credited rate on the policy’s cash value. This hedges some of the risks that sometimes happen in leverage programs.

    For the strategy to work, the loan proceeds must go into qualified investments like stocks and investment real estate—Howard can’t use them for a holiday to Monaco.

    As deposits are made in the UL policy, he’s able to borrow more money, subject to limits established by the insurance company. (As the total amount borrowed increases, total interest on the loan rises commensurately.)


    Because loan proceeds are being used on qualified investments, interest expenses on the loan are tax-deductible and can be applied against any taxable income, including withdrawals from Howard’s RRSP.

    Due to its complexity, this strategy must be implemented with the assistance of tax advisors.


    This strategy is complex and some clients may take pause, so make sure you take the time to explain all the moving parts. Clients may also have accountants who can’t get their heads wrapped around it. And a client may not feel comfortable if the accountant is not backstopping the strategy, says Friesen.

    In some cases, clients simply may not be comfortable with the leverage this strategy involves, even though it’s fully secured by an investment.

    It’s better to invest large sums, or the proceeds of successful companies, outside an RRSP. This lets clients pay capital gains tax, which is lower. Parking assets outside an RRSP also makes them more flexible for tax planning. This is important since serial entrepreneurs can amass huge sums in an RRSP—Friesen has one client who’s sheltered more than $50 million.

  • Dean DiSpalatro