Q: My daughter and my husband bought a $400,000 property three years ago near Midland, Ont. My husband earns $59,000 annually and my daughter $16,000 (self-employed). They want to renovate the kitchen and eventually sell the home to make a profit on it. The mortgage is $319,000. My daughter wants to get a $30,000 loan from the bank but I don’t think they’ll give it to her. Right now, she has an RRSP with $39,000 in it. Should they use the RRSP money to renovate? When they sell the house they’ll likely realize a $70,000 profit, so is it worth it?
A: Based on the home value and the mortgage balance, a loan or line of credit might not be approved at this point because the equity in the property is not yet high enough. (You are at 80% equity now). The lenders will also take both your daughter and husbands’ incomes into consideration—and not just the amount of income, but the source of the income as well.
Since your daughter is self-employed she will need to show the lender her past two years of tax returns to establish if she can afford the repayment of a loan. If your daughter goes ahead and redeems her RRSP, the financial institution will withhold 30% tax so she would receive just $27,300 after tax—and there may be more tax owing at tax return time.
An RRSP is best withdrawn when total income is low so the taxes owing won’t be as high. You don’t mention the age of your daughter, or if the RRSP is locked in, or if there will also be fees from the RRSP holder. Is the property currently being rented with an income to offset any reno costs? Have you spoken with an accountant on the tax implications of the sale of the property (capital gains) if the owners are not living in it?
I would recommend not to use the RRSP but instead to take a smaller loan or get a co-signer for your daughter, but only after you’ve done extensive research on the cost versus reward of the renovation.
Janet Gray is a money coach in Ottawa
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