Following a recession that took a bite out of Canadians’ RRSP contributions in 2009, catch-up loans can be a valuable tool to help get clients back on track this year.

Although RRSP loans have declined in popularity, thanks to the growing number of investors who put money into their registered plans every month, they are still an ideal option for some clients.

RRSP loans are available through the major banks, as well as through financial services institutions that serve the advi-sor channel, such as AGF Trust Co., which is owned by Toronto-based AGF Management Ltd.; MRS Trust Co. , a division of Mackenzie Financial Corp. of Toronto; Manulife Bank, which is owned by Toronto-based Manulife Financial Corp.; and B2B Trust, a subsidiary of Laurentian Bank of Canada in Montreal.

Catch-up loans should be used only if they fit within the context of a client’s written financial plan, says Crystal Wong, senior regional manager with TD Waterhouse Financial Planning in Calgary. “Sometimes, clients need to consider a carry-forward or catch-up RRSP loan in order to meet their retirement goals. The benefit to the advisor is helping the clients reach their goals sooner. [The loan] is another arrow in the advisor’s quiver.”

Most loan providers offer two categories of RRSP loans. One-year loans are designed to boost a client’s contribution for that particular year. Longer-term loans are geared toward inves-tors who have built up a significant amount of carry-forward room over a number of years.@page_break@ Toronto-Dominion Bank, for example, offers a one-year, top-up loan with both variable or fixed-rate options. The variable rate is prime plus 1%; the fixed rate is 4%. TD’s longer-term, carry-forward version has a fixed rate of 5.5% over five years, or a variable rate of prime plus 1.5%.

Bank of Montreal has a pair of offerings: a one-year loan for $1,000-$21,000 at a variable rate of prime plus 1%; and a “retro activator” loan with a minimum borrowing amount of $7,500 at a variable rate of prime plus 1% or a fixed rate of 9% over five years.

Royal Bank of Canada offers loans of up to $50,000 to help clients reduce their carry-forward contribution room. If the loan is amortized over a year or less, interest is charged at prime only; for amortization of one year to 10 years, RBC charges prime plus 1.5%.

Rod Lowry, financial planner with RBC Wealth Management in Winnipeg, says the preferred pricing rate is contingent upon clients placing their investments with RBC companies.

One possible benefit, he says, is for the client to take out a loan that’s large enough to bump his or her taxable income down into the next lowest tax bracket. That will result in significant tax refund, which can outweigh the cost of the loan at today’s low interest rates.

Bob Fast, BMO’s area manager of personal banking in Winnipeg, says it’s the advisor’s role to recommend RRSP loans to clients. It’s not uncommon, he says, for an advisor to raise the option of a catch-up loan to fund an RRSP, only to discover that clients are not aware that catch-up loans exist. “These vehicles can help clients in ways they didn’t even think about,” Fast says. “They can save money on taxes or improve their investment opportunities by doing something more immediate rather than slowly over time. When you can add value to a client’s interaction with you in a way they didn’t expect, it solidifies that relationship. You’ve helped them in a way they didn’t even know was possible.”

RRSP loans aren’t for everyone, Fast warns. If your client’s cash flow is already tight, he says, he would recommend the client pass on taking out an RRSP loan, because the monthly payments could become difficult to
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