RetireJapan

Talking with a friend who needs some money to put down on a house, and he's talking about cashing out his RSP sitting in Manulife Canada, paying the 25% nonresident fee, and then simply wire transferring it from TD to his bank in Japan.

Leaving aside for a second the discussion on whether it makes sense for his life plan to quash his RSP for this (he strongly believes owning a house will have a higher net positive long term effect than having an RSP growing at 3%), I wanted to give him a little bit of my uninformed opinion on what he can and cannot do, so would anyone here happen to have any answers to the following questions?

- For the actual wire transfer: I thought maybe using something like Interactive Brokers would be a good idea. Would anyone know if he has to open an IBKR account in Canada for this, or IBSJ in Japan? (reading their site, it seems like RSP is only supported with a Canadian account) --> I realise IBKR may not like this, but I feel like any fee they would charge for executing this will be far lower than the wire transfer fees that the bank will impose

- Based on the research I've been doing over the last few days, the taxation for this seems to be in his favour. Specifically, although it looks like the NTA does not have clear guidance on this, there's been some prior discussion that 1) this taxes like a iDeCo deferred contribution plan, so you get taxed only on the growth of the contributions (which is pathetic in his case - something like 3% over 10 years), and 2) the 25% foreign tax credit will probably nullify any tax to be paid (and I wonder if it will even cause him a tax refund in Japan, lol).

Any help welcome, please ask any questions if more info is needed, I'll go find it. Thanks!

Did you not like the advice that was posted in response on reddit?

Cashing out an RRSP is probably a bad move to begin with. One should not need a large cash position for a home purchase in Japan.

No, an RRSP is only held in Canada, and that 25% capital gains tax for non-residents will stand.

He will need to cash it. Send it to a bank. Have them wire it over. Shop for the best fees on both ends of the transaction.

Yes, Canadian bank CAD->IBSJ->Convert to yen is possible but they do not like people using them for this, so they could charge you a fee. They are a broker, not a currency platform.

SMBC is a good option.
https://old.reddit.com/r/JapanFinance/ ... n_rrsp_to/

As someone who has owned a free standing home in the center of Tokyo for the last 22 years I would advise your friend that real estate in Japan is not a great investment. Probably most people in Japan lose money on their primary residence if they consider their return in inflation-adjusted terms.

There also seems to be an over-optimistic take on how Japan applies a foreign tax credit:

2) the 25% foreign tax credit will probably nullify any tax to be paid (and I wonder if it will even cause him a tax refund in Japan, lol).

If the friend's tax rate in Japan is below 25%, they never get a credit for paying foreign taxes at 25%. The calculation of the amount you actually realize weighs the total tax rate paid overseas vs the Japan effective tax rate. Tkydon can give a detailed rundown of how this works but my experience is that around half of the foreign tax I pay results in an actual deduction in Japanese taxes (a tax credit) owed even though they are applying to the same income.

Tsumitate Wrestler wrote: ↑Thu Dec 07, 2023 8:53 am Did you not like the advice that was posted in response on reddit?
SMBC is a good option.
https://old.reddit.com/r/JapanFinance/ ... n_rrsp_to/

Fair question, well pointed out. That thread does not answer one key question:

- which incarnation of Interactive Brokers should the account be made with (it discourages the use of IBKR, but that isn't the question). It seems to suggest it shoudl be made with IBSJ, but will it definitely work for moving an RRSP to it, or does the account need to be made with IBKR? I might just be being daft here, but for example if you make the mistake of opening a TransferWise account in one country, you CANNOT open one in another country, so you have to be very strategic about how you do it.

TokyoWart wrote: ↑Thu Dec 07, 2023 9:26 am As someone who has owned a free standing home in the center of Tokyo for the last 22 years I would advise your friend that real estate in Japan is not a great investment. Probably most people in Japan lose money on their primary residence if they consider their return in inflation-adjusted terms.

There also seems to be an over-optimistic take on how Japan applies a foreign tax credit:

2) the 25% foreign tax credit will probably nullify any tax to be paid (and I wonder if it will even cause him a tax refund in Japan, lol).

If the friend's tax rate in Japan is below 25%, they never get a credit for paying foreign taxes at 25%. The calculation of the amount you actually realize weighs the total tax rate paid overseas vs the Japan effective tax rate. Tkydon can give a detailed rundown of how this works but my experience is that around half of the foreign tax I pay results in an actual deduction in Japanese taxes (a tax credit) owed even though they are applying to the same income.

He is in a higher tax bracket, not sure how much exactly, but I'll guess at least in the 33% one. Fair point, though: the goal isn't necessarily to "invest", but to "live", and the calculation of whether to own or rent seems to be roughly equivalent in terms of a return (I think we calculated something in the range of 5% if you own, assuming the house value does not decrease precipitously over the years, which is probably a function of construction, build quality and location, location, location), but the other problem is that he's having some trouble finding a place to rent that he likes in the area that he needs, yet properties are available for sale, so I guess there's an emotional component to this as well. I am not entirely convinced I would want to own in Japan, as I feel like there are more "lively" real estate markets elsewhere in the world, but he seems to think he'll be living in JP for a while, and that seems to justify owning a house.

Your friend's plan seems very shortsighted to me.

1. Drawing down a tax-free account, paying tax, and never getting that space back.

2. Financing a new construction with tax-sheltered investments in a country with incredibly cheap debt.

3. In regards to the IBKR questions, they state their policy on RRSP transfer on their website. But, you would need to sell it in Canada, so you cannot move it to Japan. Moving, it selling, it then transferring the money would probably just be more work.

He should leave the RRSP until he is 70, walk into his bank, prove his high income, and get a 100% mortgage at a low rate. I cannot imagine why he would want to do it differently. I feel something is missing here.

Tsumitate Wrestler wrote: ↑Fri Dec 08, 2023 12:25 am Your friend's plan seems very shortsighted to me.

1. Drawing down a tax-free account, paying tax, and never getting that space back.

2. Financing a new construction with tax-sheltered investments in a country with incredibly cheap debt.

3. In regards to the IBKR questions, they state their policy on RRSP transfer on their website. But, you would need to sell it in Canada, so you cannot move it to Japan. Moving, it selling, it then transferring the money would probably just be more work.

He should leave the RRSP until he is 70, walk into his bank, prove his high income, and get a 100% mortgage at a low rate. I cannot imagine why he would want to do it differently. I feel something is missing here.

Oh oh, well, since that wasn't part of the original question, I didn't into that The reason he is being asked for a down payment on a mortgage is because he already _has_ a mortgage on a condo - but because of work, he had to move elsewhere in Japan, so the original condo is rented out. So of the four local banks he went to, three balked at the "rules", and the fourth one (a local shinyo kinko) is looking at asking him for a sizeable downpayment so his "total" loan does not exceed their internal thresholds.

Funnily enough, I am browsing the forum and I seem to see that Aeon and Shinsei may treat second home loans more leniently than local banks, so I wonder if I should tell him to go visit one of those before quashing his RSP and going down a road he has no way to come back from.

t00manyusers wrote: ↑Fri Dec 08, 2023 12:13 pm

Tsumitate Wrestler wrote: ↑Fri Dec 08, 2023 12:25 am Your friend's plan seems very shortsighted to me.

1. Drawing down a tax-free account, paying tax, and never getting that space back.

2. Financing a new construction with tax-sheltered investments in a country with incredibly cheap debt.

3. In regards to the IBKR questions, they state their policy on RRSP transfer on their website. But, you would need to sell it in Canada, so you cannot move it to Japan. Moving, it selling, it then transferring the money would probably just be more work.

He should leave the RRSP until he is 70, walk into his bank, prove his high income, and get a 100% mortgage at a low rate. I cannot imagine why he would want to do it differently. I feel something is missing here.

Oh oh, well, since that wasn't part of the original question, I didn't into that The reason he is being asked for a down payment on a mortgage is because he already _has_ a mortgage on a condo - but because of work, he had to move elsewhere in Japan, so the original condo is rented out. So of the four local banks he went to, three balked at the "rules", and the fourth one (a local shinyo kinko) is looking at asking him for a sizeable downpayment so his "total" loan does not exceed their internal thresholds.

Funnily enough, I am browsing the forum and I seem to see that Aeon and Shinsei may treat second home loans more leniently than local banks, so I wonder if I should tell him to go visit one of those before quashing his RSP and going down a road he has no way to come back from.

Did his bank agree to let him rent out his property? That is pretty rare.

If you have taken out a home loan from a Japanese bank, but rent your home out to a tenant without the bank’s permission, the loan is no longer considered a home loan but rather an investment loan. Since the loan is no longer being used for its original intended purpose, banks may require that you immediately repay the outstanding loan in full or convert it to an investment loan (which will attract higher interest rates). Failure to inform your bank of this change may be classed as a violation of the original loan agreement.

Furthermore, if you intentionally lied to your bank to obtain a home loan for a property that you purchased as an investment to rent out to tenants, you have may have committed mortgage fraud and could face stiff penalties.

If you are being transferred for work, or are considering renting out your home, you are obligated to inform your bank of this.

Under the Flat 35 home loan, borrowers were once required to apply for permission before leasing out their home. However, from 2010 onwards, borrowers who received a job transfer can submit a change of address form and can lease out their property to a tenant. Borrowers who are temporarily having trouble meeting their mortgage payments may also be allowed to rent out their property until their situation improves.

Currently, variable interest rates for home loans are below 1%, while interest rates for investment-type loans are in the 2~4%+ range.

It is strongly recommended that you consult with your bank prior to (a) taking out a home loan and (b) leasing out your home while under a mortgage.

https://japanpropertycentral.com/real-e ... home-loan/

However, I would still say rent. Keep the RRSP.

Tsumitate Wrestler wrote: ↑Fri Dec 08, 2023 2:12 pm
Did his bank agree to let him rent out his property? That is pretty rare.

Honestly, I think his case just fell through the rubberstamping cracks. I remember him researching this at the time, and I told him to tell his bank for avoidance of any problems when he was doing this, and he sent several emails to his bank mortgage officer detailing EXACTLY what he wanted to do, who (as far as I know) never responded, so I guess he's stuck in some grey area of "not supposed to, but was transparent with the bank who didn't do anything, so it'll sit there in limbo until someone does something about it".

I should add that there were unavoidable circumstances in his life (being transferred abroad for work, corona, etc) so there was a lot of stuff going on that probably made things far more convoluted than if he just bought his existing property and rented it out, which wasn't the case.

t00manyusers wrote: ↑Fri Dec 08, 2023 2:46 pm

Tsumitate Wrestler wrote: ↑Fri Dec 08, 2023 2:12 pm
Did his bank agree to let him rent out his property? That is pretty rare.

Honestly, I think his case just fell through the rubberstamping cracks. I remember him researching this at the time, and I told him to tell his bank for avoidance of any problems when he was doing this, and he sent several emails to his bank mortgage officer detailing EXACTLY what he wanted to do, who (as far as I know) never responded, so I guess he's stuck in some grey area of "not supposed to, but was transparent with the bank who didn't do anything, so it'll sit there in limbo until someone does something about it".

My goodness, that is not a place I would like to be. He needs to make sure he has records of all those correspondences, and he needs to ensure that his mortgage agreement does not explicitly require written permission to lease and not just inform the bank.

If the latter is the case, he is in a potentially very dangerous situation.

I think he might want the advice of someone skilled in these matters to check over the contract and review his situation.

Tsumitate Wrestler wrote: ↑Sat Dec 09, 2023 6:28 am

t00manyusers wrote: ↑Fri Dec 08, 2023 2:46 pm

Tsumitate Wrestler wrote: ↑Fri Dec 08, 2023 2:12 pm
Did his bank agree to let him rent out his property? That is pretty rare.

Honestly, I think his case just fell through the rubberstamping cracks. I remember him researching this at the time, and I told him to tell his bank for avoidance of any problems when he was doing this, and he sent several emails to his bank mortgage officer detailing EXACTLY what he wanted to do, who (as far as I know) never responded, so I guess he's stuck in some grey area of "not supposed to, but was transparent with the bank who didn't do anything, so it'll sit there in limbo until someone does something about it".

My goodness, that is not a place I would like to be. He needs to make sure he has records of all those correspondences, and he needs to ensure that his mortgage agreement does not explicitly require written permission to lease and not just inform the bank.

If the latter is the case, he is in a potentially very dangerous situation.

I think he might want the advice of someone skilled in these matters to check over the contract and review his situation.

Hm. Interesting. Thanks, I'll pass the message on. I mean of course he has the record of that communication, but I don't know what his mortgage agreement says.