Calculators > Borrow to invest calculator

Borrow to Invest Calculator

The Borrow to Invest Calculator permits you to see the advantages of borrowing to invest in stocks and exchange traded funds (ETFs).  You can input different interest rates and other data to compare scenarios.  You will be provided with details of net after tax income for two different cases - borrowing to invest, or doing nothing.  The calculator works for all provinces and territories, including Québec.

The results of this calculator depend in part on the enhanced dividend tax credit, which is undergoing significant changes starting in 2010.  The federal dividend tax credit rate for 2008/2009 was 18.97% of taxable (grossed-up) dividends received.  By 2012 this will be reduced to 15.02% of taxable dividends received.  However, at the same time, corporate tax rates are being reduced, leaving more money for a corporation to grow its business or increase dividends.  This should help to offset the reduction in the dividend tax credit.

Please read the following information before using the calculator.

Input amounts

Data is input into some fields using drop-down lists, and into other fields by typing in the amounts.  Use the tab key or your mouse to move to the next field, and hit the calculate button when you have entered all data.

Line 1:  Enter the start year for the analysis.  This allows the calculator to apply the appropriate dividend gross-up percentage dividend tax credit rates.  These rates change each year until 2012, so 2012 rates are used for later years.

Line 2:  Choose your province or territory.  This allows the appropriate tax rates to be used.  The calculator uses 2010 tax rates for every year.  No inflation is applied to the tax brackets.

Line 3:  Current taxable income (line 260 on your tax return):  This would include your current wages/salary, self-employment income, investment and other income.

Line 4:  Enter the % amount by which you expect your taxable income to increase each year.

Line 5:  Enter the amount that you would like to borrow.

Line 6:  Enter here how many years you would like to take to borrow the entire amount.  The calculator assumes that the amount invested each year is invested gradually over the year.

It is better to invest gradually over time (dollar cost averaging).  Make your purchases periodically (monthly, quarterly) over a number of years.  This reduces volatility.  If you compare borrowing funds all in the first year versus borrowing over a period of 5 years, the calculator will provide results which show borrowing all in the first year is better.  However, the calculator doesn't take into account volatility, or the advantages of dollar cost averaging.

Line 7:  Enter your annual borrowing rate.  Obviously, the lower the rate you can get, the better.

Line 8:  Amortization period:  Enter the length of time you would like to take to pay off the amount borrowed.  If you are borrowing over a period of 3 years, the amortization period will start after this time, and in the borrowing period only interest will be paid on the borrowed funds.  If you would like to pay interest only, and no principal repayments, choose an amortization period of zero years.

Line 9:  Enter the percentage of your investments that you will hold in Canadian stocks/ETFs eligible for the enhanced dividend tax credit.

Line 10:  The amount invested in other types of stocks/ETFs is calculated automatically.

Line 11:  Enter the estimated total annual return, including capital gains and dividends.  We recommend that you use 9%, because this is a reasonable return.

Line 12:  Enter the estimated dividend yield on Canadian stocks/ETFs eligible for the enhanced dividend tax credit.

Line 13:  Enter the estimated dividend yield on other stocks/ETFs.  

Line 14:  The annual average capital gains are calculated based on Lines 10 and 11 for the Canadian stocks/ETFs eligible for the enhanced dividend tax credit, and on Lines 10 and 12 for the other stocks/ETFs.

The calculator applies the same market value increase to all stocks, and uses this to calculate capital gains when stocks are sold.  In actual fact, when you have to sell some investments because you need some money, you can choose to sell the ones which have not generated as much capital gain.  This would reduce the taxes payable.

The calculator assumes that you are not selling any stocks.  If you do sell stocks, to purchase other stocks, this will generate capital gains even if you are not withdrawing money from your investment account.

The results

To compare different results, open the calculator again in another browser window, and compare them side by side.  You only need one of the windows showing all information.  Shrink additional windows so just the input/ results column is showing.  If you change data in one of the shrunken windows, you will have to scroll to the left to hit the calculate button.

Printing

You can also print the results.  The Input and Results sheet can be printed by clicking on the print button.  To print the Details sheet, set your browser to print in landscape mode.  You can use your browser print function instead of the print button, and set it to shrink the output to fit the page.  Make sure when you print the Input and Results sheet that you set the orientation back to portrait mode.

The Details

Click on the Details link to get to the Details sheet.  Most of this sheet is self-explanatory.

Dividend income - both actual Canadian dividends and other dividends are calculated assuming that purchases of investments are made evenly throughout the year.

See our article on Borrowing to Invest from the Stocks and Bonds page.

Tax tip:  Keep a separate account for investments purchased with borrowed funds, to ensure a clear paper trail for interest deductibility.

Check out our other calculators.

Revised: July 10, 2010

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