|
|
|
|
|
|
Calculators > Borrow to invest calculatorBorrow to Invest CalculatorThe 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. Please read the following information before using the calculator. Input amountsData 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. Now that we are into 2012, this is no longer important, as the dividend gross-up rates for eligible dividends are no longer changing. Line 2: Choose your province or territory. This allows the appropriate tax rates to be used. The calculator uses 2012 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 resultsLine 15: Average annual after tax income is the average of the annual amounts for either 30 years, if there are no principal repayments being made, or for the number of years spanned by the borrowing period plus the amortization period (the analysis period). The amounts are calculated as:
The calculator assumes that the investment income is not reinvested, but is withdrawn. Line 16 and 17: Difference in the average annual amounts, and total difference. When the average annual amount for the borrowing case is greater than that for the non-borrowing case, you still may have lower net disposable income in the first several years. Click on the Details link to see the details of annual results. Line 18: Balance of investments - this is the total market value of your investments at the end of the analysis period. The cost basis will be the amount that you originally borrowed to invest. Line 19: Outstanding loan balance - this is the loan balance at the end of the analysis period. If you have chosen to pay interest only, it will be the same as the original loan balance. The calculator then computes the total that you are ahead by at the end of the analysis period, including the annual average difference in net after tax income. This includes unrealized capital gains, which will become taxable when investments are sold. Compare different resultsTo 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. PrintingYou 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 DetailsClick 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. Taxable income - The amounts are calculated as:
In calculating taxes payable, the only tax credits used are the personal amount and enhanced dividend tax credit. No refundable tax credits are included in the calculations. The Ontario Health Premium is not included in the tax calculation, but any applicable provincial surtaxes are included. Québec taxes are net of the federal tax abatement. 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: February 07, 2012
Feel free to link to the Calculators page at www.TaxTips.ca/calculators.htm from your website. | |||||||||||||||||||||||||||||||||
