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Borrowing to invest in stocks and exchange traded
funds (ETFs) outside of an RRSP
You should not consider this strategy unless you
have owned stocks for at least 2 years. We recommend this
because investing is a learning experience, and you may make more mistakes
when you are just starting out. These mistakes are magnified if you
borrow to invest, because you will have more money invested.
We used this strategy for many years, and it worked
well. When we sold our house we paid off the line of credit
mortgage, and did not borrow to invest for a while. We realize the
error of our ways, and are now borrowing to invest.
Hopefully you have already bought stocks and ETFs in
your RRSP, and have become comfortable owning them. If you have no
debt, your next step should be to borrow to invest in stocks and ETFs.
If you have debt, it still might be a good idea to
borrow to invest. However, you will have to do some financial
analysis to make sure you do not overextend yourself. If you are
worried about taking on too much debt, it may be better to either
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borrow VERY slowly, or |
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don't borrow until you have all your debt paid off. |
When you borrow to invest, you are converting regular
income, which is fully taxed, into Canadian dividends and capital gains,
which are taxed at lower rates and/or allow you to defer tax. The advantages
of borrowing to invest in stocks and ETFs are
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interest expense is tax deductible |
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dividends from Canadian corporations are taxed at low tax rates |
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only 50% of capital gains are taxed |
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capital gains are not taxed until investments are sold, so if the investments
are held forever there is no tax until death |
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investments in stocks are liquid, easy to sell if
necessary |
In most cases, the interest on the debt is only tax deductible as long as
you own the stocks. See our article regarding interest
expense on investments.
Each person's financial and tax situation differs. One solution is
not best for everyone. Use the resources on TaxTips.ca to help determine the best plan for you.
Use our Borrow to Invest
calculator to check out different scenarios by inputting different borrowing
rates, rates of return on investments, and other data.
See also
Recommended stocks (ETFs) for inside or outside of your RRSP.
See also our article How
to get money out of RRSPs/RRIFs tax free (sort of), which also uses the
strategy of borrowing to invest, and has its own calculator.
Tax tip: Be cautious, don't
overextend yourself, invest in good quality stocks and ETFs.
Revised: December 18, 2009
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