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Borrow to Invest

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Financial Planning -> Stocks, Bonds etc. -> Borrowing to Invest in Stocks

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 realized the error of our ways, and have been borrowing to invest since 2008.

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 in a non-registered account.

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

bullet borrow VERY slowly, or
bullet don't borrow until you have all your debt paid off.

You also have to be able to sleep at night!  If borrowing to invest keeps you awake at night, it is probably not for you.

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

bullet interest expense is deductible, reducing your regular income, which is fully taxed
bullet dividends from Canadian corporations are taxed at low tax rates
bullet only 50% of capital gains are taxed
bullet capital gains are not taxed until investments are sold, so if the investments are held forever there is no tax until death
bullet 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.

Methods of borrowing

Setting up the brokerage account

Buying the stocks and ETFs

What to do with the dividends

Selling the stocks and ETFs

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 Tips:

Be cautious, don't overextend yourself, invest in good quality stocks and ETFs.

Don't borrow to invest if you are novice investor!

 

Revised: June 17, 2016

 

 

 

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