TaxTips.ca - Borrow to invest

TaxTips.ca Canadian Tax and Financial Information	Borrow to Invest	TaxTips.ca does not research or endorse any product or service appearing in ads on this site. Before making a major financial decision you should consult a qualified professional. Copyright © 2012
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Financial Planning -> Stocks, Bonds etc.

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

	borrow VERY slowly, or
	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

	interest expense is tax deductible
	dividends from Canadian corporations are taxed at low tax rates
	only 50% of capital gains are taxed
	capital gains are not taxed until investments are sold, so if the investments are held forever there is no tax until death
	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 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: November 03, 2010

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