My question is: Canadian-specific
QUESTION: I recently came across an interesting tax avoidance scheme/loop
hole which merits some discussion. The idea is to cash in your RRSPs in
favor of paying off/down your mortgage. You would then get a secured line of
credit against your mortgage (home equity loan) for the purchase of income
producing investments. The benefit being that the interest on the line of
credit used to purchase the investments is now tax deductible. Effectively
giving you a tax deductible mortgage. True or not?
I suppose the downside is the tax payment required on the redemption of
RRSPs.
Thanks in advance for your advice.
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david ingram replies;
I have long being an advocate of paying down your mortgage "instead" of
buying an RRSP and in terms of guaranteed returns, think it is a far better
use of your money. I am NOT an advocate of most people cashing an RRSP in
to pay down the mortgage although if you are disabled or retired at a lower
tax rate, it can definitely make sense but not likely all at once.
If you are looking for alternatives,
Using a Seg fund borrowing program should also return more money with more
control than a regular contribution to the same product in an RRSP.
In other words, if you decided to buy "XXX FUND" as a $5,000 a year
contribution to an RRSP, you would have done better 10 years later if you
had borrowed $100,000, bought the same fund and paid $5,000 a year of tax
deductible interest to pay the loan.
If you also used $5,000 to $8,000 per year return from the investment to
pay down your non-deductible present mortgage and than use the new equity in
your home to borrow more money each year to buy what "would have been"
reinvested dividends.
Let me try that again.
When you buy an income Mutual Fund, it will pay you a dividend every year.
If we assumed you had a $100,000 fund, it should pay you dividends each year
and most people will check off the box that asks the fund to "reinvest" the
dividends in the same fund.
In short, if the dividend were to pay you 8% a year (for simplicity sake),
the result would look something like this. (the formatting is not perfect
but at this time of the morning??)
$100,000 per year at 0.08
pay $5000 per year return yield new
year paid balance
2005 5000 100000 0.08 8000 108000
2006 5000 108000 0.08 8640 116640
2007 5000 116640 0.08 9331 125971
2008 5000 125971 0.08 10078 136049
2009 5000 136049 0.08 10884 146933
2010 5000 146933 0.08 11755 158687
2011 5000 158687 0.08 12695 171382
2012 5000 171382 0.08 13711 185093
2013 5000 185093 0.08 14807 199900
2014 5000 199900 0.08 15992 215892
Pay Back 100000
Left Over 115892
Taxable if capital gains 57946
Tax at 0.4 23178
Yield ten years after tax 92714
Money into Same product as an RRSP at same yield
pay $5000 per year
year
2005 5000 5000 0.08 400 5400
2006 5000 10400 0.08 832 11232
2007 5000 16232 0.08 1299 17531
2008 5000 22531 0.08 1802 24333
2009 5000 29333 0.08 2347 31680
2010 5000 36680 0.08 2934 39614
2011 5000 44614 0.08 3569 48183
2012 5000 53183 0.08 4255 57438
2013 5000 62438 0.08 4995 67433
2014 5000 72433 0.08 5795 78227
Less tax at 0.4 31291
Yield ten years after tax 46936
"In this example, the leveraged investment returned almost"
exactly Two times the yield.
"The following shows a ""break even"" at 4%"
0.04
pay $5000 new
year percent yield balance
2005 5000 100000 0.04 4000 104000
2006 5000 104000 0.04 4160 108160
2007 5000 108160 0.04 4326 112486
2008 5000 112486 0.04 4499 116986
2009 5000 116986 0.04 4679 121665
2010 5000 121665 0.04 4867 126532
2011 5000 126532 0.04 5061 131593
2012 5000 131593 0.04 5264 136857
2013 5000 136857 0.04 5474 142331
2014 5000 142331 0.04 5693 148024
pay back 100000
Left over 48024
Taxable if capital gains 24012
Tax at 0.4 9605
Yield ten years after tax 38420
Money into Same product as an RRSP at same
pay $5000 per year
2005 5000 5000 0.04 200 5200
2006 5000 10200 0.04 408 10608
2007 5000 15608 0.04 624 16232
2008 5000 21232 0.04 849 22082
2009 5000 27082 0.04 1083 28165
2010 5000 33165 0.04 1327 34491
2011 5000 39491 0.04 1580 41071
2012 5000 46071 0.04 1843 47914
2013 5000 52914 0.04 2117 55031
2014 5000 60031 0.04 2401 62432
Less tax at 0.4 24973
Yield ten years after tax 37459
Just a little ahead of break even
If you then use the annual returns to pay down the non-deductible part of
your mortgage and borrow the money to buy what would be the reinvested
dividends, you can make your mortgage deductible over time.
goto www.centa.com and read the November 2001 newsletter for some more
ideas.
If you are coming to Vancouver in the near future, you can attend a free
seminar on the subject.
Every Thursday evening Fred Snyder and I hold a free seminar at Fred's
office at 1764 West 7th (corner of Burrard in the Spence Diamond building)
in Vancouver.
The topics are:
Seg funds and an alternative to the traditional RRSP.
Making your mortgage income tax deductible
Critical Care insurance for disasters.
coffee and cookies of course.
Phone 604-731-8900 to reserve your seat -and, you are welcome to bring your
brother, your sister, your mother or father, your children, your best
friend, your worst enemy or your own financial advisor who hasn't explained
how to make your mortgage deductible.
Another Seminar is now starting in Vancouver at 2 PM on Saturdays and yet
another in Victoria at 7 PM on Tuesday Nights.
Answers to this and other similar questions can be obtained free on Air
every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Dundee Wealth
Management and I, David Ingram will be hosting an INFOMERCIAL but LIVE talk
show called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the internet
at
www.600AM.com <http://www.600am.com/>
Local calls are taken at (604) 280-0600 and Long Distance calls are taken at
1( 866) 778-0600
I do not know how far the LD line reaches.
=========================================
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321 Fax (604) 980-0325
Email to taxman at centa.com <mailto:taxman at centa.com>
www.centa.com <http://www.centa.com> www.david-ingram.com
<http://www.david-ingram.com/>
Disclaimer: This question has been answered without detailed information or
consultation and is to be regarded only as general comment. Nothing in
this message is or should be construed as advice in any particular
circumstances. No contract exists between the reader and the author and any
and all non-contractual duties are expressly denied. All readers should
obtain formal advice from a competent and appropriately qualified legal
practitioner or tax specialist in connection with personal or business
affairs such as at www.centa.com <http://www.centa.com> . If you forward
this message, this disclaimer must be included."
Be ALERT, the world needs more "lerts"
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