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  • Mar 14th, 2018 4:19 pm
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[OP]
Newbie
Mar 8, 2018
2 posts

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Last edited by crysim on Jul 18th, 2018 6:46 pm, edited 5 times in total.
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Deal Fanatic
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Oct 1, 2011
6156 posts
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Your financial situation looks great. For once a young couple buying a home well within their means. Astonished Face

Not an expert here, but just layman's opinion.

I agree that HELOC is pointless. My investing mindset is that I prefer having essential expenses taken care of, to invest with a better peace of mind...therefore I would personally pay off the condo in full as well and simply use the margin at IB.

Alternatively, you could take advantage of the low mortgage rate, keep a small mortgage, and use a smaller portion of margin investing. That gives the money borrowed through the mortgage for you to invest and hope for gains exceeding 2.45% plus fees...there are some 2-5 year GICs that exceed this rate, even.

CDIC-insured GICs with EQ or Oaken
https://www.ratehub.ca/gics/best-gic-rates

[the difference is so small though, so not really worth the hassle for my style, especially since you both have a great income]
Member
Apr 27, 2014
306 posts
84 upvotes
Mississauga, ON
crysim wrote:
Mar 9th, 2018 2:34 pm
[*]Couldn't I just take out funds from my non-registered account and use that to pay the condo, since any interest payable in the non-registered account becomes tax deductible?
[/list]
No this isn't how interest deductions work. The purpose of the funds is what matters for interest deduction so borrowing from IB to pay for a personal residence is not tax deductible.
Deal Fanatic
Nov 24, 2013
5078 posts
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Kingston, ON
expatflame wrote:
Mar 13th, 2018 11:16 am
No this isn't how interest deductions work. The purpose of the funds is what matters for interest deduction so borrowing from IB to pay for a personal residence is not tax deductible.
Selling shares and using those funds to buy the residence, but then borrowing on margin to invest would count as a tax-deductible investment loan though, right? That would be a good approach to explore, though there'd be tax consequences for realizing any capital gains in doing so.
Member
Apr 27, 2014
306 posts
84 upvotes
Mississauga, ON
Mike15 wrote:
Mar 13th, 2018 2:39 pm
Selling shares and using those funds to buy the residence, but then borrowing on margin to invest would count as a tax-deductible investment loan though, right? That would be a good approach to explore, though there'd be tax consequences for realizing any capital gains in doing so.
Yes, that works. Anything where the purpose of the funds can be traced to investing will be deductible.
Member
Apr 27, 2014
306 posts
84 upvotes
Mississauga, ON
crysim wrote:
Mar 13th, 2018 9:17 pm
Image

So #1 is not permitted as tax deductible, but #2 is permitted as tax deductible? Both end up in the same state with assets of $500 and margin loan of $150 for a net value of $350.
Yup you've got it. You need to be able to trace the funds as investment for the deduction.
Newbie
Sep 20, 2015
25 posts
27 upvotes
Nepean, ON
Slightly off topic but how are you each spending 60 k a year on expenses.. Seems a bit much no?..-

Just curious
Deal Addict
Nov 13, 2013
1281 posts
486 upvotes
OTTAWA
ottbram1 wrote:
Mar 14th, 2018 1:43 am
Slightly off topic but how are you each spending 60 k a year on expenses.. Seems a bit much no?..-

Just curious
So they should save more than 50% of their after-tax income?
Deal Fanatic
Mar 24, 2008
5502 posts
1542 upvotes
Toronto
I would pay the condo in cash and then invest any future savings. Why play these games and leverage yourself when you don't have to?
Illegitimi non carborundum
Penalty Box
Aug 10, 2010
781 posts
185 upvotes
Mars.
What's a non registered long term asset? I can't figure out what that's for, because my immediate question is why isn't that in a TFSA? Or even just the cash that's lying around?
Don't be a cooch.
Deal Addict
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Apr 23, 2009
1349 posts
406 upvotes
This is what i would do:

(1) Pay-off mortgage
(2) Pay-off all other debts, if any
(3) Take refinancing on the condo (find the cheapest rate possible) and invest back into a joint margin with spouse (open a new account to keep it clean)
(4) Make mortgage payments from the dividend income
(5) Do nothing and let the portfolio grow over long term (in your case 30 years)

You will probably pay a very little capital gain tax since your ACB is closed to market (your move from US would have triggered taxes already). This is a perfect timing since you would have very little capital gains to report.
$500K compounded at 8% over 30 years would be $4.65 million. At 10%, this would be $7.93 million. With some planning, this rate of return is achievable.

You may optimize your investments with margin loans of up to 20% (strictly 20%) of equity. This will give you a nice boost. The interest expense on mortgage and margin loan will keep your tax liability in check. Since you will hold the assets long-term, you will be able to defer the capital gains for a long time.

As you pay-down mortgage, you may open a HELOC for emergencies, margin calls (extremely unlikely if you limit your margin exposure i.e. debt/equity to 20%) or opportunity buying. You already have sufficient cash reserves to withstand short-term hiccups.
Deal Fanatic
Mar 24, 2008
5502 posts
1542 upvotes
Toronto
ruchir wrote:
Mar 14th, 2018 12:13 pm
This is what i would do:

(1) Pay-off mortgage
(2) Pay-off all other debts, if any
(3) Take refinancing on the condo (find the cheapest rate possible) and invest back into a joint margin with spouse (open a new account to keep it clean)
(4) Make mortgage payments from the dividend income
(5) Do nothing and let the portfolio grow over long term (in your case 30 years)

You will probably pay a very little capital gain tax since your ACB is closed to market (your move from US would have triggered taxes already). This is a perfect timing since you would have very little capital gains to report.
$500K compounded at 8% over 30 years would be $4.65 million. At 10%, this would be $7.93 million. With some planning, this rate of return is achievable.
...
With a 108k surplus per year, it will take OP < 5 years to have the same 500k invested. How much of a difference would it really make in the long run once your subtract mortgage costs/fees/taxes etc?
Illegitimi non carborundum
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Apr 23, 2009
1349 posts
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ksgill wrote:
Mar 14th, 2018 12:19 pm
With a 108k surplus per year, it will take OP < 5 years to have the same 500k invested. How much of a difference would it really make in the long run once your subtract mortgage costs/fees/taxes etc?
The point is to get a tax deduction for interest expenses that are currently not tax-deductible. This is a fairly routine step that most accountants would suggest. Why wouldn't you take the deduction? Also - there are no significant costs involved in set-up as long as 'interest penalty' for breaking existing mortgage is not involved.

Legal fee is minimal (<$1000)
Discharge $375
Mortgage interest (not a factor since OP is already paying that)
Capital gains (not a significant factor as OP stated is ACB is close to market) - on the contrary he may be able to utilize previous losses that he may have had because of deemed disposition (his move from US).

Now the benefits:

OP's marginal rate is 47.97% in Ontario (46.41% for spouse). Assuming OP and spouse are paying $11,858 in interest expense ($484K X 2.45%), together they will save $5,597 per year in taxes. A small amount for OP but the point is that they are not getting this right now. The one-time costs will be nowhere near this amount.

There are many variations that may be used as long as they involve some tax planning.

Even if I had $20 million in bank - I would still be doing this.
Deal Fanatic
Mar 24, 2008
5502 posts
1542 upvotes
Toronto
ruchir wrote:
Mar 14th, 2018 12:51 pm
...
Now the benefits:

OP's marginal rate is 47.97% in Ontario (46.41% for spouse). Assuming OP and spouse are paying $11,858 in interest expense ($484K X 2.45%), together they will save $5,597 per year in taxes. A small amount for OP but the point is that they are not getting this right now. The one-time costs will be nowhere near this amount.
I could never understand the logic behind paying $11,858 in interest to get a $5597 back in taxes. This means that you end up paying ~$6261 per year more (vs not having mortgage interest - $11,858 minus $5597 tax deduction).

I have heard similar logic for keeping student loans around for a long period of time just to get the tax credit. Unless you are getting really good returns in this period, I see very little point to these shenanigans. Am I missing something? :confused:
Last edited by ksgill on Mar 14th, 2018 12:58 pm, edited 1 time in total.
Illegitimi non carborundum

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