Investing

HELOC, TFSA, Investment Charges, and MAW150 (Global Small Cap)

  • Last Updated:
  • Jun 23rd, 2018 11:55 pm
Newbie
Apr 6, 2018
2 posts

HELOC, TFSA, Investment Charges, and MAW150 (Global Small Cap)

Hi all,

I've been reading the forum diligently to better understand where I would sit with this scenario, but I can't quite figure it out...

I have a HELOC with TD Bank that allows me to borrow money at TD Prime + 0.5%. I was thinking about borrowing $5,000-$10,000, purchasing MAW150 (Global Small Cap), and only paying ~$100/mo to service the loan.

My big question is: Is this better held in a TFSA or non-registered account?

I see lots of advice to use non-registered accounts for investment loans so that I can deduct the interest expense, but if I do that, I still have to pay capital gains tax when I eventually sell the investment in years. But with a TFSA, I wouldn't need to do that.

Also, is MAW150 an appropriate investment for being able to deduct interest expenses?

Thanks!
6 replies
Deal Expert
Jan 27, 2006
21844 posts
15619 upvotes
Vancouver, BC
Deducting interest isn't too bad since the amount is relatively small that amount of principle and the current rates.

Where a registered account beats a non-registered account is you don't care of about distributions and what it does to the ACB (adjusted cost base) when you eventually do sell it. In a non-registered account, you will need to track any distributions/dividends and change your adjusted cost base so that you don't pay taxes twice on the distributions you received and that could be a pain if you don't know what you are doing.

As for the question if MAW150 is an appropriate investment for being able to deduct interest expenses, I would turn that around and ask you - will MAW150 be able to return enough to you so that paying the $100/month to service the loan be worth while? If you look at the numbers, you will need to make more than $1,200 per year (or $100/month * 12 months/year) for you to break even. According to MorningStar, MAW150 has a historical return of 14.47% over a 10 year period and let's say for argument stake that they number holds true for the next few years. In addition, let's say you put in $10,000 into MAW150 and it's in a TFSA so no taxes to worry about.

In the first year, you would make $1,447 Gross (before interest servicing charges) and $247 NET (after servicing charges) or 2.47% per year.... That's not a big return consider there is a high level of risk involved in Global Small Cap.
Newbie
Apr 6, 2018
2 posts
Ah, I didn't realize it would be tricky to manage that in a non-registered account. The ~$100/month figure is just a number I made up, so that I could pay part of the principle down in addition to the interest (I only need to pay the interest costs, monthly).

The rate of the loan is 4.10% today -- if I could average 14.47% over 10 years with something like MAW150, that looks like a 10.37% ROI on borrowed money. And because it's an interest-only loan with HELOC, I figure there's relatively little risk with no margin call.
Deal Expert
Jan 27, 2006
21844 posts
15619 upvotes
Vancouver, BC
kezow23 wrote: Ah, I didn't realize it would be tricky to manage that in a non-registered account. The ~$100/month figure is just a number I made up, so that I could pay part of the principle down in addition to the interest (I only need to pay the interest costs, monthly).

The rate of the loan is 4.10% today -- if I could average 14.47% over 10 years with something like MAW150, that looks like a 10.37% ROI on borrowed money. And because it's an interest-only loan with HELOC, I figure there's relatively little risk with no margin call.
It's not tricky... you just need to do it vs. not having to do it at all!

Remember that's 14.47% is an average so there will be some years that the fund will loose money while other years might see more than a 20% return so you need to be prepared for that... And nothing says that we can't see a loosing year in the first year either.
Sr. Member
Jun 2, 2017
786 posts
390 upvotes
For a HELOC, is the interest tax-deductible for the purpose of investment against your capital gains or regular income?
Deal Fanatic
User avatar
Jun 19, 2009
6135 posts
1981 upvotes
Scarborough
CEOofPopeyes wrote: For a HELOC, is the interest tax-deductible for the purpose of investment against your capital gains or regular income?
Regular income. Only capital losses can reduce your capital gains.
Deal Addict
Jan 18, 2014
1537 posts
512 upvotes
Rouyn-Noranda
kezow23,
what did you decide to do in the end?

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