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Thread: Tax savings I learned today. . .

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    Luv Saving People Money MortgageQueen's Avatar
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    Met with a financial advisor/associate today and learned something new (no doubt you advisors out there will roll your eyes.. I didn't know that if you took out equity on your home and used it for investing; the interest was tax deductable. I think that's awesome!

    I will be the first one to admit. . .I do mortgages and I do them well, but I do find the investment field very interesting too. There's so many tools out there for tax breaks and retirement savings. . . .I encourage everyone to talk to an advisor. You DON'T have to be RICH. Really. . I'm not kidding. There's a lot a middle class family can do to save taxes, insure themselves, and prepare for a much better retirement.
    That's my two cents. How 'bout yours?


    Try to keep it simple please. . .layman's terms.
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    This I knew about, but you better be sure that you are investing in something that will give you capital gains (and who can predict that?)...It would be a bummer to take money out of home equity only to lose it on some shady investment.
    hughjarce likes this.

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    Luv Saving People Money MortgageQueen's Avatar
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    Quote Originally Posted by marstec View Post
    This I knew about, but you better be sure that you are investing in something that will give you capital gains (and who can predict that?)...It would be a bummer to take money out of home equity only to lose it on some shady investment.
    To be sure! It was explained to me it would be based completely on risk tolerance. . .which obviously makes sense.
    I'm just learning about all the tax shelters and retirement strategies which are quite fascinating.

    Did you know that aprox 53 (retirement age) percent of Cdn's are dependent solely on gov't pension/supplements? Pretty scary. Retirement used to be a lot easier to plan for, eh?

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    CaLoonie
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    A great thing about this also is that you still benefit from the appreciation of value on your home weather your equity is in it or not, plus the returns you get on investments. And your investments don't have to be earning more than your mortgage interest rate to make money long term because your mortgage is not compounded interest, while your investment returns are. So over time you can make substantially more money then you paid in interest to do it, even if your average return on investments was a full percentage point lower than your mortgage rate, not counting the tax breaks you get as well.

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    Financial Advisor ashedfc's Avatar
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    Quote Originally Posted by MortgageQueen View Post
    To be sure! It was explained to me it would be based completely on risk tolerance. . .which obviously makes sense.
    I'm just learning about all the tax shelters and retirement strategies which are quite fascinating.

    Did you know that aprox 53 (retirement age) percent of Cdn's are dependent solely on gov't pension/supplements? Pretty scary. Retirement used to be a lot easier to plan for, eh?
    Yes, its scary; & the irony is the number is growing by the day.. more & more Canadians are realizing that their source of income in the retirement age isn't what they expected; or the amount will not give a decent quality of life (it will be too less for a comfortable retirement). Even Govt. pensions aren't enough, pension increase is not keeping pace with cost of living increase..
    Regarding "Borrow to Invest strategy" to create "interest expense tax deductibility"... one has to see the actual break-even cost (which is interest amount paid less tax savings received), You only need to achieve the breakeven cost to start making profit. using a capital gain approach makes more sense, as capital gains tax are 50% tax exempt, & only 50% is included for taxation (that too not every year like a GIC where they send you a Tslip; its only when the investments are actually sold)..
    And capital gains type investments also allows us to use strategies to benefit from unexpected losses (if there's any); where you can create a capital loss, to offset the capital gains.

    I know the above statement has become a bit technical (which I tried to avoid, as much as possible), but these things cannot be told in a layman's language. However, if anyone has any questions: you can post them here: & I will try to respond as clear as I can.
    (Please do not post any personal info on a public forum; I want you all to maintain your privacy & identity) you can use a hypothetical example (or you can use real numbers; but hide personal info)

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    Senior Canuck chillys-willy's Avatar
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    Quote Originally Posted by floydrocker View Post
    A great thing about this also is that you still benefit from the appreciation of value on your home weather your equity is in it or not, plus the returns you get on investments. And your investments don't have to be earning more than your mortgage interest rate to make money long term because your mortgage is not compounded interest, while your investment returns are. So over time you can make substantially more money then you paid in interest to do it, even if your average return on investments was a full percentage point lower than your mortgage rate, not counting the tax breaks you get as well.
    This is incorrect. Your mortgage interest is compounded just not as often as other investments generally. It also depends on which investment you make as to whether your investment gains compound interest - only interest bearing investments do this. This is a risky proposition for novice investors unless you have complete confidence in you advisor. I have extensive knowledge of this investing method. It is not for the faint of heart. Just be well informed if you proceed with it.
    hughjarce and i_forget like this.
    Just joined Kiva.org, an organization that funds micro-loans to people in developing countries. I love the idea that the $25 I saved in groceries can be given to a fish woman with 5 children in the Philippines to help grow her business.



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    Luv Saving People Money MortgageQueen's Avatar
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    I think unless you're really behind the eight ball on retirement savings, it's best to start out small and work your way up. Again, you can diversify according to your risk tolerence.
    It just makes sense to me to utilize all these potential tax shelters. I know that RRSP's are fully taxed on withdrawal, so while there is a place for them in one's potfolio, it appeared to me there were alot better options out there. . . .

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    CaLoonie
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    What everyone is talking about is leveraging and it is not for the faint of heart or risk-averse people. Here is how it works in layman's terms.

    You borrow $50,000 on your home equity line of credit and invest in the markets (stocks, aggressive mutual funds, etc). You pay interest only on the line of credit. This interest is tax-deductible. (this does NOT mean you get all of the interest back, just a percentage)

    So lets say, using the rule of 7, that in ten years you have earned an average of 7% growth each year, you will now have $100,000 in investments. You pay back the $50,000 on your line of credit and you have $50,000 profit. That's great.

    BUT what investment right now is going to earn you 7% growth? Maybe this year will be a great year, but what if next year sucks? You could end up at the end of 10 years owing more than you have left in your portfolio. Will you be able to sleep at night?

    There is also something called the Smith Manouever (look it up on the internet!)... it is also a great idea for people who don't mind risk where you switch your non-deductible debt for deductible debt.
    There are many ways to use tax loopholes and different strategies but the problem lies in the amount of risk you are willing to take.

    You CAN deduct interest costs on mortgages for income-producing properties as well as for investments.

    And Mortgage Girl, you are absolutely correct. RRSP's have their place and are an excellent way to save for your retirement but you should also have non-registered investments in your portfolio as well. However, people get sucked into the idea of RRSP's and getting tax refunds that they don't realize it will cost them in the end. If you are lucky enough to be eligible for a defined benefit or defined contribution pension, you should (in general) not be saving in RRSP's, but using non-reg investments instead (or a tfsa)

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    Just a word of caution. Not all investments allow carrying charges (mortgage interest).

    You cannot deduct on line 221 any of the following amounts:

    • the interest you paid on money you borrowed to contribute to a registered retirement savings plan, a registered education savings plan, a registered disability savings plan, or a Tax-Free Savings Account (TFSA);
    • the interest part of your student loan repayments (although you may be able to claim a credit on line 319 on Schedule 1 for this amount);

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    tightwad and proud of it! brunt's Avatar
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    With regards to the original post, make sure that there is a clear path from loan to investment. If you take the loan, deposit it in your savings account where the money mixes with other cash, take it out, then transfer it to your broker to invest it, you may find that CRA will not allow deducting the interest as they (with good reason) can debate that you are investing some of your savings.

    Keep it simple, get the loan, and deposit the funds directly in your brokerage account. That way CRA cannot question the source of the funds.

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    Financial Advisor ashedfc's Avatar
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    Absolutely true, proper trail is very important to justify that a mortgage for home & mortgage (or line of credit) for investments are separate..

    And one needs to be relatively conservative in their investments approach. there's no need to go aggressive & trying to hit a home run (specially when money for investments is coming from a borrowed source).
    It works the same like buying a house (which is generally considered very conservative investment; though of late house as an investment isn't conservative anymore). taking a mortgage & buying a house; you pay interest & principal; the interest is not tax deductible, but when you sell the house, the gains are tax free.

    Whereas, for other investment, you pay interest only (or interest & principal) & get tax deduction on the interest portion only; & you get a tax liability when the investments are redeemed (preferably capital gains tax)..

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    Quote Originally Posted by MortgageQueen View Post
    Did you know that aprox 53 (retirement age) percent of Cdn's are dependent solely on gov't pension/supplements? Pretty scary. Retirement used to be a lot easier to plan for, eh?
    53% of Canadians is vague. Did you mean 53% of retired Canadians? 53% of Canadian workers ready to retire? 53% of all Canadian workers?

    When retirees stop supporting the economy because they can't afford to, I'm sure it will be a wake up call to the Government. I mean, they stood by and did nothing when companies stopped funding employee retirement plans.

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    Quote Originally Posted by MortgageQueen View Post
    I think unless you're really behind the eight ball on retirement savings, it's best to start out small and work your way up. Again, you can diversify according to your risk tolerence.
    It just makes sense to me to utilize all these potential tax shelters. I know that RRSP's are fully taxed on withdrawal, so while there is a place for them in one's potfolio, it appeared to me there were alot better options out there. . . .
    Not only they are fully taxed upon withdrawal , lot of your gov. Benefits like OAS and GIS also get clawed back due to your RRSP income...so someone with no RRSP income usually gets more OAS and GIS on retirement than someone with RRSP income.

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    Quote Originally Posted by tjthemanto View Post
    Not only they are fully taxed upon withdrawal , lot of your gov. Benefits like OAS and GIS also get clawed back due to your RRSP income...so someone with no RRSP income usually gets more OAS and GIS on retirement than someone with RRSP income.

    With the OAS you don't get clawed back til you make $67,668 and have to make over $100,00 to lose it all.
    The OAS is aprox $6,000 a year.
    Not saying it should not be considered but if my retirement income is over $100,000 I would not be as concerned.

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    Quote Originally Posted by marmaduke View Post
    With the OAS you don't get clawed back til you make $67,668 and have to make over $100,00 to lose it all.
    The OAS is aprox $6,000 a year.
    Not saying it should not be considered but if my retirement income is over $100,000 I would not be as concerned.
    However for GIS the clawback takes place at a much lower threshold and is 50 cents to a dollar.

    TFSA's make more sense than RRSP's in case you don't want your OAS or GIS income to be clawed back when you retire as withdrawals from them don't affect gov. Benefits and the withdrawals are not taxed either.

    People blindly put money into RRSP due to all the hype and marketing , its worth it for some but for quite a few they are not as great as they are made out to be.

    In some cases investing in TFSA or paying down your debt like mortgage etc is better than putting money into RRSP's inspite of the tax savings.
    Last edited by tjthemanto; Wed, Apr 18th, 2012 at 03:13 AM.

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