The tax facts about borrowing to invest in AIC mutual funds
The concept of using other people’s money to work for you can be a very powerful strategy in building your long-term net worth.
Borrowing to invest, also called Upvesting™, should always be practiced prudently, and at a level that fits with your personal circumstances.
If applied properly over the long-term, an investor can accumulate significant amounts of wealth through the use of borrowed money.
The Power of Upvesting
Rate of return on
your investments
(before-tax) |
After-tax Rate of return |
| Without using leverage |
Using leverage |
| $ Return |
% Return |
$ Return |
% Return |
| 15.00% |
$11,550 |
11.55% |
$9,660 |
19.32% |
| 10.00% |
$7,700 |
7.70% |
$5,810 |
11.62% |
| 5.00% |
$3,850 |
3.85% |
$1,960 |
3.92% |
| 4.91% |
$3,781 |
3.78% |
$1,891 |
3.78% |
| 0.00% |
$ - |
0.00% |
($1,890) |
(3.78%) |
Assumptions: Return – Treated as capital gains with a 50% inclusion rate. No Leverage – Assumes $100,000 invested for one year and a 46% marginal tax bracket. Leverage – assumes $100,000 invested of which 50% ($50,000) is borrowed at 7% loan interest rate, used for investment purposes a taxpayer is in a 46% tax bracket.
For investors who want to implement an Upvesting strategy with their financial advisor, there are aspects about taxation that must be understood before undertaking this strategy.
Borrowing to invest requires an investor to pay an interest expense associated with the debt. The Income Tax Act of Canada sets out rules that apply to the tax deductibility of interest expense by taxpayers.
