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Many Canadians invest regularly to save for retirement, but most investors could do better by borrowing to invest. The concept of leveraging or borrowing to invest has been used forever by the rich to make themselves richer. But anyone can benefit – if they know how.
The Advantage
Most Canadians spend thousands a year on loan payments to purchase consumer items and vehicles that decrease their financial wealth. Properly understood and implemented responsibly, borrowing can also be used to purchase investments to increase wealth. This concept, called leveraging, has been used by the rich forever to make themselves richer.
Government Clarifies that Interest Expense is Tax Deductible
It is important to understand that whenever you borrow to invest outside of RRSPs, the interest expense is tax deductible. In a recent interpretation bulletin, the government has clarified that when an investor borrows to invest in mutual funds, the interest expense is generally tax deductible.
The Challange
The challenge is that leveraging is a strategy that magnifies both gains and losses. It is a tool that can help or hurt investors, depending on how it is used. When both are understood and implemented properly, leveraging is one of the most powerful wealth-creation strategies that exist.
