Borrow to Invest

Borrow to Invest in Stocks and Exchange Traded Funds (ETFs) – Outside of an RRSP

You should not consider this strategy unless you have owned stocks for at least 2 years.  recommends this because investing is a learning experience, and you may make more mistakes when you are just starting out.  These mistakes are magnified if you borrow to invest, because you will have more money invested.

borrow to investHopefully you have already bought stocks and ETFs in your RRSP, and have become comfortable owning them.  If you have no debt, your next step should be to borrow to invest in stocks and ETFs in a non-registered account.

If you have debt, it still might be a good idea to borrow to invest.  However, you will have to do some financial analysis to make sure you do not overextend yourself.  If you are worried about taking on too much debt, it may be better to either:

  • Borrow very slowly, or
  • Don’t borrow until you have all your debt paid off

You also have to be able to sleep at night!  If borrowing to invest keeps you awake at night, it is probably not for you.

When you borrow to invest, you are converting regular income, which is fully taxed, into Canadian dividends and capital gains, which are taxed at lower rates and/or allow you to defer tax.  The advantages of borrowing to invest in stocks and ETFs are:

  • Interest expense is deductible, reducing your regular income which is fully taxed
  • Dividends from Canadian corporations are taxed as lower tax rates
  • Only 50% of capital gains are taxed
  • Capital gains are not taxed until investments are sold, so if the investments are held forever, there is no tax until death
  • Investments in stocks are liquid, easy to sell if necessary

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