Borrowing to Invest
When money is borrowed for investment purposes, the interest paid is deductible from taxable income under paragraph 20(1)(c) of the Income Tax Act. This tool illustrates the real impact of this strategy on your wealth.
| Year | Payments made | Interest paid | Tax benefit | Net borrowing cost | Loan balance | Investment value | Net gain |
|---|
The investment return can be lower than the borrowing cost, even after the tax benefit. Borrowing amplifies losses as much as gains. A significant decline early in the period is particularly unfavourable.
A home equity line of credit typically carries a variable rate. Rising rates increase the cost of servicing the debt without improving returns, compressing or eliminating the net benefit.
Payments must be maintained regardless of investment performance. A separate cash reserve of at least 3 to 6 months of payments is strongly recommended.
Deductibility rests on the direct link between the loan and the income source (s. 20(1)(c) ITA). A withdrawal or a change in use can break that link. The CRA scrutinizes these arrangements closely.
In volatile periods, the client may panic and sell at a loss while still carrying the debt. True risk tolerance must be assessed carefully, factoring in the psychological pressure that comes with borrowing.
If the property is already the main asset and the investment targets categories correlated with real estate (REITs, MICs), the client’s wealth becomes highly concentrated.
If the property value declines, the institution can reduce the credit line limit or require partial repayment, forcing a liquidation at an unfavourable time.
The strategy requires a minimum horizon of about 10 years. A short-term need for cash can make the strategy unattractive, or even loss-making.