# leveraged investing for TFSA



## honorinthedollar (Jul 28, 2016)

I have done quite a bit of research on leveraged investing and there is substantial information on leveraging in non-registered accounts (due to interest deductibility) and RRSPs (especially for RRSP catch up loans that generate a refund). There is almost nothing about leveraged investing for the TFSA account and was wondering if this is a good idea for those who have high contribution room?

Here are the options:

*Option 1) borrow money at prime + 1% or prime + 1.5% and invest proceeds in the TFSA*
The interest on the loan would not be tax deductible, however, the gains and dividends would be ‘tax free’ within the TFSA account (I will ignore foreign withholding taxes on non-CDN securities for now as these are not recoverable within a TFSA)

OR
*
Option 2) borrow money at prime + 1%or1.5% and invest proceeds in a non-registered account, pay off the loan within 2-2.5 years and then sell the investment and invest the money within the TFSA*
The interest on the loan would be tax deductible, however, the dividends paid would also be taxable and when selling the investment (assuming it’s a gain) there would be a taxable capital gain

OR
*
Option 3) Do not leverage to invest in the TFSA and gradually invest over the next 2-2.5 years to catch up on TFSA contributions*

I would be looking into using an index equity ETF either tracking the US or World Market (ex-North America) to do the strategy

Looking forward hearing opinions on this topic. Thanks!

*HonorInTheDollar*


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## Woz (Sep 5, 2013)

What tax bracket you’re in and the type of investments your making (primarily div, cap gain, interest) would make a difference.

Take your tax rate on income and divide by your expected tax rate of the investment you’re making. Multiply that by your rate of borrowing. If you return is higher than that then TFSA will be better, if you earn less than that unregistered will be better. With the TFSA you also increase your contribution room so that’s an advantage even if they expected return were the same.


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## Market Lost (Jul 27, 2016)

The question would be what would you do if the market tanks, and the stocks cut, or worse, completely stop paying their dividend? Leverage is a great thing when the market goes up, but is a nightmare when the market goes south. I've seen a few people who did the Smith Maneuver, and now regret ever considering it. Granted, they were doing it with much more money then you are likely talking about, but it can still hurt.


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## My Own Advisor (Sep 24, 2012)

Personally I wouldn't bother with leveraged investing, if you have a mortgage and you haven't maxed out your TFSA(s) or RRSP(s) yet. Especially not near market highs.


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## james4beach (Nov 15, 2012)

You could use the HXU ETF to attain leverage, without borrowing any money. The downside is that this will not perfectly track the index over longer periods. But it will still give you a leverage effect, if you're sure you want that.


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## GalacticPineapple (Feb 28, 2013)

I have a HELOC at 3% and use it to buy REITs in my TFSA that yield ~6% for a 3% net gain. To me this is barely worthwhile. If you're looking at loans over 3% I doubt it's worth it.


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## honorinthedollar (Jul 28, 2016)

After careful consideration, I have decided not to borrow to invest in my TFSA. I have found other non-leveraged ways to close the gap in the amount of contribution room I have. It's not to say that leverage wouldn't work (i.e. the strategy can be highly effective in a non-registered account).

Thank you all for your input


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## familyman (Apr 6, 2015)

Woz said:


> What tax bracket you’re in and the type of investments your making (primarily div, cap gain, interest) would make a difference.
> 
> Take your tax rate on income and divide by your expected tax rate of the investment you’re making. Multiply that by your rate of borrowing. If you return is higher than that then TFSA will be better, if you earn less than that unregistered will be better. With the TFSA you also increase your contribution room so that’s an advantage even if they expected return were the same.


Can you give me a practical example, as I'm more visual and it's hard to understand what you're saying.

Say you're borrowing 32K at 7%, and you're at the top end the 32% tax bracket. Earning a few more thousand would put you into the 40% tax bracket. Let's say if you expect to earn around 20%-25% returns on your investments. Would it make sense to do this in the TFSA or in a non-registered account?

Thanks!


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## Spudd (Oct 11, 2011)

I don't know the answer to your question. 

BUT. If you actually honestly expect to earn 20-25% return on your investments, then you probably have quite a risky investment in mind. I would be VERY reluctant to invest in something so risky with borrowed money. Yeah, if it works out, you win big, but if it doesn't, whoops. Now you owe money and you can't pay it back.


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## Woz (Sep 5, 2013)

familyman said:


> Can you give me a practical example, as I'm more visual and it's hard to understand what you're saying.
> 
> Say you're borrowing 32K at 7%, and you're at the top end the 32% tax bracket. Earning a few more thousand would put you into the 40% tax bracket. Let's say if you expect to earn around 20%-25% returns on your investments. Would it make sense to do this in the TFSA or in a non-registered account?
> 
> Thanks!


You didn’t specify what kind of investment, but lets assume capital gains. Your tax rate on income is 32%. Your tax rate on the investment is 20% (assuming capital gains). 32%/20% = 1.6. Rate of borrowing is 7%. 1.6 * 7% = 11.2%.

Given the example, when borrowing to invest if you earn more than 11.2% TFSA is better if you earn less than 11.2% then unregistered would be better, so if you earned 20%-25% then you’d be better off borrowing to invest in a TFSA. 

One assumption, done for simplicity is that you pay your accrued taxes every year which wouldn’t be the case for capital gains.


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## My Own Advisor (Sep 24, 2012)

Again, I wouldn't borrow to invest unless you do this in taxable account.

Even then, I wouldn't do it if you have lots of debt (BIG reason #1) and you haven't maxed out all RRSP or TFSA accounts.

Why take on more debt _and _risk if you don't have to?

Just me maybe.


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## james4beach (Nov 15, 2012)

Why not just use TSX mini futures for leverage? They offer far more leverage without borrowing any money


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## familyman (Apr 6, 2015)

Woz said:


> You didn’t specify what kind of investment, but lets assume capital gains. Your tax rate on income is 32%. Your tax rate on the investment is 20% (assuming capital gains). 32%/20% = 1.6. Rate of borrowing is 7%. 1.6 * 7% = 11.2%.
> 
> Given the example, when borrowing to invest if you earn more than 11.2% TFSA is better if you earn less than 11.2% then unregistered would be better, so if you earned 20%-25% then you’d be better off borrowing to invest in a TFSA.
> 
> One assumption, done for simplicity is that you pay your accrued taxes every year which wouldn’t be the case for capital gains.


Thanks Woz, that makes a lot of sense. I think I can likely get 30K for about 3.99%, will see in about 12 hours for sure, so this way it makes sense to do it in a TFSA even if the investment returns 10%, correct?


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## familyman (Apr 6, 2015)

My Own Advisor said:


> Again, I wouldn't borrow to invest unless you do this in taxable account.
> 
> Even then, I wouldn't do it if you have lots of debt (BIG reason #1) and you haven't maxed out all RRSP or TFSA accounts.
> 
> ...


I have no debt and will likey max out both TFSA's for my wife and me by the end of next year. I don't have RRSP money as I plan to save for about 10 years and then buy a good business I've been researching and that my friend also has and is doing very well with. He gets a 20% return yearly for 1.35 million dollar cost of business and hasn't worked since 40 (he's 45 now). An RRSP wouldn't allow me to withdraw the money and buy a business like this...


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## familyman (Apr 6, 2015)

james4beach said:


> Why not just use TSX mini futures for leverage? They offer far more leverage without borrowing any money


Why is a TSX mini future? I've tried googling and haven't come up with much...


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## james4beach (Nov 15, 2012)

familyman said:


> Why is a TSX mini future? I've tried googling and haven't come up with much...


See this thread. Futures are tricky and there some downsides, notably that you'll need an Interactive Brokers account, and you have to roll over the contracts (for example the existing contract only goes to September)
http://canadianmoneyforum.com/showthread.php/95793-TSX-Mini-Futures-(SXM)

But very little capital controls a large position; leverage is very high. No explicit loan is made to accomplish this.


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## My Own Advisor (Sep 24, 2012)

familyman said:


> I have no debt and will likey max out both TFSA's for my wife and me by the end of next year. I don't have RRSP money as I plan to save for about 10 years and then buy a good business I've been researching and that my friend also has and is doing very well with. He gets a 20% return yearly for 1.35 million dollar cost of business and hasn't worked since 40 (he's 45 now). An RRSP wouldn't allow me to withdraw the money and buy a business like this...


$1.35 M is a big investment and lots of leverage but starting a business and becoming successful at it certainly can be worth the risk. 

This isn't leveraged investing inside the TFSA like the thread started out with.


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## familyman (Apr 6, 2015)

james4beach said:


> See this thread. Futures are tricky and there some downsides, notably that you'll need an Interactive Brokers account, and you have to roll over the contracts (for example the existing contract only goes to September)
> http://canadianmoneyforum.com/showthread.php/95793-TSX-Mini-Futures-(SXM)
> 
> But very little capital controls a large position; leverage is very high. No explicit loan is made to accomplish this.


Thanks for the info. I don't think this would be for me since I'm not necessarily interested in just leveraging, but levaraging with certain individual stocks that I feel very confident will do quite well, and futures are not really for this from what I understand.


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## familyman (Apr 6, 2015)

My Own Advisor said:


> $1.35 M is a big investment and lots of leverage but starting a business and becoming successful at it certainly can be worth the risk.
> 
> This isn't leveraged investing inside the TFSA like the thread started out with.


Or buying one that is already functioning and with a proven track record of returns - even better!

The only reason why I mentioned this was to explain my situation better, since you mentioned I should be maxing out the RRSP's before borrowing to invest - which I totally agree but this doesn't suit my future plans. I do really appreciate your advice though, and look forward to hearing your point of view on things.


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## Market Lost (Jul 27, 2016)

james4beach said:


> Why not just use TSX mini futures for leverage? They offer far more leverage without borrowing any money


I tried ES before, and I'd rather put my money on red 16. It's just so easy to hit your stop position when the market turns volatile, especially if you're not doing it full-time. If you can make money off it, then my hats off to you.


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## Market Lost (Jul 27, 2016)

familyman said:


> I have no debt and will likey max out both TFSA's for my wife and me by the end of next year. I don't have RRSP money as I plan to save for about 10 years and then buy a good business I've been researching and that my friend also has and is doing very well with. He gets a 20% return yearly for 1.35 million dollar cost of business and hasn't worked since 40 (he's 45 now). An RRSP wouldn't allow me to withdraw the money and buy a business like this...


A 20% ROI in a business he doesn't have to work on? That's a nice investment if you can get it, and is pretty much were most VC expect to end up.


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## james4beach (Nov 15, 2012)

Market Lost said:


> I tried ES before, and I'd rather put my money on red 16. It's just so easy to hit your stop position when the market turns volatile, especially if you're not doing it full-time. If you can make money off it, then my hats off to you.


I can't trade them, and I don't recommend that anyone does. But if someone is asking about using leverage, well, you get the most leverage with futures -- the least capital controlling the largest trading position. And these TSX minis are liquid with tight spreads, and have good trading hours, so there are many nice aspects.

But I would not trade them.


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