# Spreadsheet - interest cost vs tax deduction



## iherald (Apr 18, 2009)

I'm hoping someone has an excel spreadsheet I can use to try and figure out the advantages of either keeping an investment loan outstanding or paying it off.

In short, I'd be taking a loan for $100,000 for an investment. I am in the highest tax bracket, so the interest is a tax deduction at my tax rate. But, I'm still paying money out of pocket for the loan, so I'd like a spreadsheet to determine what type of return I'd need to make on my money to make it better to use cash for other investments versus paying off the original loan.

While I have an idea what I want, I obviously can't explain it well, hence I am having difficulty finding an appropriate spreadsheet. Does anyone have a link or a spreadsheet?

Thanks!


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## Barwelle (Feb 23, 2011)

Unless I'm missing something, it's pretty simple to figure out what return you need.

You say you're in the highest tax bracket. What is your marginal tax rate? (Depends which province you're in). I'll assume 45%.

Say your interest rate is 3%... 45% of that would be your refund if you were to claim it, so your "real" interest rate 55% of 3%... so 0.55 x 3% = 1.65%. If you can get more than 1.65% (either tax-free or after-tax) elsewhere, then you're better off doing that rather than paying off the loan.

Edit: that last part is important... I'm sure you understand this, but say you see the 2.55% 5-year GIC at ING Direct right now. Oh! that sounds like it works, right? Well, no. Because unless you put it in your RRSP or TFSA, that return is more like 2.55% x .55 = 1.4025%, so in that case you'd be better off paying down the loan. (by 0.2475%)

Source: I love math.


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## KRIS_KROSS (Jan 28, 2014)

Note that borrowing to invest in TFSAs or registered accounts (RRSPs) is not tax deductible. Thus, you'd have to invest in non-registered investments (your most likely scenario) or CCPC shares, and would have to beat 1.65% after-tax given Barwelle's assumptions on tax rate and interest rate. Play around with the numbers for your actual provincial tax rate, actual loan interest %, and split of annual income from investments (dividends, interest, rough estimate of CG).


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## Canadian (Sep 19, 2013)

You need to specify what type of investment. The type of returns you will earn will impact the tax calculation. Barwelle's calculation is good for interest income but it needs to be adjusted if the investment distributes dividends or other types of distributions.


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## OhGreatGuru (May 24, 2009)

It's nice to save time by not re-inventing the wheel. But frankly, if you can't make up a spreadsheet to do this yourself, you probably shouldn't be borrowing $100,000 to invest.


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## pwm (Jan 19, 2012)

OhGreatGuru: I was thinking the same thing, but didn't want to offend.


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## OurBigFatWallet (Jan 20, 2014)

iherald said:


> I'm hoping someone has an excel spreadsheet I can use to try and figure out the advantages of either keeping an investment loan outstanding or paying it off.
> 
> In short, I'd be taking a loan for $100,000 for an investment. I am in the highest tax bracket, so the interest is a tax deduction at my tax rate. But, I'm still paying money out of pocket for the loan, so I'd like a spreadsheet to determine what type of return I'd need to make on my money to make it better to use cash for other investments versus paying off the original loan.
> 
> ...



If I understand this correctly you'd want to compare two things:

The after-tax annual rate of return on the 'other investments'

vs.

The annual interest savings of paying off the loan (after-tax, given your marginal tax rate)

Basically you'd want to make sure your after-tax interest costs on the loan are lower than the after-tax earnings from the other investments.

That's on a high level. More information is needed to give a better picture. Also as someone noted interest to invest in a TFSA/RRSP isn't deductible so Im assuming this is non-registered?

As well, as someone else mentioned above it depends on the type of investment income being earned as they are taxed differently.


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## steve41 (Apr 18, 2009)

Sounds like a RRIFmetic opportunity.... especially if taxation is involved.


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## OhGreatGuru (May 24, 2009)

pwm said:


> OhGreatGuru: I was thinking the same thing, but didn't want to offend.


It wasn't intended to be offensive - just advice that OP may not want to hear. I realize it might be construed as unconstructive, as it does not answer OP's apparently simple request. But I was trying to look at the bigger picture.

PS: in quickly reviewing a number of iherald's other posts, I would guess he probably does have the ability to do this, and was just looking for quick help to save him time and effort. I withdraw any possible inference about his abilities.


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## Zeeshanbmerchant (Jan 4, 2014)

OhGreatGuru said:


> It's nice to save time by not re-inventing the wheel. But frankly, if you can't make up a spreadsheet to do this yourself, you probably shouldn't be borrowing $100,000 to invest.


But everyday everyday I meet people who make million dollar decisions for corporations and dont understand the after tax cost of borrowing


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## steve41 (Apr 18, 2009)

If you are trying to solve a problem which entails tax to a large degree.... remember spreadsheets generally fall short. There is no such entity as a tax rate, average tax, nor marginal tax..... there is an income tax formula, and while you can compute your T1 using a spreadsheet (the formula is complex but straightforward), using it recursively is a spreadsheeters nitemare.


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