# Help me understand



## D-ru (Nov 27, 2011)

Hello,

I was told something that I hope I can get clarification on.

B/c interest rates are low right now, I could potentially borrow money at lets say 3%. Then I could purchase shares in (lets say) a canadian bank that pays a dividend more then 3%.

Therefore in the end, I borrowed money but the investment is actually paying off the interest + a little principle..


ALSO, I have another question: 

For ex: RBC has a yield of 3.922% (dividend of $0.71) paid quarterly. does this mean each quarter they pay me 3.922% at the current stock price? or they pay me $0.71 on each share I hold. b/c it works out differently both ways

currently there shares are $71 each. 
3.922% of $71 is $2.70 - more then $0.71 each share

Second question may be stupid but I do not understand how the dividend payout works.


Thanks in advance


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## Canadian (Sep 19, 2013)

Hi D-ru,


Yes, borrowing money to invest is called a leveraged strategy. It can work well for some, but is risky because you face equity risk and eventually may have to sell a stock at a loss and pay out of pocket to cover the debt. Typically, to be able to borrow at such a low rate, the loan would have to be secured [i.e., borrowing money against your use via a HELOC]. A leveraged strategy also imposes a hurdle rate - the cost of borrowing money. Having a 3% hurdle rate, for example, means that your portfolio must return more than 3% to break even. The higher the hurdle rate, the more your portfolio must return, and thus the more risk you must bear.

Dividend yield is annual dividend divided by current stock price. RY pays a $0.71 dividend per share quarterly. Multiply this by 4 to calculate the annual dividend and divide by current stock price to calculate the current dividend yield.


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## MoreMiles (Apr 20, 2011)

Your loan interest payment obligation is guaranteed. Your investment return is not. The only winner for sure here is the bank you borrow money from. If you buy their stocks, helping them to fund their stock price and executive pay... you are helping them to make money from you twice.


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## Eclectic12 (Oct 20, 2010)

First you need to be doing this in a taxable account and be following some rules to keep the interest charges tax deductible.

Second ... you likely want the payout to be more than the 3% as you have to pay taxes on the dividend income.
Actually if it is eligible dividends, if you are paid $1 in dividends, you report $1.38 as income on your tax return and depending on your income level, it could be a 1.89% tax rebate or it could be a 25.40% tax to be paid in Ontario for 2013.
http://www.taxtips.ca/taxrates/on.htm

If it is non-eligible dividends, the tax rates are higher and if it's income (ex. bought an ETF or MF or REIT that has income as part of the payment), it is a higher tax rate.

So without knowing a lot more, it is hard to tell if 3% interest cost and 3% dividend is enough to be paying any of the principal (for most people it won't be).

Here is a link for other considerations:
http://www.financialpost.com/money/wealthyboomer/story.html?id=a251451b-7717-42a0-962f-b1b30a0c3b74


The thing to bear in mind with yield is that the share price is always changing so it is a point in time measure. If the share price drops $10, the yield will go up but the amount paid as a dividend has not changed. 

To illustrate, I bought a beat down split share in Mar 2009 that resumed paying it's distribution in June 2009 for under $4. When I bought it, the yield was $0 as per the rules, the share price was under $5 so they were not paying. When it started paying again the $0.10 a month payment, the yield was something like 24% (i.e. $1.20 / 5). When I sold in in 2012, the share price had risen to $12 so the yield was 10%. From a cash perspective, the only change was going $0 to $1.20 a year.


For their common stock, Royal just raised their dividend from $0.67 a share in January to the $0.71 paid in April ... so until they adjust it up or down, it's going to be $0.71 a quarter or $2.84 a year. This is whether you paid $72.60 a share on March 25th, 2014 or $53.22 a share on Feb 3rd, 2012.



The dividend payout is that the cash shows up in your brokerage account around or a bit after the date Royal says it will be paid. You can then transfer it to pay down the loan.


When you prepare that year's income tax return, the broker will send you by mail or through electronic delivery a T5 letting you know what you were paid, what income you have to report (ex. as Royal pays eligible dividends, being paid $2.84 means reporting something like $3.92 of income).

When you sell the shares, your will also have to report the capital gain (or loss) on that year's income tax return.


If you are going to do this, I recommend you check out the sticky in the CMF taxation "How Investment Taxes Work" or borrow a book on investing/taxes from your library as these books usually have a good chapter on investment taxes, as well as the rules to keep the interest charges tax deductible.


Cheers


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## Moneytoo (Mar 26, 2014)

There're a few good articles in the milliondollarjourney blog on the so called Smith Manoeuvre, and the author shares updates to his personal leveraged dividend portfolio every quarter: http://www.milliondollarjourney.com/smith-manoeuvredividend-portfolio-q1-2014-update.htm


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## Eclectic12 (Oct 20, 2010)

^^^

I disagree ... they are similar as they are both leveraged investing but not the same thing.


The SM uses transfers the equity that is being built up in one's house to be a secured, cheaper interest loan to buy an investment portfolio. The dividends can be used to speed up paying off the mortgage.

The idea is that one is already highly leveraged with their house where the interest is not tax deductible. Transferring the equity paid off into a HELOC to buy stocks keeps the amount owed the same but results in having both a house plus an investment portfolio plus a growing interest charge that is tax deductible.

While the OP could be getting the 3% using a HELOC, there is no indication this is the case and the dividends are stated to be paying off the loan, not a mortgage.

So without further information, this is borrowing to invest in stocks and write off the interest making it leveraged investing.


Cheers


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## Just a Guy (Mar 27, 2012)

Some things you also need to know...

The interest paid on borrowed money, for investment purposes, is tax deductible.

The income generated from investments is taxable...different gains are taxed differently....capital gains, dividends, interest all have different tax rates which can affect the amount you need to earn to actually gain. Remember, you pay back the loan with after tax dollars.

The dividend return, 3.922% in your example was based on the stock price at the time the dividend was last paid. The dividend is $0.71x4 or $2.84 a year regardless of the current stock price. The only time the payout changes is if the bank announces it. You're return is based on how much you pay for the stock at the time.

For example...if there was another financial crisis, and RBC dropped to $39.22/share you'd make a 10% return just from the dividend (assuming rbc didn't announce a cut to their dividend). If RBC later announced it was increasing it's dividend by 10% to $4.3142 per year....your return (assuming you bought at $39.22) would now be 11% (current dividend/purchase price) if the stock went back to $71 you'd also have a potential capital gain of $31.78 if you sold (current price - purchase price). 

If you bought at $71, your dividend would yeild 4% (2.84/71). 

Another thing to consider, if you buy American stocks, the dividends are subject to a withholding tax paid the the irs. You may be able to get it back as a tax credit in Canada, depending on your tax situation.

Finally, it also depends on what kind of account you hold the stocks in...TFSA, RRSP, RESP, or non-registered. Each has different benefits/drawbacks...

Not to discourage you...most of these details won't hurt you, they just can affect the rates of return...with more research, you can learn to maximize the returns...

Truthfully, I wouldn't wait until you've learned everything before investing...as that will never happen. It's better to get started once you understand the basics, and learn the subtleties as you go on...remember, you can't earn anything from investments until you actually own some..


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## Moneytoo (Mar 26, 2014)

Eclectic12 said:


> ^^^
> 
> I disagree ... they are similar as they are both leveraged investing but not the same thing.


Agreed - corrected my comment


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> Some things you also need to know...
> 
> The interest paid on borrowed money, for investment purposes, is tax deductible ...
> 
> Finally, it also depends on what kind of account you hold the stocks in...TFSA, RRSP, RESP, or non-registered. Each has different benefits/drawbacks...


Hmmm ... unless it's something like an RRSP where it will generate a tax refund that enables paying off most of the loan, I'd want to thing long and hard about whether it's worth giving up the ability to write off the interest charges and the ability to write off capital losses against other capital gains.

A loss in a registered account destroys one's contribution room ... a loss in a taxable account can be used to reduce the capital gains owing.




Just a Guy said:


> Not to discourage you...most of these details won't hurt you, they just can affect the rates of return...with more research, you can learn to maximize the returns...


I agree the OP should not be overwhelmed by the info or discouraged (it takes time to understand/learn anything!) but some details can hurt the investor. 

Learning years later that I needed to reduce the REIT's adjusted cost base (ACB) by the return of capital (RoC), after the REIT had been bought out twice so that the needed info was no longer readily at hand was *painful* compared to taking a snapshot of the info once a year and updating my records.

Then too ... unless the OP is in a lower income level, with the interest cost at 3% and the dividend payout at 3%, there's not a lot of room to maneuver if the interest rate goes up (and is likely not enough to be paying interest plus capital out of the loan).




Just a Guy said:


> Truthfully, I wouldn't wait until you've learned everything before investing...as that will never happen.
> It's better to get started once you understand the basics, and learn the subtleties as you go on...remember, you can't earn anything from investments until you actually own some..


I'd modify that to say "learn everything about one investment type including the bookkeeping as well as the taxes (yearly and when sold) and then stick to the investment one understands when pulling the trigger". One can always add more types as one learns about them - jumping in without a full view can be painful.

Keeping learning at one's own pace but don't buy anything before understanding how it works, what the taxes plus required bookkeeping is.


Where one uses one's own money, worst case - one will lose a set amount. Using other people's money (i.e. borrowing to invest) means one can lose *more* than the original amount. 

Actually, the worst case would be to lose the entire investment, pay enough interest so that one has paid double the price and then have CRA determine the taxes were done incorrectly, assigning enough penalties plus interest so that when it is all added up, one has nothing but has paid 3x the price.




Moneytoo said:


> Agreed - corrected my comment


I figure there is enough confusion without adding to it (plus I've misrepresented things myself in posts) so thanks for updating it and no worries.


Chers


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## Just a Guy (Mar 27, 2012)

Remember, the op was talking RBC, not REITs or venture stocks...the odds of RBC going to zero are slim.


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## Eclectic12 (Oct 20, 2010)

While I tend to agree ... the same was said of BreX, Laidlaw, Nortel, Corel etc. so keeping the risk in mind is a good idea, IMO.

This is particularly important if like me, one can go for long stretches with no access to react to bad new.



Plus if one is not clear on what is an investment that pays a mixed cash distribution going in, such as a REIT, MF or ETF - it's all too easy to rue the purchase after the fact. (Case in point ... me!)


Cheers


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## Time4earlyretirement (Feb 21, 2014)

Depending on whether you buy into the speculation of a much needed correction, and similar to value investing, many people forget to factor in valuation into their strategy and are too focused on the short term, cash payout. If you're loan is 3%, you will need to find an investment that offers back more than that (considering all the tax factors), AND one that is safe and won't lose you capital, the latter being more important. It is hard to find a safe blue chip stock that will provide you with 4-5% at current valuations. Even if you do, lets say you manage to make 1% on your leveraged position. In 12 years, excluding capital appreciation, you would have compounded a 12.7 return (assuming reinvestment of income at the same rate.) Not having a crystal ball, I will throw it out there that I think in 12 years there will be at some point a correction greater than 12.7%, meaning any gains would be offset and even capital would be taken away. Obviously if the market continues to go up, you get both the cashflow and cap appreciation.

My point being though... the best time to take on risk and leverage (borrow money) is when the economy is doing worst; right now it is hitting new highs. Granted that you chose secure companies with dividends that can weather a depressed economy to cover your leverage position, you are actually making a play on capital appreciation, having the dividends cover your cost of borrowing. This in my opinion, is the best way of using leverage in terms of potential/effort needed.

Take for example BCE... if you leveraged in 2009, with the yield in 5.x%, you would have probably been able to make a little cash from divs - cost of borrowing, and the stock has since then, nearly doubled in price. The only difference of doing the strategy then and now is that, then it was a recession; things at an all time low are poised to go up greater than things that are at a 5 year high.


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## Rusty O'Toole (Feb 1, 2012)

If you mortgage your house and invest the money the interest is tax deductible, if you have a mortage and invest your savings it is not. So you are better to cash in your investments, buy the house, mortgage it and invest the money. This is called the Smith maneuver.

http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm

Now may not be a good time to invest, when the market is making new highs.


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## Brian Weatherdon CFP (Jan 18, 2011)

Dear D-ru ...there are no stupid questions. You seek clarity on matters that have puzzled many. Others have offered great insights above ...and wider resources are easily available on the web as well. 

As it seems you're starting out on this path, one may not wish to begin with a specific stock. That strategy can become lucky or unlucky for many reasons, and several such are beyond your control. Your focus on dividends can be immensely helpful, and you may reduce risks and better stabilizie your results by choosing a dividend investment fund or ETF or pool to diversify holdings at little cost. _BTW in mentioning cost, I'm not referring just to the "cost" of trade or MER ....but rather the risk-adjusted cost: thus you reduce risk yet also target effective results._


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## Joewho (Nov 18, 2015)

I am picking up this old thread because I have an a bit unclear on some points, perhaps someone can enlighten me.

I am planning on buying a cottage ( I know it is not a good investment, but I want it, anyway) and was hoping to find a way to reduce the costs. My plan is to sell enough stocks to pay for the cottage, borrow on my investment margin account at 2.7 percent and buy the same high dividend stocks back, thus making money on the dividends above the debt repayment interest. I know that things could turn out in a way not as planned. But, I have made arrangements to cover this if needed.

Some of the things I don't understand:
1) Is there any advantage in borrowing money on your house ( it is fully paid) rather than a margin loan. The advisor at the bank told me that I would not probably get a better rate than this.

2) How do you manage to get a tax deduction on money that has been borrowed to pay the interest down, if I have understood it correctly.

3) Is there any point in paying down capital, at least in the short term? For instance, I would be making more money on dividends than it costs to service the debt. An hopefully in the long term both the portfolio of stocks and the property will grow in value. Why not pay it off in ten or twenty years?

Thanks for any help
jjoe


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## james4beach (Nov 15, 2012)

D-ru said:


> B/c interest rates are low right now, I could potentially borrow money at lets say 3%.


Yes, true although it will be significantly higher for an unsecured loan



> Then I could purchase shares in (lets say) a canadian bank that pays a dividend more then 3%.


Yes, also true.



> Therefore in the end, I borrowed money but the investment is actually paying off the interest + a little principle..


That's not quite right.

It's true that dividends will pay enough to cover your *interest payments* -- the cashflow from the dividends will pay your interest.

But you'll still have to repay the principal of the loan, and with stocks there is never any guarantee of principal. If the stock price declines, you'll be unable to pay your full principal loan, and you will have a loss. The dividend yield (3%) is not the same thing as the stock's total return. For your strategy to work, you need a total return that exceeds the cost of the loan.


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## Joewho (Nov 18, 2015)

Hello James4Beach,
Thanks for answering. But, I think you will find that you answered the questions of the previous poster and not mine. They concerned the general approach of a kind of Smith Maneuver. I understand that procedure but had a few more specific questions. It is probably my fault in picking up an old thread. I know very well that equities are a risky business. But, I mention in my post that I have covered myself in case of unpleasant eventualities. I would still appreciate your advice, however, on the questions posed.
thanks Joe


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## Nerd Investor (Nov 3, 2015)

Joewho said:


> I am picking up this old thread because I have an a bit unclear on some points, perhaps someone can enlighten me.
> 
> I am planning on buying a cottage ( I know it is not a good investment, but I want it, anyway) and was hoping to find a way to reduce the costs. My plan is to sell enough stocks to pay for the cottage, borrow on my investment margin account at 2.7 percent and buy the same high dividend stocks back, thus making money on the dividends above the debt repayment interest. I know that things could turn out in a way not as planned. But, I have made arrangements to cover this if needed.
> 
> ...


The advantage to borrowing money on your house is you generally get a cheaper rate. But if you get a cheaper rate borrowing on margin, than go for it. The only disadvantage to borrowing on margin is that there is a greater chance the asset securing your line of credit (ie: stocks) will decrease and put you in a position where you might risk a margin call. The chances of this happening really depend on how much you're borrowing relative to how much is in the account. 

Point 2, I'm not quite sure I follow, sorry. The interest is deductible because you are borrowing to earn income from investments (by purchasing shares). Not sure if that clarifies anything. 

Point 3, you could argue that as long as your upside from the stocks is greater than the interest rate you don't have to rush and pay down the debt. Just keep in mind however, it go bad on you at some point. Interest rates will rise eventually (perhaps sooner than later). I doubt you'll still be getting 2.7% 10 + years from now, but who knows really?


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## Just a Guy (Mar 27, 2012)

One thing I'm not clear on, is the cottage for personal use? If so, it may not be considered an "investment" as far as CRA is concerned and you may not be able to write off the interest on the money borrowed.


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## Eclectic12 (Oct 20, 2010)

Joewho said:


> ... Some of the things I don't understand:
> 1) Is there any advantage in borrowing money on your house ( it is fully paid) rather than a margin loan. The advisor at the bank told me that I would not probably get a better rate than this.


YMMV so I'd find out for both.

In terms of differences, the loan against the house typically only has interest rate changes to worry about. Technically, as I understand it, the loan could be called at any time but where the cash flow is good, it is not likely.

The margin loan can also have rate changes but as the assets backing the loan tend to be stocks - a sharp drop in the stock values may trigger a demand for cash where one was not expecting it (this is a margin call). Where one does not make the payment on time, one's stocks may be sold to cover it, regardless of how good/bad/indifferent the timing is. The sale may also generate capital gains taxes to pay.

Where one has considered the risk and has a plan - it may be fine. Personally, I didn't want to deal with it plus had a line of credit against my house for only a bit higher than the margin rate so I went the home loan route (i.e. HELOC).




Joewho said:


> ... 2) How do you manage to get a tax deduction on money that has been borrowed to pay the interest down, if I have understood it correctly.


Make sure the investments bought qualify, make sure to follow the rules to keep the loan 100% deductible and to keep bookkeeping easy, I only use the HELOC for the investments.
http://www.taxtips.ca/personaltax/investing/interestexpense.htm
http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm

Each year I am sent a yearly summary listing the interest costs that I plug into my tax software into Line 221 "Interest costs and carrying charges". The tax software applies it to reduce the income.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html




Joewho said:


> ... 3) Is there any point in paying down capital, at least in the short term? For instance, I would be making more money on dividends than it costs to service the debt. An hopefully in the long term both the portfolio of stocks and the property will grow in value. Why not pay it off in ten or twenty years?


I prefer to whittle it down so that I can handle a 40% drop in the stock value ... but that may be because having a regular job, I can't always make the investing moves I want at the time I want. :biggrin:


Cheers


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## Eclectic12 (Oct 20, 2010)

Nerd Investor said:


> ... Point 2, I'm not quite sure I follow, sorry. The interest is deductible because you are borrowing to earn income from investments (by purchasing shares).


In practice, most of the time .... yes ... there are a few wrinkles though.

From write ups, the Finance dept requires that the stock pay income. CRA on the other hand has spelled out that they will assume a stock that does not pay income has the *potential* to and will allow it. If the company has a policy to never pay dividends (or other income), then the interest won't be allowed.

Another factor is to be able to trace the use of the money to the investments. As per the million dollar journey link in post # 20, using the same loan for different purposes can result in more than one expects of the interest to be disallowed. Between using the HELOC for documentation for the investments plus avoiding any confusion ... I keep it simple by only using the HELOC for investments.

Finally, the same link mentions that RoC is a potential issue ... so I make sure to withdraw more than the RoC paid during the year and pay the HELOC down with it.


Cheers


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> One thing I'm not clear on, is the cottage for personal use?
> If so, it may not be considered an "investment" as far as CRA is concerned and you may not be able to write off the interest on the money borrowed.


Proceeds from selling investments pay for the cottage ... so the cottage use is irrelevant as far as I can tell.

When new investments are bought, the cottage may be used as collateral but the loan money should be directly traceable to buying the new investments so there's no issue that I can see.


Cheers


*PS*

If there was a mortgage that paid for the cottage, then yes - personal use would matter.


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## agent99 (Sep 11, 2013)

It's possible to get money at low interest rates. For example a car loan or home mortgage.

When we needed a new car, I had the option to buy it for cash or with 1.9% financing. I chose to finance and have probably earned say 6% by not selling existing investments to buy the car. Still well worthwhile even after taxes. If market had plummeted (it did!), I would still have been receiving the dividends and then eventually the market recovered (as it did). Once did something similar when we still had a mortgage. Just added ~$10k or so at renewal time and invested the extra funds in a GIC that at the time paid double digit interest! (Obviously a while back!) Can't likely claim interest for investment deduction doing it this way? Never did anyway.


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## lonewolf :) (Sep 13, 2016)

Eclectic12 said:


> First you need to be doing this in a taxable account and be following some rules to keep the interest charges tax deductible.
> 
> Second ... you likely want the payout to be more than the 3% as you have to pay taxes on the dividend income.
> Actually if it is eligible dividends, if you are paid $1 in dividends, you report $1.38 as income on your tax return and depending on your income level, it could be a 1.89% tax rebate or it could be a 25.40% tax to be paid in Ontario for 2013.
> ...


 Start claiming expenses more chances of being taxed as a business. I would stay away from claiming any expenses.


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## lonewolf :) (Sep 13, 2016)

borrowing money @ a lower interest rate to buy a stock that pays a higher dividend rate then the interest rate used to borrow the money to buy the shares is not a sure thing. The dividend does not have to be paid. This type of strategy not good when we are putting in a historic top. Not there yet to early to short have to wait for price structure to complete. Completion of 5 up from Feb 2016 lows could complete 5 up going back to the year 1932


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## Joewho (Nov 18, 2015)

Thanks very much, these are really thoughtful answers and they help in mulling the question over. Regarding the question of personal use for the cottage. Yes, it is personal use. That is why, though, I am selling and then borrowing to buy stocks to buy it. As Eclectic 12 has noted, getting a loan to buy stocks rather than a mortgage to buy the cottage makes it tax deductible. I am aware of the danger of a margin call and have that covered. I think the only thing that I really need to consider is whether to go with a Heloc or a margin loan. Once again, thanks for the excellent discussion.
joe


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## Just a Guy (Mar 27, 2012)

Eclectic12 said:


> When new investments are bought, the cottage may be used as collateral but the loan money should be directly traceable to buying the new investments so there's no issue that I can tell.


Umm, getting a mortgage on a cottage is very difficult, most banks won't touch them. In theory though, you could d that. I thought he was borrowing to buy the cottage.


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## Eclectic12 (Oct 20, 2010)

lonewolf :) said:


> Start claiming expenses more chances of being taxed as a business. I would stay away from claiming any expenses.


The only expense being claimed is the interest expense that has a trail to back to the investment portfolio showing it was used for investments and is only for the investments.

I suppose CRA could decide to reclassify it as a business but with the low volume as well as maybe eight sells in the year - I doubt they'd be able to make it stand up.
Tax tips lists some of the factors at this link ... http://www.taxtips.ca/personaltax/investing/taxtreatment/capitalorincome.htm

Of the eight factors, one fits while the other three that might fit, there is lots of evidence to counter it. For example, I have held some securities for a short period but with over 90% being held a year plus, it does not fit IMO.


It seems clear to me that I would be at risk of having part of the interest deduction disallowed due to either missing a company having a policy to not pay dividends (small part of the overall holding as the TSX companies mainly pay dividends) or taking the wrong steps to deal with RoC payments.


Regardless ... the interest costs have been claimed for over a decade now so if CRA wants to make this claim - they are taking their time.:biggrin:




lonewolf :) said:


> borrowing money @ a lower interest rate to buy a stock that pays a higher dividend rate then the interest rate used to borrow the money to buy the shares is not a sure thing.


True ... especially with taxes having to be paid on the dividends. 




lonewolf :) said:


> ... The dividend does not have to be paid.


True again ... though this is risk whether one paid one's own money or OPM for it. It also depends on how close to the interest costs the dividends are paying.



Cheers


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> Umm, getting a mortgage on a cottage is very difficult, most banks won't touch them. In theory though, you could d that ...


Never have done it so I have no idea.




Just a Guy said:


> ... I thought he was borrowing to buy the cottage.


The OP says:


Joewho said:


> ... I am planning on buying a cottage...
> My *plan is to sell enough stocks to pay for the cottage, borrow on my investment margin account at 2.7 percent and buy the same high dividend stocks back* ...


So unless the plan changes, the interest costs would be for the replacement stocks.


Cheers


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## Eclectic12 (Oct 20, 2010)

Joewho said:


> ... I am aware of the danger of a margin call and have that covered. I think the only thing that I really need to consider is whether to go with a Heloc or a margin loan ...


If you have the margin call planned for, then from what I understand - the interest should be close to, if not lower than the HELOC. I don't believe there are any costs to setup the margin account where there may be fees to setup the HELOC (ex. appraisal of value to set $$$).

There's one aspect I missed mentioning ... where are the investments to sell held?

If it is a TFSA, the almost the full $$ will be available to fund the cottage purchase as only the sell commission will reduce it as it is Canadian tax free.
If it is a taxable account, it will look similar (i.e. only sell commission will reduce it at the time) but there likely will be capital gains (CG). Without capital losses to reduce or eliminate the CG, one is wise to set aside fund to cover the taxes instead of putting everything into the cottage.
If it is an RRSP or RRIF withdrawal, there may also be tax implications.

If you have already factored this in, great. If not, it needs to be estimated/planned for.


Cheers


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## Koogie (Dec 15, 2014)

Might also have to think about superficial losses on the stocks sold (if in a loss position) and any stocks bought to replace them (IF they are the same securities). Either now or in the future if carried.


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## Joewho (Nov 18, 2015)

Eclectic12 said:


> If you have the margin call planned for, then from what I understand - the interest should be close to, if not lower than the HELOC. I don't believe there are any costs to setup the margin account where there may be fees to setup the HELOC (ex. appraisal of value to set $$$).
> 
> There's one aspect I missed mentioning ... where are the investments to sell held?
> 
> ...


I am planning on taking some from TFSA; some more from my margin account. I transferred some money from a RIF to the margin in December and so, although there is a high capital gain in the Rif, as of today there is just a three percent cap gain in the margin account, as it hasn"t been in there long.

Someone mentionned superficial loss. Although it is a little risky I have so far successfully negotiated that. For instance, there is a loss on Stella Jones in my margin account. I bought a similar amount in my rif just yesterday, planning on selling the margin stock for a loss or a gain after an appropriate waiting period. since Stella was up about five per cent today, I think, so far so good. Of course, short term doesn't mean much. 

So, most of those angles I have covered. I had thought of selling some stocks that I hold that have a high capital gain for rebalancing purposes. My ôriginal plan was to keep them to perhaps beyond my own life time. But, you have to pay the taxes at some point. So I have wondered about doing this. But, I am inclining against this idea. I have enough money just selling a stock or two that is just a bit of capital gains, maybe one capital loss ( which I have arranged for in the way mentionned) and maybe one from my TFSA. 

One thing about the margin loan that is a bit troubling ( not a problem if I decide not to pay down the capital) is that although I can get a rate of 2.7 percent, the sweetspot is $100,000. And, when I called the other day, and this is the kicker, she said that in order to keep this rate I would have to keep a constant loan of at least $100,000. With a mortgage, which I have never had, so I don't really know, but I think you would not have this limitation.

hope this addition is not confusing,
I have really appreciated the advice and discussion 
thanks Joe


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## twa2w (Mar 5, 2016)

Wow, a lot of posts.
So not sure if my reply is relevant to OP or subsequent questions. Here are some random thoughts which may already be covered. Sorry.
If you sell stocks to pay for the cottage, you may face a tax bill if they are in a gain position.
If they are at a loss, you have to ensure you know the 30 day rule. Also be aware of the carry forward and carry back rules on losses.

If you then use a margin loan to rebuy the stocks then there are a couple of issues to think about.
Margin loans may be called for margin or otherwise- know your terms.
Margin loans are floating and will go up as rates rise.
Rate may be adjusted depending on size of outstanding margin loan.
Not all stocks eligible for margin.

Advantage disadvantage of securing the loan with real estate?
Rate may or may not be better.
Cost is likely higher. - Appraisal legal
Can lock in low rates for up to 5 years, but may face penalties if you have to get out for whatever reason.
If rate locked in, you will have to pay down principal. As part of payment versus margin which is interest only.


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