# What To Do with Extra Income



## Spalding (May 11, 2014)

I find myself in a good position where I am looking at making about an extra $150k this year above what I usually make. I live in the GTA. I owe about $250k on my $500k house, no other debts, vehicles are owned outright. I have about $75k in my RRSP with $100k in contribution room carried over from previous years and $50k in my TFSA with only this years contribution room. I will certainly max out my TFSA but that's only $5500. I am interested in buying an investment property as well. I'm having a hard time figuring out where to put the extra money. What would you do?


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## MoreMiles (Apr 20, 2011)

If you pay your mortgage, it's a guaranteed return of 3% (ie, variable rate) after taxes... You need to make 5% before taxes elsewhere to get the same benefit. Can you find 5% guaranteed anywhere these days? Not GIC, not even bonds... So there is nothing "risk free" that gives you the same return.

$150k won't get you any "investment property"... at least not in GTA. So you need to take out another mortgage... Do you really want to leverage that much, with 2 mortgages, with our real estate at all time high?

I would pay the mortgage... that feeling of "mortgage free" is undescribable.


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## brad (May 22, 2009)

Everyone's priorities are different, but if I were making an unexpected $150K, I'd donate at least $50K of it to a charity, preferably one that achieves the greatest good per dollar donated. For example, 100% of a donation to the Against Malaria Foundation goes to buy and distrbute antimalarial nets to poor families in developing countries. All the organization's overhead costs are covered separately by a group of private donors. On average, the cost of saving the life of a child this way is $3,400 (see http://www.givewell.org/international/top-charities/AMF#Costperlifesaved). So if you donated $50K, at least 15 children would owe their lives to you. It's an easy way to feel like a hero, plus you'd get about $20,000 back as a tax refund, which you could use toward your mortgage, RRSP, or to fund other donations.


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## the-royal-mail (Dec 11, 2009)

Congrats on the windfall. I do take issue however with the idea of buying "investment property" when you are $250K in debt from your existing property. This is a terrible time to buy, unless you are in the legal, govt and RE industries.

Note that most of your windfall will be taxed away so you will probably only clear about $80K or so.

Put the money towards your existing mortgage and carry on.


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## Spalding (May 11, 2014)

the-royal-mail said:


> Congrats on the windfall. I do take issue however with the idea of buying "investment property" when you are $250K in debt from your existing property. This is a terrible time to buy, unless you are in the legal, govt and RE industries.
> 
> Note that most of your windfall will be taxed away so you will probably only clear about $80K or so.
> 
> Put the money towards your existing mortgage and carry on.


Thanks for the advice, that would definitely be the best option for "sleeping easy". I like to look at the results of my actions 5 years out, and want to make sure that I won't be leaving money on the table. 
The taxes won't be that punitive as my earnings come into my corporation, and I have shareholder loan repayments, salaries to my wife and myself, and dividends as options to protect against heavy taxation.
As far as the properties go, I've seen many friends in downtown Toronto make $500k plus in equity on their homes over the past 5 years. Do you anticipate a U.S. style bubble? Why is it such a bad time to buy when interest rates are as low as they can possibly go?


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## MoreMiles (Apr 20, 2011)

Not only that! It will artificially raise your income so next year, you will be asked to pay for tax instalment early, etc. You need to prepare for your cash flow well.


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## bgc_fan (Apr 5, 2009)

This strikes me as the textbook case where you want to max your RRSP to reduce tax liability and use the reduced tax liability and remaining funds for the mortgage.


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## Jagas (Feb 11, 2013)

bgc_fan said:


> This strikes me as the textbook case where you want to max your RRSP to reduce tax liability and use the reduced tax liability and remaining funds for the mortgage.


^This is what I would do.


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## uptoolate (Oct 9, 2011)

^ Sounds like a decent idea. Helps smooth the income out a bit and you can carry as much of the RRSP contribution forward as makes sense depending on future income projections. With your current income level it looks like it makes sense to use the RRSP going forward. I would probably go this way but it I didn't have the RRSP room I would probably pay the mortgage down with the after tax amount after funding next year's RRSP amount.


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## Mortgage u/w (Feb 6, 2014)

Definately max out RRSP, TFSA and RESP if applicable......the rest I would pay off current mortgage.

As for the rental, recommendable only if you can find a 'bargain' where all expenses (mortgage, taxes, insurance) are covered by the income generated + a surplus of $500/mth. This would represent a simulated return of 4% on your $150k downpayment. If you can't attain at least these numbers, then I would not dive into a rental at this time.


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## Cal (Jun 17, 2009)

Spalding said:


> Why is it such a bad time to buy when interest rates are as low as they can possibly go?


Low rates=high prices.

I would consider discussing with your accountant how much they recommend putting into your RRSP to reduce any taxes payable. You don't mention how much salary that you draw from the corp.

With today's low rates, you may not want to pay off your principle residence. However you don't mention any other assets, so it may be wise to diversify outside of RE, especially if you can hold the assets inside your corp.

Again, it may be wise to discuss with your accountant.


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## derp (Feb 23, 2014)

MoreMiles said:


> If you pay your mortgage, it's a guaranteed return of 3% (ie, variable rate) after taxes... You need to make 5% before taxes elsewhere to get the same benefit.
> 
> I would pay the mortgage... that feeling of "mortgage free" is undescribable.


I agree with MoreMiles; my preference has always been to pay down debts as a top priority - regardless of how low the interest rate is. Being mortgage free is indeed a great place to be :biggrin:


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## Marguerite Gilmore (Apr 10, 2014)

With extra income:
1. Pay off your debts
2. Invest in your house


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## Abbie Darcy (Apr 10, 2014)

Before you use your extra income for a mortgage or investing, think about your overall financial plan.


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## Xoron (Jun 22, 2010)

bgc_fan said:


> This strikes me as the textbook case where you want to max your RRSP to reduce tax liability and use the reduced tax liability and remaining funds for the mortgage.


This exactly. You can parlay that extra income into a 100k RRSP contribution, and only pay taxes on the remainder. 

The only reason NOT to do this is if you expect to be in a high tax bracket in retirement (own your own business, rental properties, lots of unregistered investments).


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## iherald (Apr 18, 2009)

If you're looking for an income property, you might want to look in the US. There is obviously other issues with that, currency changes, and having to hire a property manager, but I'm netting out (before taxes) at 15% on my properties in the US. 

Like any investment, the key is finding someone you trust to be your point person down in whatever area you are buying in.


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## Eclectic12 (Oct 20, 2010)

^^^^ 

I'm surprised you are not mentioning the tax implications which seems to include filing a US tax return, the differences between the two tax systems (ex. CRA has CCA as options, the IRS has it as mandatory) as well as where the cost is more than $100,000, the Canadian tax return has to have a Form T1135 Foreign Income Verification Statement with the CRA.

http://taxtalk.hrblock.ca/internati...tax-implications-on-both-sides-of-the-border/


Then too, this article warns that:


> Perhaps the easiest way to get dinged with unexpected costs—and even expensive fines—is not thoroughly understanding the paperwork required to own U.S. property. “The first year is the roughest,” says Chuong. “You have no idea what you’re doing, you have to file a lot of paperwork and keep a lot of receipts, and it’s expensive to get set up.”


http://www.moneysense.ca/property/be-an-american-landlord-2


I also was interested to read that it could involve more that just the IRS ....


> Finally, know when to quit.
> If you buy more than six properties in any one complex or subdivision you’ll need to file additional paperwork with the Securities and Exchange Commission.



This is not to say it's not a good investment ... just that there seems to be more to be aware of and do that is indicated.




iherald said:


> Like any investment, the key is finding someone you trust to be your point person down in whatever area you are buying in.


According to the first link - as a Canadian, one does not have the right to operate a business or rental so this means the property management company is a legal requirement, where the Canadian would require work visas to repair the rental.


Cheers


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## My Own Advisor (Sep 24, 2012)

Definitely max out RRSP, TFSA and kill off mortgage.

Once that hat trick is done, you can have lots of fun!


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## Spalding (May 11, 2014)

Thanks for the feedback, I guess I was looking for "permission" to buy a rental property as it's a much more exciting proposition than mortgage paydown and RRSP's. Do you think that the GTA real estate bubble will burst, level off or continue to appreciate as dramatically as it has been?


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