Borrowing to invest
Q – What are your comments on borrowing money to invest in a non-registered plan? What tax implications are there for the money that you borrow? – C.S.
A – If the money is borrowed for investment purposes, you can usually deduct the interest paid on the loan, under “carrying charges” on the tax return. However, there are some limitations on this, so be sure that the money is invested in qualifying securities like bonds, stocks, mutual funds, and the like. Check with Canada Customs and Revenue if you are unsure.
On the larger issue of the wisdom of borrowing to invest, the technical term for this is “leveraging”. If done successfully, you can significantly enhance your returns because you’re using other people’s money to make profits. However, the risks are significant, as anyone will attest who borrowed heavily to invest back in the late 1990s when stock markets were riding high. Leveraged portfolios have probably incurred heavy losses since then, unless they were very skillfully managed and concentrated on a few high-performance areas such as gold and income trusts.
Anyone can make strong numbers case for leveraging. However, your personal psychology must be taken into account. People who are uncomfortable with risk should not try this strategy. They are likely to bail out if their securities lose value, locking in their losses in the process. Only investors with a strong stomach, a lot of experience, and patience should consider this approach.
There’s a full chapter on this subject in my book Secrets of Successful Investing, which is now available in a trade paperback edition. It’s available at a discount of 20% off the suggested retail price. – G.P.