Quote:

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Originally posted by Timon

Thanks Pramodji for your responses.

The only investment that I see I make out of RRSP would be conservative, given that I need to have the investment to offset the catchup loan eventhough my general risk tolerance and the time horizon is high.The maximum return I could expect out of a conservative portfolio would be in the range of 4-6% which is almost the prime(the interest I will be paying for the loan).

Does it make sense to go with this plan in this case if my investments are probably earning less than prime? I still need to figure out how the fact that I will be paying off my LOC make an impact.

I am sure this analysis would be helpful to others as well.

Thanks for your time once again and waiting for your response.


T

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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada

Quote:

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Originally posted by dp_jain

Hi,

There are secured investments out in the market where one may expect getting over 12% with interest earned working like RRSP and investment is taxed at maturity/withdrawal like capital gain.

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Hi,

Please note that I am not a broker/agent who sale these products. What I can enlighten is that take investment loan and invest in secured - seg funds (secured 75% or 100% depending on situation). Loan is mosly available on prime or prime plus 1/2 - 1%. This is interest only loan. Pramodji, you must be aware of this. There are seg funds out in the market which historically have been returning over 15% (10-25%). Mind it that the investment has to be for a fairly longer period.

Interest paid on loan is directly decucted from the taxable income being investment loss as it did not earned any income and resulting in either tax refund or lowering the tax payable as RRSP. Whenevr, seg funds are matured/encashed the reminder of money after paying investment loan is taxable capital gain which is 50% exempt and 50% .taxable.

My wife is a financial consultant and she has lot of clients in her basket who have been investing in such vehicles. However, individual scenario might be different. Hope it will help.

DP Jain

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Live and Let Live. Together we can make a difference.

DP JAIN, CPA, CGA, CPA (US), CA(I), LL.B.(I)
416-305-0080
(Loans, Mortgage, Tax, Accounting, Investments)

Thanks for your replies, Pramodji and dp_jain.

I have been trying to do some research on my own and I have another question.

1. What is a debt service ratio?

2. How LOC and RRSP catchup loan affect Debt Service Ratio? For e.g, If I decide to go for RRSP catchup loan, how differently it will affect my debt service ratio? (except for the fact that my loan will be higher in case of an RRSP catchup).

3. If I decide to go for a mortgage in a year or two, will the RRSP catchup loan affect my credit worthness(I do have a clean credit so far)



Thank you very much.

T

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"The grass is not, in fact, always greener on the other side of the fence. Fences have nothing to do with it. The grass is greenest where it is watered. When crossing over fences, carry water with you and tend the grass wherever you may be"

Hi Mr. Jain,

let me know if I understand this properly

Interest on unsecured/secured LOC for investment purposes is tax deductible, which means that 10000 taken at 6.25 % is only going to be actually costing (10000 * 6.25%) * marginal rate of return (43%) =
Therefore the affective interest rate is only 3.57%

now the 2nd thing: segregated funds: I know some funds making close to 12-15 % (nothing more than that), are there some rules in regard to this, meaning flexibility?

Not coming from financial field: i would still assume than RRSP way is a good investment strategy but the one stated above goes even further.
Because the capital gains on method one is only taxable to the tune of 50% (50% * marginal rate of tax).
An example if 10,000 were to become 1,00,000 in 10 years
if withdrawing:

1. from rrsp
it would be 1,00,000 * marginal rate of tax (30% or maybe 43%)
means 33,000 gone

2. outside RRSP
it would be 50% of dividend earned
and 30% of one half of capital gain

This all makes sense.

Is this the way you see it? and furthermore can i have your contact details so I can pursue this option.

My situation:
new to financial planning(but read a lot, sometimes assume that know a lot)
have a house
steady job
can invest (50 -50 mix)

Thanks

Amar

Quote:

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Originally posted by amarbajwa

Hi Mr. Jain,

let me know if I understand this properly

Interest on unsecured/secured LOC for investment purposes is tax deductible, which means that 10000 taken at 6.25 % is only going to be actually costing (10000 * 6.25%) * marginal rate of return (43%) =
Therefore the affective interest rate is only 3.57%
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Yes, interest paid on investment loan is tax deductible. You rightly understood it.
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now the 2nd thing: segregated funds: I know some funds making close to 12-15 % (nothing more than that), are there some rules in regard to this, meaning flexibility?
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Lot of funds are making more than 12-15%. If by flexibility you mean early withdrawal than yes, one can withdraw subject to deferred service charges. After seven years there is no DSR.
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Not coming from financial field: I would still assume than RRSP way is a good investment strategy but the one stated above goes even further.
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This is certainly better. One can enjoy both benefits. RRSP investment as well as interest paid on investment loan.
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Because the capital gains on method one is only taxable to the tune of 50% (50% * marginal rate of tax).
An example if 10,000 were to become 1,00,000 in 10 years
if withdrawing:

1. from rrsp
it would be 1,00,000 * marginal rate of tax (30% or maybe 43%)
means 33,000 gone

2. outside RRSP
it would be 50% of dividend earned
and 30% of one half of capital gain

This all makes sense.

Is this the way you see it? and furthermore can i have your contact details so I can pursue this option.
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Exactly. You can call me any time at 416-305-0080. Aggressive investors can investment in mutual funds which also brings the same benefits with higher return. Investment loan Up to $50000.00 is available without proof of income.---------------------------------------------------------------------------------------

My situation:
new to financial planning(but read a lot, sometimes assume that know a lot)
have a house
steady job
can invest (50 -50 mix)
---------------------------------------------------------------------------------------
No problem, call any time and we can sit for a one to one meeting.


Thanks

Amar

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Live and Let Live. Together we can make a difference.

DP JAIN, CPA, CGA, CPA (US), CA(I), LL.B.(I)
416-305-0080
(Loans, Mortgage, Tax, Accounting, Investments)

(Not coming from financial field: i would still assume than RRSP way is a good investment strategy but the one stated above goes even further.
Because the capital gains on method one is only taxable to the tune of 50% (50% * marginal rate of tax). )
I have pasted a link it gives comparision of personal income tax rates
MarginalTax Rate /Marginal Rate on Capital Gains/ Marginal Rate on Dividends .
Gives an idea what type of income is taxed favorably which in turn can guide your Investment choice.
http://www.2ontario.com/welcome/bctx_606.asp