Borrow to invest
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In some cases, it may be to your advantage to borrow money to invest in your RRSP.
For example, suppose your taxable income is $50,000 and you want to contribute $2,000 to your RRSP this year. Let's see what happens if you borrow $8,000 to raise your contribution to $10,000 (and this contribution is within your legal limit).
Our example is based on the hypotheses that it is a 5-year loan at 7.20% interest, and it is based on the 2004 tax schedule.
This $10,000 contribution will entitle you to a tax refund of $3,837, which you would immediately use to pay back a portion of the loan, bringing your balance to $4,163 ($8,000 - $3,837).
You would then have five years to pay the balance which, at term, will have cost you $5,0201, including interest!
In 10 or 15 years, you will be happy you contracted this loan. Look at the following table and compare both contribution amounts, assuming an annual return of 7.00%. The numbers speak for themselves!
Value |
$2,000 contribution |
$10,000 contribution |
after 10 years |
$3,934 |
$19,672 |
after 15 years |
$5,518 |
$27,590 |
 |
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1The loan refund is calculated over an amortisation period of 5 years, with payments made weekly at a rate of 7.20%, considering that the tax savings is used to reduce the loan after 8 weeks - the period between the end-of-February contribution and the approximate date of the tax refund.
