Borrow to invest
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 maximum RRSP contribution 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 2006 tax schedule.
This $8,000 contribution will entitle you to a tax refund of $3,360, which you would immediately use to pay back a portion of the loan, bringing your balance to $4,640 ($8,000 – $3,360). You would then have five years to pay the balance which, at term, will have cost you $5,5251, 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%. The numbers speak for themselves!
Time span |
Value of the $2,000 contribution |
Value of the $10,000 contribution
|
|---|---|---|
After 10 years |
$3,934 |
$19,672 |
After 15 years |
$5,518 |
$27,590 |
 |
||
1. The 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.
