We’ve all been listening to Bank of Canada governor, Mark Carney and Finance Minister, Jim Flaherty warn us about the perils of debt for what seems like years now. We’ve been told we’re to stop buying homes we can’t afford, to stop using HELOCs like they’re ATM machines, and to be very careful with how much we take out in home equity loans. But is all debt really that bad? Of course not.
We know that some types of debt are actually good debt – and HELOCs and home equity loans may actually fall into that category, as they can improve the value of our home, thereby increasing our total assets. Student loans are another type of good debt because they help you build your future, and your future income. But even though you can’t claim this type of investment on your taxes, there is another type of debt that you can – and that’s by investing in capital markets.
“I use it all the time,” says Jeanette Brox of Investors Group Inc. “You’ll make some capital gains which are tax preferred but the other thing is that type of borrowing is a good form of debt because you get to write off the interest. I do it personally myself.”
Capital markets are financial markets such as stock markets and bond markets and when used wisely, they can not only make Canadians a lot of money, but save them a lot, too – if they’re willing to borrow first to become active in them.
Ms. Brox says the strategy she recommends to clients is to first take out a loan for $100,000 and then invest that money in her client’s capital market of choice. The loan will have to be repaid, but over a course of typically about 20 years – plenty of time for even the longest-term investors. Over that time frame, the individual will be raising additional funds outside of their RRSP from the return on their investments, and they’ll be able to write off their interest, too when it comes to tax time. This, says Ms. Brox, is one of the most overlooked ways to accumulate (and use!) good debt.
“It’s a curse and a blessing,” says Ms. Brox when referring to how Canadians are now more concerned about debt than ever – and afraid to take on any more. “I was raised not to carry any debt, don’t carry any balances. And that’s good advice. But Canadians have to open their mind to the idea that there are forms of good debt.”
Do you think this is a wise strategy for Canadians to pay down their debt and make a little money in the meanwhile? Or are you of the mindset that taking on more debt, even to make and save money, is a slippery slope – and one you don’t want to be on?
