Everyone Needs a Mentor

How?

Everyone needs a mentor. Often the wealthy are taught methods and techniques by accountants and lawyers that the average person is not aware of. Does this make it wrong or illegal? Certainly not.

A debt conversion strategy has been used by the wealthy for many years, and now you too can learn how to implement the debt conversion program that has many Canadian talking!

Many individuals struggle with whether they should be building an investment portfolio or paying down their mortgage. As you know mortgage interest is deductible in the US but not in Canada, but investment loan interest is. You can actually do both. There is a way to build an investment portfolio and make payments on your mortgage.

In many cases implementation may not require additional cash outlay above and beyond your current mortgage payment.

The strategy helps families build an investment portfolio while paying down the mortgage.

Three main benefits of the strategy are
(1) Get annual income tax credit by deducting allowable interest expense.

This is achieved by building up a deductible investment loan at the same rate as the non-deductible mortgage is being paid down.

(2) Pay down your non-deductible mortgage quicker.

With the program any income tax refunds are deposited against the non-deductible mortgage. As a result the non-deductible mortgage is repaid quicker and exchanged into a deductible investment loan quicker. See the interactive calculator of a sample illustration and what your potential may be.
(3) Build an investment portfolio at the same time as you pay down your mortgage.

Did you know that a $200,000 mortgage really costs $700,000, after factoring in $282,000 in income tax and $218,000 in bank interest?

Does this look like an efficient mortgage?

Non-Deductible Debt and Deductible Debt

Finance 101 teaches us the different types of debt. Unfortunately, many people have been advised by grandparents, family and friends that all debt is bad. This common knowledge is 100% incorrect. Not all debt is equal.

Common sense tells us to pay off purchases for personal consumption items like: cars, credit cards, vacations, boats and your house mortgage ASAP. These expenditures need to be paid for with AFTER TAX dollars. That is to say one needs to earn a wage, pay the income tax, then pay the bank interest and principal payments to slowly own the car, boat or house outright. The interest cost on these purchases can be hundreds of thousands of dollars. You just have to look towards the bank’s profits to know that this is true.

On the other hand business people have learned that interest cost on money borrowed for the business is an allowable expense deduction before income tax is paid. The same is true for interest costs on investments (see – Canada Revenue Agency, forms and publications, Interest Deductibility and Related Issues No.: IT-533 section 31).

Assuming a business person does not mind paying 6% interest to finance the business if they are confident the business can earn a profit of 15%. As this business model will net the owner a profit of 9% (15% – 6%). This model of using debt to one’s advantage is an example of deductible debt and I call that EFFICIENT.

The debt conversion program facilitates a systematical restructuring of your debt by converting the non-deductible interest costs which you pay with after tax dollars, to a legal form of tax deductible interest expense. See Lipson case, Supreme Court of Canada ruling 2009.

Why Implement The Strategy?

As a financial advisor, I come across many people who simply do not have the cash flow to maintain their lifestyle today, and save sufficiently for their future needs. By converting their non-deductible debt in to deductible debt they can use sections within the Canadian Income Tax Act that may generate additional cash flow which can be used to help save for the future. Often the program may be implemented without any extra cash required. In my opinion, it is a simple and great way to create wealth.

A family earning $60,000 has a future retirement income need of $40,000 after tax income. Assuming 25 years until retirement, annual average inflation rate of 2.5%, average annual investment return of 8% and the income to last for 20 years, they will need a total of $ 944,248 today or make monthly non-registered savings of $1,032 to fund the retirement.
Often this is difficult to do as the current pay cheque is spent on groceries, utilities, house maintenance, car, vacations and… the mortgage payment. Typically less than required is going to savings.

The debt conversion program involves exchanging your non-deductible debt with tax deductible debt. The debt conversion process results in purchasing long-term investments. This enables you to build up an investment portfolio simultaneously as you are paying down your non-deductible debt while building your deductible investment loan. In many cases this may be achieved with no extra cash flow required.

This is intended for information purposes only and is not to be construed as investment advice. Borrowing to invest is suitable only for investors with higher risk tolerance. You should be fully aware of the risks and benefits associated with investment loans since losses as well as gains can be magnified. The value of your investment will vary and is not guaranteed, however you must meet your loan and income tax obligations and repay your loan in full. Consult with your financial advisor before acting on this and/or any investment.

Case Study