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The Companion Advisor: Techniques & Methods
Consider a Debt Swap during down times
Concerned about your investments and wondering what to do to help in these topsy-turvy times?


The idea has to do with converting your bad debt into good debt. There are three characteristics of debt that you need to look at:

    1. The interest rate on the debt (high interest or low);
    2. The purpose of the borrowing (for personal consumption, to acquire depreciating or appreciating assets);
    3. Whether the interest is deductible for tax purposes.

Take your credit card debt as an example. It's generally the worst kind of debt. Why? Because the interest costs are high (often 19% or more), we typically use credit cards for personal consumption or to buy depreciable assets and the interest costs are not usually deductible.

Now, what about your home mortgage? It's a better type of debt because the interest costs are much lower and you're buying an asset that you likely expect to appreciate in value over time. You can't usually deduct your mortgage interest (unless your home is used in your work), so you lose out on this front.

Finally, consider a third type of debt: Money borrowed to invest. In this case, your interest costs are lower, you're buying assets that should appreciate in value over the long term and the interest costs are generally deductible. This type of debt is arguably the best type of debt.

Here's the strategy. Consider selling some of your non-registered investments that have dropped in value, use the cash proceeds to pay down some of your bad debt, then take out a new loan to replace those investments you've liquidated. By doing this, your total debt loan will remain the same, but unlike the old debt, you've paid down, the interest costs on the new debt should be deductible since you're borrowing to invest.

The benefits of this strategy are clear.

  1. You'll trigger some capital losses that, to the extent that they can't be applied against capital gains this year, can be carried back to prior years to recover taxes paid, or can be carried forward indefinitely to save tax in the future.
  2. You'll manage to swap bad debt for good debt by making some interest costs tax deductible, creating tax savings.
  3. You'll have the opportunity to re-consider where you're investing your money and to buy at a time when many securities are on sale.

For more information on this subject, consult with your Fiscal Agents representative or call (905) 844-7700.

By Tim Cestnick, Managing Director, Tax Smart Services at AIC, and author of "Winning the estate planning game: Estate planning strategies for Canadians", "Winning the Education Savings Game" and "2003 Winning the Tax Game"

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25 Lakeshore Road, Oakville, On L6K 1C6.
(905) 844-7700





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Companion Advisor
Techniques & Methods
Consider a Debt Swap during down times

Seven easy ways to save money

Borrowing to invest can be advantageous to your wealth

Potential benefits of maintaining a minimum monthly balance

Why the smart money remains fully invested

Spreading Your Wealth Around

Investing for the Long Term

Home ownership works with borrowed money; investing can too

Market benchmarks

The power of compounding

Derivatives: Not so scary

Finding the money to invest

The nature of diversity

How to analyze risk

Sources of investment information