Investment leverage strategies

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Investment leverage strategies

• Name, DESIGNATION
• Job title, Company Name

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Tax efficient borrowing

• Not all loans are created equal
• Interest on loans used to generate income is
  generally tax-deductible
• You can reduce your cost of borrowing by
  converting non-deductible debt into deductible
  debt

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Tax efficient borrowing

• Matt, Rachel and Andrew
• Siblings who want to buy a 150,000 family
  cottage
• All three have similar incomes
• Each sibling
• Contributes 50,000
• Has a 50,000 non-registered investment
• no-load units of fund XYZ.
• Takes a different approach to pay for the cottage
• with varying results.

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Tax efficient borrowing

• Matt
• Sells his investment to pay for his share of the
  cottage.
• Rachel
• Takes out a 50,000 10-year loan from the local
  bank
• Andrew
• Sells his investment to pay for his share of the
  cottage
• Immediately takes out a 50,000 investment loan
• to re-purchase the investment.

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Tax efficient borrowing

• Results after 10 years (non-Quebec)

For illustration purposes only. Rate of return is
8, interest rate is 7, taxable portion of
return is 33, tax rate on investment income is
35, marginal tax rate is 40, loan interest for
Andrew is 100 tax deductible, loan interest for
Rachel is not tax deductible.
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Tax efficient borrowing

• Results after 10 years (Quebec)

For illustration purposes only. Rate of return is
8, interest rate is 7, taxable portion of
return is 33, tax rate on investment income is
35, marginal tax rate is 40, loan interest for
Andrew is 100 tax deductible, loan interest for
Rachel is not tax deductible.
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Leverage using alternative equity
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Leverage using alternative equity

• Challenge
• You want to leverage more than 250,000
• Youll need over 83,000 for a 31 leverage loan
• How can you avoid liquidating other investments?

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Leverage using alternative equity

• Solution
• Use the value you have already built in your
  existing non-registered investments
• Options
• Manulife Mutual Funds
• Manulife Segregated Funds
• Manulife Bank GICs
• Manulife Financial GICs
• Manulife permanent life insurance with a cash
  surrender value
• Existing leverage growth

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Insured investment leverage
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Insured investment leverage

• Combine life insurance and leveraged investing
• Protect your estate in the event of your death
• Seg. fund contract-holders
• Name a successor annuitant
• Contract passes on intact to the spouse upon
  death
• Insurance policy
• UL, Whole life or Term
• Leveraged investment
• Life insurance contract is assigned to Manulife
  Bank
• Pays off the loan in the event of death

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Insured investment leverage

• Tax efficiency
• Loan interest and all or part of the premium on
  the assigned insurance policy may be tax
  deductible
• In the event of the investors death
• The insurance policy pays off the loan
• The seg. fund contract can continue to grow
• Capital gains taxes are deferred until the spouse
  sells the funds
• Protect your estate!

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Maximize discretionary RRIF income strategy
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Maximize discretionary RRIF income strategy

• Problem
• Mandatory RRIF income withdrawal if even its not
  needed
• In many cases this is taxed at a high marginal
  rate
• Solution
• Use the income stream to fund an investment loan
• Interest payments may be deducted from taxable
  income

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Maximize discretionary RRIF income strategy
For illustration purposes only.
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Maximize discretionary RRIF income strategy
Results after 10 years
63,070 increase in net worth by leveraging vs.
straight investing of after-tax RRIF income
(annually)
For illustration purposes only. Assumptions End
of year pre-tax non-leveraged contributions equal
to leverage cost of borrowing. Annual loan
interest rate is 7, annual investment return is
7, with return 100 deductible. Annual taxable
portion of return is 25, tax rate on income
allocations is 30, and marginal tax rate is 46.
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Charitable leverage
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Charitable leverage

• Support causes that are important to you
• Government tax credits can help make your
  contribution go farther
• AND with leverage
• There is a way to make your charitable
  contribution work even harder

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Charitable leverage

• How it works
• Loan proceeds purchase non-registered
  investments
• Cash previously designated for charity, now pays
  loan interest
• Interest may be tax-deductible
• Tax savings from interest deduction donated to
  charity annually
• Less any tax on investment income
• When investment is sold
• Repay loan and taxes
• Donate proceeds
• Result Cash set aside is the same
• But the donation can be greater

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Charitable leverage

• Example
• Joe currently donates 3,000 per year
• He could fund a 50,000 investment loan at 6
  interest rate
• How would his current strategy compare to a
  charitable leverage strategy over 10 years?

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Charitable leverage
48,358 contributed after loan repaid, plus
donation of annual tax savings For illustration
purposes only.Assumptions 7 return, 6 loan
interest, 25 taxable portion of earnings, 30
tax rate on investment earnings, 46 marginal tax
rate.
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Charitable leverage

• With the charitable leverage strategy, Joe is
  able to
• Increase his donations by 95
• From 30,000 to 58,531 over 10 years
• Maintain 3,000 annual out-of-pocket cost for
  charity
• Increase tax savings by 51
• From 13,389 to 20,000 over 10 years

For illustration purposes only.
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Charitable leverage

• Other benefits of charitable leverage
• Tax rate on capital gains is cut in half
• If securities such as mutual funds and segregated
  funds contracts are donated to a charity
• Flexibility
• You are free to hold back annual donations at any
  time if your ability to give changes
• interest is generally tax deductible. Clients
  should consult their tax advisor

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Put your retained earnings to work
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Put your retained earnings to work

• How do you remove retained earnings from your
  business in the most tax-efficient manner
  possible?
• Do you have significant equity built up in your
  home?
• There is a strategy available to you.

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Put your retained earnings to work
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Put your retained earnings to work
For illustration purposes only.
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Put your retained earnings to work
For illustration purposes only.
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Put your retained earnings to work

• After 10 years
• Assuming an average annual compounded return of
  8
• The leveraged account has more than doubled
• Growing in value to 539,731.
• After repayment of the loan, Jeremy's net worth
  after-tax has increased by 239,753.
• Jeremy has enhanced his personal net worth
  without paying tax on the withdrawal from
  retained earnings (assuming a 46 marginal tax
  rate).

For illustration purposes only.
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Important Notes

• Borrowing to invest is suitable only for
  investors with higher risk tolerance. Clients
  should be fully aware of the risks and benefits
  associated with investment loans since losses as
  well as gains may be magnified. Preferred
  candidates are those willing to invest for the
  long term and not averse to increased risk. The
  value of a client's investment will vary and is
  not guaranteed, however they must meet their loan
  and income tax obligations and repay their loan
  in full. Clients must read the terms of their
  loan agreement and the investment details for
  important information. Manulife Bank of Canada
  solely acts in the capacity of lender and loan
  administrator, and does not provide investment
  advice of any nature to individuals or Advisors.
  The Dealer and Advisor are responsible for
  determining the appropriateness of investments
  for their clients and informing them of the risks
  associated with borrowing to invest.
• Tax deductibility of loan interest depends on a
  number of factors, with the Income tax act
  providing the framework for determining tax
  deductibility Tax laws are subject to change and
  therefore, tax treatment of illustrated figures
  cannot be guaranteed. Clients should consult
  their own tax and legal advisors with respect to
  their particular circumstance.

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Thank you