News and resources for Canada's top financial advisors
The bad: Little details that can be easily forgotten. It’s easy for complex leveraging strategies to backfire if advisors and clients cut corners and the last thing anyone wants is to be penalized by CCRA, Golombek notes. For example, a person recently wrote to CCRA asking if he could still deduct interest if he didn’t use the re-borrowed money toward investments. “CCRA said you can’t deduct in this case because there’s no direct link,” Golombek explains. “CCRA doesn’t allow you to skip steps. The new loan needs to go directly toward buying the investments.”
The bad, part 2: Purporting myths without doing the math. Many advisors and clients believe that for leveraging to be beneficial, the returns must immediately exceed the cost of borrowing. “But returns often come in the form of capital gains which are not only taxed less but taxed later,” notes Talbot Stevens, author of Dispelling the Myths of Borrowing to Invest. “The deferred capital gain benefit is the real hidden benefit of an equity investment, so you really only need returns in the neighbourhood of two-thirds of the gross cost of borrowing for clients to come out ahead.”
The ugly: It’s no surprise that the worst forms of leveraging are also the most popular. Consumer debt has increased rapidly in the last decade, mainly due to credit card debt and borrowing the maximum amount the lender will allow, “I generally suggest that clients only borrow a maximum of half of their capacity,” Stevens says. “If the lender thinks you can handle a $100,000 line of credit, for example, borrow between 10% to 50% of that amount.”
Stevens adds that if you advise clients to take this conservative approach, they’ll find it easier to sleep at night as borrowing a small amount results in no financial or emotional strain. “If you borrow to invest and that forces you, due to fear, to bail out of something, it always makes things worse.”
When do you suggest leveraging to your clients? Is it a smart strategy in today’s rocky market? Share your opinions about the good, the bad and the ugly of leveraging in the Talvest Town Hall on Advisor.ca.
Filed by Deanne Gage, Advisor’s Edge, dgage@rmpublishing.com
(06/13/03)
 |
(June 13, 2003) To leverage or not to leverage? That’s the question on some clients’ minds as they look to increase their investable assets in a down market. While leveraging is certainly a viable option for clients, advisors need to spell out the good, bad and ugly side of borrowing to invest, says Jamie Golombek, vice-president of taxation and estate planning at AIM/Trimark.
The good: Leveraging techniques that also allow clients to deduct the interest. One such strategy is using investments to pay off a mortgage and then re-borrow the same amount of capital to buy back the investments. “This is a no-fail, no-proof proposition,” Golombek told attendees at the Advocis national conference in St. John’s, Newfoundland.
The bad: Little details that can be easily forgotten. It’s easy for complex leveraging strategies to backfire if advisors and clients cut corners and the last thing anyone wants is to be penalized by CCRA, Golombek notes. For example, a person recently wrote to CCRA asking if he could still deduct interest if he didn’t use the re-borrowed money toward investments. “CCRA said you can’t deduct in this case because there’s no direct link,” Golombek explains. “CCRA doesn’t allow you to skip steps. The new loan needs to go directly toward buying the investments.”
The bad, part 2: Purporting myths without doing the math. Many advisors and clients believe that for leveraging to be beneficial, the returns must immediately exceed the cost of borrowing. “But returns often come in the form of capital gains which are not only taxed less but taxed later,” notes Talbot Stevens, author of Dispelling the Myths of Borrowing to Invest. “The deferred capital gain benefit is the real hidden benefit of an equity investment, so you really only need returns in the neighbourhood of two-thirds of the gross cost of borrowing for clients to come out ahead.”
The ugly: It’s no surprise that the worst forms of leveraging are also the most popular. Consumer debt has increased rapidly in the last decade, mainly due to credit card debt and borrowing the maximum amount the lender will allow, “I generally suggest that clients only borrow a maximum of half of their capacity,” Stevens says. “If the lender thinks you can handle a $100,000 line of credit, for example, borrow between 10% to 50% of that amount.”
Stevens adds that if you advise clients to take this conservative approach, they’ll find it easier to sleep at night as borrowing a small amount results in no financial or emotional strain. “If you borrow to invest and that forces you, due to fear, to bail out of something, it always makes things worse.”
When do you suggest leveraging to your clients? Is it a smart strategy in today’s rocky market? Share your opinions about the good, the bad and the ugly of leveraging in the Talvest Town Hall on Advisor.ca.
Filed by Deanne Gage, Advisor’s Edge, dgage@rmpublishing.com
(06/13/03)
|
(June 13, 2003) To leverage or not to leverage? That’s the question on some clients’ minds as they look to increase their investable assets in a down market. While leveraging is certainly a viable option for clients, advisors need to spell out the good, bad and ugly side of borrowing to invest, says Jamie Golombek, vice-president of taxation and estate planning at AIM/Trimark.
The good: Leveraging techniques that also allow clients to deduct the interest. One such strategy is using investments to pay off a mortgage and then re-borrow the same amount of capital to buy back the investments. “This is a no-fail, no-proof proposition,” Golombek told attendees at the Advocis national conference in St. John’s, Newfoundland.
The bad: Little details that can be easily forgotten. It’s easy for complex leveraging strategies to backfire if advisors and clients cut corners and the last thing anyone wants is to be penalized by CCRA, Golombek notes. For example, a person recently wrote to CCRA asking if he could still deduct interest if he didn’t use the re-borrowed money toward investments. “CCRA said you can’t deduct in this case because there’s no direct link,” Golombek explains. “CCRA doesn’t allow you to skip steps. The new loan needs to go directly toward buying the investments.”
The bad, part 2: Purporting myths without doing the math. Many advisors and clients believe that for leveraging to be beneficial, the returns must immediately exceed the cost of borrowing. “But returns often come in the form of capital gains which are not only taxed less but taxed later,” notes Talbot Stevens, author of Dispelling the Myths of Borrowing to Invest. “The deferred capital gain benefit is the real hidden benefit of an equity investment, so you really only need returns in the neighbourhood of two-thirds of the gross cost of borrowing for clients to come out ahead.”
The ugly: It’s no surprise that the worst forms of leveraging are also the most popular. Consumer debt has increased rapidly in the last decade, mainly due to credit card debt and borrowing the maximum amount the lender will allow, “I generally suggest that clients only borrow a maximum of half of their capacity,” Stevens says. “If the lender thinks you can handle a $100,000 line of credit, for example, borrow between 10% to 50% of that amount.”
Stevens adds that if you advise clients to take this conservative approach, they’ll find it easier to sleep at night as borrowing a small amount results in no financial or emotional strain. “If you borrow to invest and that forces you, due to fear, to bail out of something, it always makes things worse.”
When do you suggest leveraging to your clients? Is it a smart strategy in today’s rocky market? Share your opinions about the good, the bad and the ugly of leveraging in the Talvest Town Hall on Advisor.ca.
Filed by Deanne Gage, Advisor’s Edge, dgage@rmpublishing.com
(06/13/03)
"Landmark" legislation is significant step forward in protecting investors, organization says
By James Langton |May 28, 2024
2 min read
Reichmann Segal Capital Partners says it plans to invest in new product development and expansion
By The Canadian Press |May 28, 2024
1 min read
Despite challenges, overall revenue grew
By Ian Bickis, Canadian Press |May 28, 2024
3 min read