You are familiar with the concept of leverage if you’ve ever:
Both individuals and companies use leverage as an investment strategy; a company with a lot of debt is considered highly leveraged.
Leverage magnifies your losses as well as your gains, and you must be able to withstand those losses if you are going to use borrowed money to invest. The leveraged investment should be suitable to your investment goals and objectives and consistent with the “Know Your Client” information that you have provided to your advisor.
It is both your responsibility and your advisor’s to ensure that you understand the investment, and are comfortable with the risk level.
Risk of Borrowing to Invest
Here are some risks and factors that you should consider before borrowing to invest:
Is it Right for You?
Borrowing money to invest is risky. You should only consider borrowing to invest if:
You should not borrow to invest if:
You Can End Up Losing Money
Tax Considerations
Interest Deductibility
When you borrow funds to purchase non-registered investments, the interest is only tax deductible as long as you continue to hold the investment or any substituted investment.
There are special exceptions to the rules related to tax deductions on interest costs designed to provide relief to investors who have borrowed money to buy investments that have since declined in value.
This allows you to continue to deduct the interest expense on the loaned funds after the sale of the investment subject to certain restrictions, illustrated by the following:
These rules do not apply to investments in real or depreciable property.
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Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Wealth Max Financial, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Wealth Max Financial and covered by the CIPF. Financial planning and insurance services are provided through Wealth Maximization Group. Wealth Maximization Group is an independent company separate and distinct from ACPI/Wealth Max Financial.
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