Quote:
Originally Posted by blkgsr
for the topic of pull investments (or invest said money) vs pay down mortgage.
Let's assume we're in the highest tax bracket or close to. Let's assume it's not in a TFSA but a regular taxed account.
If I have $20K to invest and I'm getting 10% return, I'm going to lose %50? of the to the tax man? so let's say it comes to approx 5% gains?
Assume mortgage is in the 4.5% range, it would be slightly less gain putting that money direct on the mortgage?
Please correct my numbers and logic if I'm missing something
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The proper way to analyze this is to assume that your mortgage debt is tax deductible when you are comparing it to a non-registered portfolio. While it may take some up front work and perhaps realizing some capital gains to reorganize in this way, the point is that you should be able to use the Smith maneuver to result in your interest being deductible if you leave the mortgage in place to keep a non-registered portfolio in place.
Therefore, the math should really be (assuming you are in the top marginal tax rate):
Cost of debt = 4.5% with a 53.5% tax credit of that amount, net cost = 2.1%
It's also worth remembering than equity portfolio that returns 10% per year in the long run would typically do a few percent in dividends, and most of the rest in capital gains which is half the tax bill.
The net of this is that the after-tax result of having 4.5% debt and a 10% return on an equity portfolio is an average gain larger than 5.5% each year, not less.
-Mark