Maximizing discretionary RRIF income by borrowing to invest

If you are an investor with discretionary RRIF income, you can put that income to good use. By borrowing to invest, you not only achieve tax savings each year, but gain the potential to significantly increase the value of your non-registered investment portfolio over the long term.

Perhaps you are someone with additional sources of income, who does not need the money from your Registered Retirement Income Fund (RRIF) payments for day-to-day living expenses. Instead, your RRIF payments are actually reinvested into a separately held non-registered investment.

If this sounds like you, then you may be in a higher tax bracket, making quarterly tax installments – and looking for ways to reduce taxes. 

A unique strategy tailored to people like you is available. The strategy involves creating a tax deduction using discretionary RRIF income to pay the interest on funds borrowed to invest. 

The interest payments are generally tax deductible, and instead of investing after tax RRIF income each year, a large lump sum amount gets working right away.

An in-depth look at the issue... and the opportunities

Individuals who are reinvesting their after-tax, discretionary RRIF income each year because they don’t need the money to meet their living and other discretionary expenses can put that revenue stream to work. Instead of building their non-registered investment with their RRIF payments, they can consider borrowing to invest.

Here’s how it works

  1. You apply for an investment loan.
  2. The amount of the loan is applied in a lump sum to purchase non-registered investments.
  3. The loan interest is paid with the discretionary RRIF payments being received.
  4. The loan interest paid becomes a deduction on your tax return.¹

As you can see, it’s very straightforward – and it can make a big difference to your bottom line.

How borrowing to invest can work

Harry is a wealthy retiree looking for an opportunity to reduce his taxes. He has discretionary RRIF income of $12,000 a year. Here’s how his situation looks, using this strategy:

The chart shows the assumptions used and how to calculate the loan amount needed for the case study of Harry a retiree looking for an opportunity to reduce his taxes. The assumptions are: Discretionary RRIF Income is $12,000, Annual rate of return is 6%, Loan interest is 5%, Tax on RRIF withdrawals is 46%, Tax rate on investment earnings is 25%, Taxable percentage of investment returns is 25%.
Harry's loan amount is $240,000, calculated by dividing the $12,000 annual RRIF income by the loan interest rate of 5%.

How the situation stacks up

The discretionary RRIF income amount of $12,000 is used to cover all borrowing expenses, instead of being invested after-tax on a yearly basis. Harry gains the tax deductibility of the interest and a lump sum amount ($240,000) is immediately invested.

What it looks like at year 10

Harry’s RRIF minimum amount will carry an interest-only loan of $240,000, calculated as follows:

At year 10, the after-tax value of the $240,000 Harry invested (with the loan repaid) is $142,668 vs. $80,404 which would be the after-tax value of the regular deposits if Harry had simply invested his discretionary RRIF income each year.

Harry increased his net worth by $62,264 by having a larger lump sum invested over the 10 years, instead of investing the after-tax discretionary RRIF income on an annual basis. After taxes are paid on the annual taxable distributions in the leveraged account, the interest deductions totaling $120,000 over 10 years have reduced his taxes payable by $44,819.

Ideal candidates

Investors who:

  • Don’t need their RRIF payments for day-to-day living expenses or to fund their leisure activities such as travel during their retirement

It’s important to remember that this strategy may not be appropriate for someone with a very low risk tolerance.

Take action

Consider:

  • Adding a leverage loan to the investment plan to potentially leverage wealth accumulation
  • Adding a dollar-for-dollar deduction from income to reduce taxes

Investment options with Manulife Investment Management

Mutual Funds can help meet your specific financial needs, throughout your life. Whether you are just starting out, accumulating wealth or are nearing/in retirement, mutual funds offered by Manulife is committed to providing quality investment products and services so you can enjoy life and worry less.

Manulife Segregated Fund Contracts combine the growth potential offered by a broad range of investment funds, with the unique wealth protection features of an insurance contract. Through Manulife segregated fund contracts, investors can help minimize their exposure to risk through income, death and maturity guarantees, potential creditor protection features, and estate planning benefits – all from a single product or insurance contract.

Manulife Bank Investment Loans allow investors to make a large initial investment contribution and benefit from the potential for compound growth and interest deductibility. These loans are available for a variety of Manulife Mutual Fund accounts and Segregated Fund contracts, and offer attractive options such as 100 per cent financing, no margin-calls on market fluctuations*, interest-only payments and a one-step application process.

1 Actual tax deductibility of loan interest depends upon a number of factors with the Income Tax Act (Canada) providing the framework for determining deductibility. Results for Quebec residents may differ due to the different interest deductibility rules. Readers should consult their tax and legal advisors with respect to their particular circumstances. 

*No margin-calls on 100% Loans and Multiplier Loans, however if Loan to Value (LTV) exceeds 125%, then interest only loans may be converted to a principal plus interest loan at the discretion of Manulife Bank. The no margin-call feature is not available on Custom Loans.

Borrowing to invest may be appropriate only for investors with a higher risk tolerance. You 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 your investment will vary and is not guaranteed, however you must meet the loan and income tax obligations and repay the loan in full. Please ensure you read the terms of the 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.

The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Manulife Funds and Manulife Corporate Classes are managed by Manulife Investment Management Limited (formerly named Manulife Asset Management Limited). Manulife Investment Management is a trade name of Manulife Investment Management Limited. 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. The Manufacturers Life Insurance Company (Manulife) is the issuer of insurance contracts containing Manulife segregated funds and the guarantor of any guarantee provisions therein. Manulife Investment Management is a trade name of Manulife. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Quick loans, Multiplier and Custom loans are offered by Manulife Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

MK1380E 10/19

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

Read bio