Contact: Judy Culford

February, 2000

Phone: (519) 663-2252

Best Alternative to RRSPs
Poorly Understood

At this time of year, overtaxed Canadians are wondering what other investment strategies are available beyond RRSPs to reduce taxes while saving for their future.

Some have used up all of their RRSP room, while others wisely want to diversify by strategy and not have all of their voluntary savings in any single approach, especially one 'registered' with the government.

"While labour sponsored investment funds offer some tax relief, leveraging or borrowing to invest is the best alternative to RRSPs," say Talbot Stevens, a London-based financial educator, speaker, and author of Financial Freedom Without Sacrifice.

"By simply borrowing to invest outside of RRSPs, generally the interest expense is tax deductible," says Stevens. Alternative tax saving investment strategies to complement RRSPs are particularly important to those with a good pension plan and don't have much RRSP room available.

Stevens emphasizes that leverage simply magnifies returns, both up and down. Because borrowing to invest is a double-edged sword, he only endorses leverage implemented conservatively, long term, with the guidance of a trusted advisor.

This controversial strategy has been used by the rich for centuries and has started to become more popular in the last decade as interest rates have fallen significantly.

Before considering the pros and cons of this RRSP alternative, it is important to dispel some of the myths that prevent people from openly exploring whether conservative leverage makes sense as an integrated part of their financial plan. Stevens cites five myths of borrowing to invest.

1. Leverage is only for the "wealthy". Generally the wealthy do act on more powerful wealth-creation strategies like leverage. However, the fastest way for middle-income investors to become richer is to act on the same strategies that the wealthy already benefit from.

2. All debts are bad and should be avoided. Personal debts used to purchase consumer items that depreciate by 20 to 50% per year, with non-deductible interest rates of 18 to 33%, obviously should be avoided or paid off quickly.

But there is also "good" debt that is used to buy investments that appreciate 10 to 13% per year, where interest rates are near or below prime, and the interest expense is tax deductible to further reduce the cost.

3. Leverage is too risky for me. The reality is that most people who could qualify for an investment loan have probably already leveraged in a much worse way without even realizing it.

Anyone who has taken out a mortgage has already borrowed to purchase an equity investment that has zero diversification, poor liquidity, with low future growth expectations, and the interest expense isn't even tax deductible.

Borrowing to purchase equity investments expected to grow 10 to 13%, with better diversification and liquidity, and where the interest expense is deductible is obviously less risky.

4. For leverage to be profitable, investment returns must exceed the cost of borrowing. Most people rationally think that if your interest expense is 9%, then your investment returns must be higher than 9% or you won't make any money.

"The only problem with this rational and reasonable view," explains Stevens, "is that it's wrong. When borrowing to invest in equity investments that are mostly capital gains that are taxed less and, more importantly, tax deferred, the real breakeven point is much lower than most people think. Not only that, but the breakeven point, which defines the risk of the strategy, decreases over time and is often less than half of the interest expense."

5. Returns must exceed the interest expense for leverage to be better than not leveraging. While true for interest-paying investments like GICs, this is a myth for tax-deferred investments like equity funds or stocks.

"Equity investors with a 20-year time horizon only need investment returns that are about two-thirds of the cost of borrowing for leveraging to be better than not leveraging," states Stevens. "In a 50% tax bracket, borrowing at 9% interest to invest in equity funds averaging only 9% returns would increase your retirement fund by about 50% 20 years later."

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Talbot Stevens is a financial educator, industry consultant, and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources menu of For more information, contact Judy Culford, Communications Director for Talbot Stevens, by calling (519) 663-2252, or emailing