cheapest way to borrow money

[donit]

I'm currently working some project and needing around 10k to 20k. Is there any cheapest way to borrowing money? Line of credit ? where? rate ? any other type of finance I should consider too ?

[pitz]

Basically this is the cheapest:

1) Sell your capital income/dividend-producing assets (ie: stocks, bonds, etc.) that do not have a large loss or gain position.

2) Use the proceeds to pay for your project.

3) Go to the bank, obtain a line of credit, and repurchase your former capital investments. Pledge the investments as collateral for a secured line of credit.

If you follow the above, the interest payments on the money borrowed are tax deductible.

For instance, say you borrow on a line of credit at 5.75%, and you are in a 30% tax bracket. Your effective cost of borrowing is 5.75% * (1-30%) = 4.025%. If you are in a 40% tax bracket, your cost of borrowing = 3.45%.

[gedwards]

Is this project a personal project or a money making venture (business, investment etc)?

How long do you need the money for (or you going to pay it back over 3 years, 5 etc etc)?

How are you going to pay it back (do you need equal payments or it is possible you will want to have the option to pay the loan down faster?)

All of these factors can impact what type of financing you would get and may be even more important than the cheapest rate.

[bionicbadger]

parents/relatives

[15-20_God]

Basically this is the cheapest:

For instance, say you borrow on a line of credit at 5.75%, and you are in a 30% tax bracket. Your effective cost of borrowing is 5.75% * (1-30%) = 4.025%. If you are in a 40% tax bracket, your cost of borrowing = 3.45%.

wouldn't opening a margin account and drawing funds from there accomplish the same thing without churning your own account?

[divx]

Borrow from your friends and never pay them back :lol:

[Dibble]

wouldn't opening a margin account and drawing funds from there accomplish the same thing without churning your own account?

Well, it would depend on the restrictions of the margin account and the line of credit.

[pitz]

wouldn't opening a margin account and drawing funds from there accomplish the same thing without churning your own account?

No, because then you wouldn't have interest deductibility. The Income Tax Act only allows for interest deductibility when you actually borrow to invest. Borrowing on a margin account would not be borrowing to invest, unless, of course, this 'project' is a legitimate business investment that meets the definition required of a business investment.

[15-20_God]

No, because then you wouldn't have interest deductibility. The Income Tax Act only allows for interest deductibility when you actually borrow to invest. Borrowing on a margin account would not be borrowing to invest, unless, of course, this 'project' is a legitimate business investment that meets the definition required of a business investment.

from my understanding it meets the cra criteria. Intererst on an investment account is tax deductible when there is a reasonable assumption that the borrowed money will be used to invest in assets that pay income.

[gedwards]

15-20_God, I think pitz is using the assumption that the project is not a business venture (it is a personal project). In this case based on your origin question "wouldn't opening a margin account and drawing funds from there accomplish the same thing without churning your own account?".

In this case if the amount being withdrawn from the margin account is being
used to fund a personal project then it wouldn't be deductible as the money is not being used to invest in assets that pay income.

Normally a margin account is used to buy investments with little money compared to the value of the investment. Margin money used to buy investments within the margin account is borrowing to invest. As such in most cases the interest on an investment margin account is deductible.

The fact is if the project is a legitimate business / income producing venture the whole idea of selling capital investments (which will trigger some capital gains/losses, not to mention brokerage fees) is unnecessarily complex. Any interest on any loan for this purpose would already be tax deductible. In that case it is much simplier to simply take out a separate loan and fund the project.

[15-20_God]

Normally a margin account is used to buy investments with little money compared to the value of the investment. Margin money used to buy investments within the margin account is borrowing to invest. As such in most cases the interest on an investment margin account is deductible.

that's what i'm referring to. you draw from your margin account, essentially borrowing funds from the broker, to fund assets aleady held inside the account that pay income. what you are doing when you withdraw the funds is just removing your own capital, and any interest charged in the brokerage acct is tax deductible.

[pitz]

that's what i'm referring to. you draw from your margin account, essentially borrowing funds from the broker, to fund assets aleady held inside the account that pay income. what you are doing when you withdraw the funds is just removing your own capital, and any interest charged in the brokerage acct is tax deductible.

No, the CRA uses a 'tracing principle', where they directly look at the money borrowed, and they must be able to 'trace' it to an actually purchased investment.

Merely borrowing $25k from a margin account to buy a car or to do a bathroom renovation on a principal residence, would not be a situation where you could deduct the interest. The CRA must see this clear sequence:

money borrowed --> investments purchased

Therefore, you cannot just borrow against pre-existing investments to fund non-investment expenditures such as personal consumption. That is why the up-front liquidiation (and later repurchase, with borrowed funds) of capital assets is required, with the attendant tax consequences.