Leverage vs RRSP: can borrowing to invest beat the RRSP?
For the right investor it can grow wealth faster. It also carries far more risk, and the loan must be repaid no matter what.
For most Canadians the Registered Retirement Savings Plan (RRSP) is the default: contribute part of each paycheque, get a tax refund, and let compounding work for 30 years. Borrowing to invest, often called leveraging, is the alternative. Here is how it works, why it can be faster, and the tax rules and risks you need to know before you call the bank.
In short
With an RRSP you invest, for example, $500 a month, get a refund now and pay full income tax on every withdrawal. With leverage you borrow, say, $100,000 at once and use the $500 a month to pay the interest. The CRA lets you deduct interest on money borrowed to earn income in a non-registered account, but not on RRSP or TFSA loans, and only half of a capital gain is taxed. When markets rise, leverage can finish well ahead; when they fall, you still owe the full loan.
The core difference: starting capital
Borrowing to invest can be faster for one simple reason: more money is working from day one.
Traditional RRSP
You invest small amounts monthly, for example $500 a month. It takes years to build a large asset base. You get a refund on each contribution, and every dollar you take out later is taxed as income.
Borrowing to invest
You borrow a lump sum, for example $100,000, right away. Instead of investing $500 a month, you use that $500 to pay the loan interest. With $100,000 in the market from day one, the whole portfolio compounds immediately. If the market rises, you earn returns on borrowed money.
The tax rules: deductibility vs deferral
Tax treatment is what decides this comparison. These are the CRA rules for line 22100.
| Question | Borrowing to invest (non-registered) | RRSP |
|---|---|---|
| Deduction now | Loan interest, if the money is used to try to earn investment income | The contribution, within your RRSP room |
| Interest on a loan to invest | Deductible on line 22100 | Not deductible (RRSP loan) |
| Investments that can only make capital gains | Interest not deductible | Not applicable |
| Tax while invested | Interest and dividends taxed each year | None until withdrawal |
| Tax when you take money out | Half of a capital gain is taxable; dividend tax credit on Canadian dividends | Every dollar taxed as regular income |
1. The deductible-interest advantage
If you borrow to invest in a non-registered account in income-producing assets, such as dividend-paying stocks or a rental property, the interest is deductible. The refund that deduction creates can go back into the loan or into more investments.
The Smith Manoeuvre. Homeowners can go a step further by converting mortgage interest, which is not deductible, into deductible investment-loan interest over time. It builds a portfolio while the mortgage is paid down, but it is not simple and it adds debt.
2. The RRSP tax trap
The RRSP gives a deduction on the contribution, but has two drawbacks in this comparison. Interest on an RRSP loan is not deductible. And withdrawals are fully taxable: when you retire and take money out, every dollar is regular income. Non-registered investments get the lower tax on capital gains and the dividend tax credit instead.
Leverage vs RRSP comparison calculator
Investor A puts the monthly amount into an RRSP. Investor B uses the same amount to pay interest on a loan invested all at once. Both get similar refunds (on the contribution or on the interest), so the calculator compares what each keeps after tax at the end.
Simplified: growth is treated as a deferred capital gain, and yearly tax on dividends is ignored. Real results depend on returns, rates and your tax situation.
For more detail, use the investment leverage calculator or the RRSP triple dip calculator.
The math: a 10-year case study
For example, suppose two investors each have $500 a month for 10 years. Investor A contributes it to an RRSP. Investor B uses it to pay the interest on a $100,000 investment loan, which is what $500 a month covers at 6%.
Investor A starts from zero and builds slowly, so the portfolio after 10 years is smaller, and the whole amount is taxable on withdrawal.
Investor B has $100,000 working from the start. After repaying the loan, the net result can be well ahead, often 30% to 40% more under steady growth, because of the larger starting sum and the lower tax on capital gains at the end. At the calculator's default settings (6% growth, 40% tax rate), Investor A keeps about $49,000 and Investor B about $63,000.
Change the growth to 0% and the picture flips: Investor A still has $36,000 after tax, while Investor B has paid ten years of interest and has nothing left once the loan is repaid.
The disadvantages: risk is magnified
Leverage multiplies losses as well as gains. Understand these before you sign a loan.
Magnified losses
If your $100,000 investment drops 10%, you have lost $10,000 of capital. If it drops a lot, you can owe more than the investments are worth.
The loan must be repaid
The lender expects every payment whatever the market does. If you lose your job or interest rates rise, you still have to service the debt.
Margin calls
If you borrow through a margin account and the portfolio falls, the broker can demand cash at once, forcing you to sell at the worst time.
Is it right for you?
Borrowing to invest suits aggressive investors with stable income, a long horizon (10 years or more) and a high tolerance for swings.
Stick to the RRSP if
- You want a guaranteed tax refund now.
- You dislike debt.
- You might need the money in less than 5 to 10 years.
Consider leverage if
- You have used up your registered accounts.
- You have high job security.
- You want to try to bring your retirement date forward by taking on a measured risk.
Planning your retirement strategy? Before borrowing, review your finances, time horizon, borrowing costs and risk tolerance with a qualified advisor. Pankaj can run both strategies with your real numbers. Call 647-640-2222 or WhatsApp. You can also compare with the RRSP calculator and leverage and your TFSA.
Leverage vs RRSP questions
What does borrowing to invest mean?
You take a loan, for example $100,000, invest it all at once, and use your monthly savings to pay the interest instead of contributing small amounts.
The whole sum compounds from day one. Losses are magnified in the same way as gains.
Is interest on an investment loan tax-deductible?
Usually yes, if you borrow to invest in a non-registered account in investments that can earn income such as interest or dividends; you claim it on line 22100.
The CRA says that if the only earnings an investment can produce are capital gains, you cannot claim the interest. Keep records showing how the borrowed money was used.
Can I deduct the interest on an RRSP loan?
No. The CRA does not allow a deduction for interest on money borrowed to contribute to an RRSP, TFSA or FHSA.
An RRSP loan can still make sense if you repay it quickly with the tax refund, but the interest is a true cost.
How are withdrawals taxed in each strategy?
Every dollar out of an RRSP or RRIF is taxed as regular income; in a non-registered account only half of a capital gain is taxable, and Canadian dividends get the dividend tax credit.
That difference at the end is a large part of why leverage can come out ahead when markets do well.
What is the biggest risk of leveraged investing?
You must repay the full loan whatever the investments are worth, so a market fall can leave you owing more than the account holds.
Rising interest rates and job loss add to the risk, and margin accounts can force a sale at the worst time.
Who should consider borrowing to invest?
Investors with stable income, a horizon of 10 years or more, high tolerance for swings, and registered accounts already used.
If you dislike debt or may need the money within 5 to 10 years, stick with the RRSP.
What is the Smith Manoeuvre?
A homeowner strategy that gradually converts non-deductible mortgage debt into a deductible investment loan by re-borrowing paid-down equity to invest.
It adds debt and needs careful records. Compare paying the mortgage off with investing in our mortgage paydown vs borrow to invest calculator.
Can I do both?
Yes. Many people keep contributing to an RRSP for the refund and use leverage only for money beyond their registered room.
The RRSP triple dip calculator shows how refunds can be recycled.
Written by Pankaj Bhatia, CHS, PFA
Insure In Canada Inc. · Licensed in Ontario, Alberta, British Columbia, Manitoba, Saskatchewan, New Brunswick and Nova Scotia
Pankaj stress-tests every leverage plan with a flat or falling market before a client signs anything, and walks away from the idea when the cash flow is not there.
Call 647-640-2222 · WhatsApp · info@pankajbhatia.ca · About Pankaj
Sources and related pages
For information only, not financial advice. Leveraging involves significant risk and is not suitable for everyone. Consult a qualified advisor before making investment decisions.