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Debt swap
Turn savings you already have into tax-deductible borrowing
If you have a mortgage on one side and non-registered investments on the other, a debt swap rearranges them. You use the investments to pay down your mortgage, then borrow to reinvest. Your net worth and your investments stay the same, but the interest may now be deductible.
How it works
Same money, same investments, a different kind of debt.
Sell
Sell some or all of your non-registered investments.
Pay down
Put the proceeds onto your home mortgage as a prepayment.
Borrow back
With a readvanceable mortgage, that same amount opens up on your line of credit. Borrow it back.
Reinvest
Buy income-producing investments in a non-registered account. Because the borrowing is used to earn investment income, its interest may be deductible.
Debt swap estimate
A quick look at the yearly tax savings, and the one-time tax on selling, so you can see whether the swap clears the bar.
For illustration only. Uses a 50% capital gains inclusion rate and your marginal tax rate, holds the line of credit rate and balance steady, and leaves out mortgage prepayment charges, investment returns and trading costs. Your Blueprint and your accountant confirm the real numbers.
What it could look like
An illustration, not a real client.
Illustrative example
A $100,000 portfolio and a $400,000 mortgage
The starting point
Priya has $100,000 in non-registered investments that she paid $85,000 for, and a $400,000 home mortgage. Her marginal tax rate is about 43%, and her line of credit is at 5%.
The swap
She sells the $100,000, puts it on her mortgage, borrows $100,000 back from her line of credit and reinvests it. She still owns $100,000 of investments and still owes $400,000, but $100,000 of that is now investment borrowing.
The trade-off
Selling realizes a $15,000 capital gain, about $3,250 of tax at her rate. The deductible interest saves her about $2,170 a year, so the swap pays for itself in about a year and a half and keeps saving after that.
What to know before you start
A debt swap can be quick to set up, but a few details decide whether it’s worth it.
- Selling can trigger tax. Any gains on the investments you sell are taxable that year. The swap makes the most sense when the tax cost of selling is small compared with the deductions it creates.
- Watch the 30-day rule on losses. If you sell at a loss and buy the same investment back within 30 days, the superficial loss rules can deny that loss.
- Registered accounts don’t count. This works with non-registered investments only. Interest on money borrowed for an RRSP, TFSA or FHSA isn’t deductible.
- The investments need to earn income. To support the deduction, the borrowed money should go into investments that reasonably could pay interest or dividends, not just grow in value.
- You’re investing borrowed money. Your investments can fall in value while the borrowing stays the same, and line of credit rates are usually variable.
- Check your mortgage first. Prepayment limits or penalties on your current mortgage can change the math.
How we work together
We start free, and you decide at every step whether to keep going.
- 1
See your range
Try the debt swap estimate above.
- 2
Free strategy call
We get to know your situation and see whether a debt swap is a fit.
- 3
Your custom Blueprint
$500. Scenarios built on your real numbers, reviewed with you on a call.
- 4
Implementation
If you go ahead, your $500 is credited toward implementation.
Questions
How is this different from rental cash damming?
Cash damming converts your mortgage slowly, month by month, using rent or business income. A debt swap converts a chunk of it all at once, using investments you already own.
Do I have to sell everything?
No. You can swap only part of your portfolio, for example the holdings with the smallest gains, to keep the tax on selling low.
Can I buy back the same investments?
Often, yes. If you sold any at a loss, the 30-day superficial loss rule matters, so timing and choice of investments get planned ahead.
What about my RRSP or TFSA?
Registered accounts aren’t part of a debt swap. Withdrawing from an RRSP is taxable, and borrowing to contribute to registered accounts doesn’t create deductible interest.
Can it be combined with other strategies?
Yes. A debt swap is often a good starting move, followed by cash damming or cash flow diversion to keep converting the rest of your mortgage.
Other strategies
Every situation is different, and some of these can be stacked together. We’ll talk through which ones fit on your free strategy call.
Rental cash damming
Your rent pays down your home mortgage while the rental’s bills are paid with borrowing that may be tax-deductible.
StrategyBusiness cash damming
For self-employed people: your business income goes on your mortgage and your business expenses are paid with deductible borrowing.
StrategyCash flow diversion
Keep investing the same amount each month, routed through your mortgage so your borrowing becomes deductible.
StrategyOffset mortgages
An all-in-one account where the money you keep in it lowers the balance you pay interest on, every day.
Wondering if your portfolio clears the bar?
We’ll run the numbers with you on a free strategy call.
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