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EXAMPLE
Let’s examine a case study similar to those we frequently deal with.
Mark was considering the purchase of new equipment, valued at $50,000, for his business. He knew this investment into his business would take 5 years to pay off and he was looking for the best way to finance it. His bank was willing to offer him a Line of Credit (LOC) for his business at a rate of Prime +1%. Mark wished to further explore his options and take advantage of his legal right, confirmed by the Supreme of Canada, to rearrange his affairs in order to maximize his tax efficiency, making the best possible investment into his business.
After consulting with an IMPACT planner, Mark opted to explore refinancing his personal residence in order to access the best rates in the market on a 5 year loan; the best rate for Mark at the time was Prime -0.20%. At that time, Mark had a $300,000 mortgage on his principle residence. For the sake of comparison, let’s assume Mark’s mortgage was also at Prime -0.20%. There is usually the potential to gain from a lower rate, but to keep the example consistent, we’ll assume that the rates are the same.
Let’s see how the numbers break down when we compare the two options:
| IMPACT |
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Bank LOC
|
| $359,000 |
Total Debt |
$350,000 |
| $1,907.45 |
Total Payment /mo |
$1,903.67 |
| $21,361.00 |
Total Tax Deduction
(in just the first year) |
$1,476.34 |
The total debt shown includes all fees associated with planning and mortgage conveyance. Mark paid $0 for anything out of his cash flow. All of his expenses were covered with the proceeds of the new investment loan. Both scenarios show Mark paying for his regular mortgage exactly as before and fully paying off his equipment at the end of the 5 year period. Mark didn’t pay a single cent until his first monthly payment and then it was only $4 more than his alternative. Mark was happy when he deducted $21,361 off his personal income in the first year, and even happier when he realized that these deductions would continue year after year.
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