Diary of a locked-down accountant

Diary of a locked-down accountant: Part 1

As we emerge from the pandemic, stay healthy and get back to so-called “normal,” it’s important that our finances remain healthy as well. This monthly series for 2021 will offer timely, money-saving ideas and strategies from our financial expert and analyst (and Graphic Arts Media Advisory Board member), Steven Aprile.

Save over $8,000 on your taxes with strategic home refinancing

Mickey purchased a rental property for Minnie and himself. They had the required down payment and closing costs of $250,000 – but he decided to get advice from Goofy, his accountant. Goofy recommended some refinancing of their current house mortgage before closing on the property. His strategy? 1. Arrange for a line of credit on their existing house equal to 80% of the current value allowing them to have at least three mortgages within that line of credit, and pay off the current mortgage using the line of credit and the $250,000. 2. Convert the remaining balance on the line of credit to a mortgage, three to five year, fixed or variable rate – whatever they think is best. 3. At the time of closing on the rental property, the bank will put a second mortgage within the line of credit, and advance $250,000 to the lawyer. The bank will also put a mortgage on the rental property. 4. The interest on the $250,000 mortgage can now be deducted. They both have a marginal tax rate of 43%, interest rate of 1.7% and 30-year amortization. They’ll reduce their taxes by $19,535 X 43% – or $8,400 over five years! If interest rates climb, the savings will only be higher. Finally, if Mickey is smart, he’ll use some of that $8,400 to take Minnie out to celebrate Canada Day on July 1. Smart borrowing to invest

Five years ago, Jack and Jill had a $600,000 mortgage – 3.2%, 25-year amortization, and monthly payments of $2,901. The mortgage is up for renewal this month and they owe $515,000. They can renew $590,000 at 1.7% for five years, achieve a 20-year amortization and have a monthly payment of $2,900. They take the extra $75,000, contribute to their TFSAs and buy investments that yield 5.1% annually. After five years, the investments are worth $96,000 and they owe $461,000 on the mortgage. The “net” amount owing is about $365,000. If they chose to continue with a payment of $2,900 and skip the TFSA investing, they’ll owe about $379,000. If the investments go up in value, they’ll be even better off with the borrowing-toinvest strategy. If the investments drop in value by over 18%, they would be worse off. Borrowing to invest is not for everyone. So choose what’s best for you and make your money work harder for you by paying down debt or by investing it. Other good options include renewing with a 25-year amortization, lowering monthly payments to $2,107, and paying for an RESP for babies Jane and Joe (and maybe for a new well in their backyard)!

Steven Aprile (CPA, CA, CFP) is a Partner with Grant Thornton LLP in Toronto. His expertise covers corporate and personal tax return planning and preparation, new business start-ups, personal financial and estate planning, and more. He’s especially helpful in providing owner-managed businesses with guidance when completing year-end financial statements and tax returns. As a Certified Financial Planner, Steven can develop a financial plan that considers a client’s entire financial picture, including tolerance for risk. He can be reached at Steven.Aprile@ca.gt.com