A dedicated reader recently emailed me about how I’ve managed to reach my financial position today without making a large income. So I thought I’d reveal one of my best kept secrets to becoming rich: Taking money from the government 😉

I’ve blogged about my various income streams in the past, but there is one income source that I have never talked about, until now. This income provides me with thousands of dollars every year! (゜o゜) It’s undeclared income so I pay no taxes on it, which is perfectly legal 😀 It’s also not disclosed in the list of incomes on my take home pay vs expenses graph because it’s not technically a legitimate income 😕 But it is 100% passive, and gets automagically deposited into my bank account 🙂

In many countries like Canada and the U.S., the interest we pay on loans for investment purposes is tax deductible, as long as the investment is expected to produce an income, like with dividend paying stocks or rental properties. So if we pay \$1,000 of interest this year on an investment loan, and our marginal tax bracket is 30% (like mine is,) then the tax man will give us back \$300.

Here’s a look at all my tax deductible debts taken from my latest net worth update 🙂 I’ve left out my mortgage and RRSP loan because those do not qualify for interest tax deductions.

• Farm Loans: \$208,300 @ 3.89% annual interest rate = \$8,100 of interest /yr
• Margin Loan CDN: \$27,900 @ 4.25% = \$1,200 interest /yr
• Margin Loan US: \$25,000 @ 4.50% = \$1,200 (converted to \$CAD)
• TD Line of Credit: \$33,700 @5.25% = \$1,800
• CIBC Line of Credit: \$14,000 @ 5.5% = \$700
• HELOC: \$17,900 @ 3.5%= \$600
• Total Tax Deductible Interest = \$13,600

So after paying \$13,600 of tax deductible interest this year I’ll be getting 30% of that, or roughly \$4,000, back from the government 😀 This refund has zero risk since I’m guaranteed to receive the \$4K regardless of my investment’s performance. Thank goodness I have debt 😀 Otherwise I wouldn’t be getting any of this money 😉

Investment interest deduction is a rarely talked about government benefit 😀 The CRA created this tax incentive because spending and investing grows the economy, even if it’s done using borrowed money 🙂 Using leverage to make thousands of dollars in risk free tax refunds isn’t everyone’s cup of tea, but I personally love using this strategy to give a free inconspicuous boost to my income every year. Awesome sauce! ʘ‿ʘ

It appears that more than half the readers of this blog make over \$80,000 a year, which is more than what I earn. Well good news folks 🙂 It makes even more sense for all you high income earners to invest using other people’s money because not only can you claim a higher tax refund due to your higher tax bracket, but you can also recover more quickly from any potential losses on your leveraged investments. Losing \$5,000 on a stock trade may be devastating for middle class earners, but relatively speaking it’s probably less concerning if that happened to someone making \$100,000 a year because the loss can be easily recovered with a few week’s worth of his labor.

To claim this tax deduction simply fill out Line 221 – Carrying charges and interest expenses, on a Canadian tax return. In the U.S. I believe you need to fill out form 4952. But as usual please do your own research and double check with a professional. Every dollar I receive from a tax refund helps to grow my net worth. Speaking of which, J Money recently posted a list of various blogger’s net worths, including mine 🙂

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Random useless fact: McDonald’s sells about 75 hamburgers worldwide every second

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Guest

Good article. I do have “Passive Income from the Government”… But in my case it will be like \$220 as I paid around \$750 in interest on an line of credit.

Guest

I’m looking forward to executing Smith Maneuver with my house and being able to write off the interest I pay on it.

Guest

Thanks for sharing my list of blogger net worths! Glad to have you included in it 🙂

Guest

Interesting. Sadly I don’t have anything to wrote off in this case (wasn’t used for investments) but I’ll keep it in mind if I ever have a margins account. My tax return will be ballin’ for other reasons 🙂

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Junior

I am confused here.

If you made \$5000 of rent income in 2013 from a piece of farmland great. And if you paid \$5000 of interest expense in 2013…..

…. Your tax liability is zero because you made nothing. Not because you found some loophole in the system.

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Marvin

Great article and great way to point out how to use other people’s money. Of course you have to be safe because if you have a losing investment it can come back to bite you.

[…] payable on his dividend income is only a small amount, which is easily neutralized by Tyler’s investment expense tax credit, since he bought some of his stocks on […]

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Brian

Tyler. I’d like your opinion on rising interest rates. Seems to me this is the single biggest risk to your overall strategy, likely closely followed by a large downturn in markets and getting margin calls. So my question is this: what is your prepared change in strategy if say interest rates rise by 1%, 2% or more? I agree that borrowing to invest is a reasonable strategy, and if it’s cheap enough it’s likely worth the risk (at your age) ie borrowing let’s say on average 4% and expecting a return of say 6-7% Also, many real estate investors have told me explicitly that it’s often dangerous to run cash-flow negative on real estate, and you seem to be doing just that by quite a bit on your farm land. For this reason I have not gone out and purchased additional real estate and have opted for only stock market. It puts more emphasis on you absolutely needing to earn steady income for the negative cash flow and also means you depend on the farm land real estate to grow in value for any return/profit. I, for one, am not a believer of “real estate is guaranteed growth” as the… Read more »