Do I need to already own investments?

No. Existing non-registered investments are one common starting point, but they are not the only one. A debt swap may also become relevant when you receive an inheritance, sell a property or business, or otherwise have meaningful capital available while still carrying personal debt.

Do I have to sell everything at once?

No. The appropriate amount depends on your available capital, existing debt, investments, borrowing capacity and individual circumstances. A swap can involve some or all of the capital available.

Does this work with registered accounts?

Registered accounts create different considerations. Withdrawing from an RRSP, RRIF, TFSA or another registered account is not the same as selling investments in a non-registered account. Withdrawals can have different tax consequences or affect contribution room. Registered and non-registered assets should not be treated as interchangeable when designing the strategy.

Can I buy back the same investments?

Potentially. There can be tax considerations when investments are sold and subsequently repurchased, particularly when the original investment was sold at a loss. What you sell and what you subsequently purchase should be considered with your tax and investment advisors.

Why not just borrow against the investments I already own?

Because that is a different transaction. A debt swap begins by using existing capital to reduce personal debt and then creating new borrowing for a different purpose. Simply borrowing additional money while leaving the original personal debt outstanding does not change what that debt was used for.

Does a debt swap reduce how much I owe?

Not necessarily. That is not the objective. A debt swap may leave your total debt approximately where it started. What changes is what some of that debt was used for.

Is the interest tax deductible?

Interest on the new borrowing may be deductible depending on the requirements of the Income Tax Act and your individual circumstances. The direct use of the borrowed money, the investments purchased and the actual transactions all matter. You should always seek independent tax advice if you are thinking about implementing these strategies.

Debt Swaps

You already have capital. You already have debt. A debt swap changes which one is doing the work.

You can have significant wealth and still carry significant debt. Maybe you have a large non-registered investment portfolio, are receiving an inheritance, or have sold a property or business. At the same time, you may still have a mortgage or other personal debt.

Most people look at those two things separately. A debt swap looks at them together. You use the capital to pay down the debt first, then borrow again, following a deliberate process, and invest the newly borrowed money. The amount you owe may end up right back where it started. What the debt was used for has changed.

We design the strategy together and help you set it up, implement it and track it. You run it.

Apply for a call →Join the free masterclass

01 The Opportunity

Your money can do more than one job.

Plenty of Canadians build significant investments while still carrying a mortgage or other personal debt. There is nothing inherently wrong with that.

But when you already have meaningful non-registered investments, or a large amount of capital becomes available, there may be an opportunity to look at the structure differently.

Consider someone with a $400,000 personal mortgage and a $100,000 non-registered investment portfolio. They could leave everything exactly where it is, and continue to own $100,000 of investments while carrying $400,000 of personal debt.

Or they could ask a different question:

What if that $100,000 of capital reduced the existing debt first?

That is where the debt swap begins. The investments are sold. After accounting for any amount that needs to be reserved for tax, the available proceeds are used to reduce the existing debt. Money is then borrowed again and used to invest.

The total amount of debt may end up right back where it started. But some of that debt now exists for a different purpose.

That distinction is the entire point of the strategy.

02 How It Works

Four transactions. One deliberate sequence.

The concept is straightforward. The execution matters.

01
Create the capital
The capital might come from selling existing non-registered investments, an inheritance, the sale of a property or business, or cash you already have available. What matters is that you have capital available while still carrying existing personal debt.
If creating that capital involves selling an asset, the tax consequences of the sale need to be considered before deciding how much is actually available for the swap.
02
Pay down
Use the available capital to reduce the personal debt. The debt is actually paid down.
03
Reborrow
Borrow again for the purpose of investing. The new borrowing is kept separate and its use is clearly documented, so the borrowed money can be followed from the moment it is advanced to what it was ultimately used for.
04
Invest
Use the newly borrowed money to purchase investments in a non-registered account.

Each step is documented and borrowing for different purposes is kept separate. The result is a clear trail showing where the money came from, where it went and what the new borrowing was used for.

03 Why It Matters

The same amount of debt is not necessarily the same debt.

Take the same household: a $400,000 personal mortgage and a $100,000 non-registered portfolio bought with their own money.

A debt swap sells the investments first. Because selling investments can create a tax liability, assume for this example that $5,000 of the proceeds is set aside for tax. That leaves $95,000 available for the swap. The $95,000 is used to reduce the mortgage. Then $95,000 is borrowed again and used to invest.

Before

Personal mortgage: $400,000
Non-registered investments: $100,000

After

Personal mortgage: $305,000
Investment borrowing: $95,000
New investments: $95,000
Tax reserve: $5,000
Total debt: $400,000

The total debt has not increased. The original $100,000 of capital is still accounted for between the $95,000 reinvested and the $5,000 reserved for tax.

What changed is what $95,000 of the debt was used for.

That is why the use of the borrowed money, the order of the transactions and the ability to trace those transactions matter.

04 The Risks

The structure can change. The risks are still real.

A debt swap involves investing with borrowed money. That cuts both ways.

The risks, plainly

Leverage. After the swap, investments that could otherwise have been owned using your own capital are instead funded with borrowed money. The debt remains payable regardless of what happens to the investments.

Market declines. Investments can fall in value. If $95,000 is borrowed and invested, the portfolio could be worth less than $95,000 while the full borrowing remains outstanding.

Interest rates. Investment borrowing may have a variable interest rate. If rates rise, the cost of carrying that borrowing can rise with them.

Cash flow. Interest payments still need to be made. The strategy needs to fit within your ongoing cash flow, including periods when interest rates or investment markets move against you.

Tax consequences. Selling existing assets can create tax consequences. The tax treatment of interest also depends on the Income Tax Act and the actual use of the borrowed money.

Execution and record keeping. The strategy depends on being able to understand and document what actually happened. Mixing borrowing used for different purposes makes that harder, which is why the strategy is mapped before implementation and tracked afterward.

05 The Rules and CRA Guidance

New borrowing. New purpose.

A debt swap is not simply about moving money between accounts. For Canadian tax purposes, the use of borrowed money matters when determining whether interest may be deductible.

Section 20(1)(c) of the Income Tax Act addresses interest on money borrowed for the purpose of earning income from a business or property. CRA's Income Tax Folio S3-F6-C1, Interest Deductibility, discusses the direct use of borrowed money and tracing borrowed funds to the use they were put to.

This is why the sequence matters. The original debt may have been incurred for a personal purpose. After that debt is paid down, new money is borrowed and put to a different use. Depending on the requirements of the Income Tax Act and your individual circumstances, interest on that new borrowing may be deductible. You should always seek independent tax advice if you are thinking about implementing these strategies.

Singleton v. Canada (Supreme Court of Canada, 2001)

How it is cited. Commonly referenced in discussions of reordering borrowing and the direct use of borrowed money.

The principle. The test looks at the direct use of the borrowed money, based on the transactions that actually took place. The general anti-avoidance rule (GAAR) was not argued in the case.

Ludco Enterprises v. Canada (Supreme Court of Canada, 2001)

How it is cited. Commonly referenced when considering money borrowed for investment purposes.

The principle. Earning income does not have to be the main purpose of an investment, as long as there is a reasonable expectation of income. Income means income, not net profit.

Lipson v. Canada (Supreme Court of Canada, 2009)

How it is cited. Often raised as a reminder that tracing is not necessarily the end of a tax analysis.

The principle. Transactions can also be considered under GAAR. Tax planning and abusive tax avoidance are not the same thing. Individual circumstances and the transactions that actually occurred matter.

These summaries describe how the cases are commonly discussed. They are not legal or tax advice about your situation.

06 Selling Existing Investments

Selling first can create a tax bill.

For someone who already owns non-registered investments, a debt swap usually begins with a sale, and that sale can have tax consequences.

If the investments are worth more than their adjusted cost base, the sale may create a capital gain. If they are worth less, it may create a capital loss.

That matters because the market value of a portfolio is not necessarily the amount available for the swap. If selling $100,000 of investments creates an expected tax liability, some of the proceeds may need to be set aside rather than applied against the existing debt.

There can also be additional considerations when investments are sold and repurchased, particularly where a loss is involved and the superficial loss rules may apply. The consequences of the sale should be considered before deciding how much capital will actually be used in the swap.

07 Implementation

Map it before moving the money.

A debt swap is not difficult to understand. The important part is making sure the transactions actually reflect the strategy that was designed. Before anything moves, we map the process.

01
Map the swap
We start with what you own, what you owe and what capital is available. Together we work out how much debt is being considered for the swap, where the capital will come from and what the new borrowing will be used for.
02
Build the structure
We identify the accounts and borrowing facilities needed to complete the transactions and keep different uses of borrowed money identifiable. Where mortgage financing is involved, your mortgage representative handles the mortgage and borrowing facilities.
03
Run the transactions
You make each transaction yourself. We support you through the sequence so the movement of money follows the structure mapped in advance.
04
Keep the trail
The transactions are recorded so there is a clear history of the capital used to reduce the original debt, the new borrowing and what those borrowed funds were used for. Borrowing used for different purposes is kept identifiable.

The goal is not complexity. The goal is clarity.

08 Who Handles the Investments

Investment advice stays with an investment professional.

Freedom10 does not choose your investments. The investment side of the strategy is handled by a licensed financial advisor. You can continue working with your existing advisor, or we can introduce you to an advisor partner familiar with the strategy.

If you work with one of our advisor partners, Freedom10 may receive a referral fee. You are never required to use one of our partners.

What you sell, what you purchase and whether those investments are appropriate for you are decisions made between you and your licensed investment advisor.

09 Who Does What

Clear roles. Clear responsibilities.

You

Make the transactions
Provide complete, accurate and current information
Keep borrowing used for different purposes properly separated
Tell us when something changes
Make investment decisions with your licensed investment advisor

Freedom10

Design the strategy, sequence and account structure together with you
Help you set it up, implement it and track it
Provide the tracking framework and twelve months of implementation support: up to three 30-minute calls a month for the first 90 days, then one a month
At tax time, spend up to an hour with your accountant walking through the strategy and records

Your mortgage representative

Your choice: your own mortgage agent or broker, your bank, or Sean or Devon through Tango Financial in a separate engagement
Where mortgage financing is required, handles the mortgage and related borrowing facilities
Confirms borrowing limits, prepayment terms and product mechanics
Works with us to make sure the financing structure can support the strategy
Freedom10 receives no mortgage referral fees. If you engage Sean or Devon through Tango, they do not charge you a fee for the mortgage work; they may be compensated by the lender through Tango

Your independent tax advisor

Advises on the tax consequences of selling existing assets
Advises on the tax treatment of interest on the new borrowing
Advises on what you claim on your tax return

Your investment advisor

Provides investment advice
Helps decide what should be sold and what should be purchased
Assesses whether the investments and the use of leverage are appropriate for you
Can be your existing advisor or an advisor partner introduced by Freedom10

10 An Illustration

The $100,000 swap, step by step.

The same household as above: a $400,000 personal mortgage and $100,000 of non-registered investments with an adjusted cost base of $80,000. For simplicity, assume no investment growth or decline after the swap.

01
Sell
The $100,000 portfolio is sold. With an adjusted cost base of $80,000, the sale realizes a $20,000 capital gain. That does not mean $20,000 of tax is owing. For this illustration, assume $5,000 is set aside for the expected tax, leaving $95,000 available for the swap.
02
Pay down
The $95,000 is applied against the personal mortgage, which falls from $400,000 to $305,000.
03
Reborrow
$95,000 is borrowed again for investment purposes. The new borrowing is kept separate and documented.
04
Invest
The newly borrowed $95,000 is invested in a non-registered investment account.

Assumptions

Non-registered investments: $100,000
Adjusted cost base: $80,000
Personal mortgage: $400,000
Rate on the new investment borrowing: 5%
Tax set aside from the sale (illustrative): $5,000
Investment returns: None assumed

What changes

Personal mortgage: $305,000
Investment borrowing: $95,000
Total debt: $400,000 (unchanged)
New investments, at cost: $95,000
Tax reserve: $5,000
Annual interest on the investment borrowing: $4,750

The amount of debt did not increase. What changed is what $95,000 of that debt was used for.

The $5,000 tax reserve is illustrative only; the actual tax depends on the investor's circumstances. The illustration makes no assumption about future investment performance. The investments could be worth more or less than $95,000 while the borrowing remains outstanding.

11 Your Numbers. Your Facts.

Every swap starts with the situation in front of us.

There is no standard amount to swap and no single structure that works for everyone. Your existing debt, available capital, investments, borrowing options, cash flow and tax circumstances all matter.

Our analysis is based on the information you provide and information supplied by your advisors, lenders and financial institutions. You are responsible for making sure that information is complete, accurate and current.

We will ask questions when something appears inconsistent, but we do not independently audit the information provided to us. If the facts change, the analysis may change too.

FAQ

Debt Swap Questions

Next Step

Before you invest the capital, look at the debt.

If you have significant non-registered investments, are receiving an inheritance, have sold a property or business, or otherwise have meaningful capital available while still carrying personal debt, it may be worth looking at the two together.

A short application tells us what you own and what you owe. If a debt swap could fit, we model it on your numbers and walk you through it on a 30-minute video call.

Apply for a debt swap call →

Not ready to apply? Join the free masterclass →

The examples on this page are illustrations only and are not a recommendation to borrow, invest, sell an investment or implement a particular tax strategy.

Borrowing to invest involves risk. Investment values can rise or fall, interest rates can change, and investment borrowing remains repayable regardless of investment performance.

Tax outcomes depend on the Income Tax Act and individual facts and circumstances. Freedom10 does not provide legal or tax advice. Independent professional advice should be obtained where appropriate. Investment recommendations and suitability assessments are provided by appropriately licensed investment professionals.