Leverage Programs
Leverage is a strategy where you purchase an investment with borrowed funds. In a rising market, the strategy can greatly enhance the return of an investment. Conversely, when the market falls, the loss on the investment is magnified. Interest paid on borrowed funds is generally tax deductible if the money is borrowed to earn income from a business or property. For example, if you borrow money to buy a mutual fund outside of an RRSP, the loan interest will be tax deductible. Generally, leveraging is a worthwhile strategy if the after-tax rate of return on the investment is greater than the after-tax cost of the loan interest. This and other factors should be discussed with your financial advisor when considering the use of leverage as part of your overall investment program.
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| Leverage Risks |
| - When share prices fall, leverage magnifies the losses on the investment. The percentage loss on the investor's equity in the investment will exceed the percentage decrease in the share price. |
| - Poor investment performance may result in an after-tax return that is less than the after-tax carry costs of the loan. |
| - The lending institution may request more collateral or a loan reduction if the value of the investment drops below a certain percentage of the market value of the shares. If the investor does not have cash available, he/she may have to sell shares at a loss to pay down the loan. |
| - Investors should have adequate financial resources both to pay the loan interest and any required loan repayments. Rising interest rates or loss of employment may put a strain on these resources. |
