Should You Use Your TFSA to Buy a House? | Ep. 58

Should you use your TFSA to buy a home, or leave it invested and use a different strategy?

In this episode of the Plain English Finance Podcast, Tré and Sierra work through a real planning puzzle: someone wants to buy a home, has money in both a non-registered investment account and a TFSA, and needs to decide whether using the TFSA creates a better long-term outcome. The answer depends on tax deductibility, investment returns, taxable income, how quickly the TFSA can be replenished, and whether the borrowed money is actually used to invest. 

The key issue is that mortgage interest on a personal home is normally paid with after-tax dollars, whereas interest on money borrowed for investment may be deductible if certain conditions are met. In this case, using the TFSA helped pay off the home purchase fully, then allowed a larger investment loan to be created in a non-registered account. That created a larger potential interest deduction, but it also meant temporarily giving up tax-free TFSA growth. 

In this episode, we discuss:

•  Whether it makes sense to use a TFSA for a home purchase 
•  Why mortgage interest for a personal home is different from investment-loan interest 
•  Why the paper trail matters when borrowing to invest 
•  Why borrowed money cannot be used inside a TFSA or RRSP for this strategy 
•  The trade-off between tax-free TFSA growth and deductible investment-loan interest 
•  Why taxable income and tax bracket matter 
•  Why investment allocation and risk tolerance matter 
•  Why tax drag matters in non-registered accounts 
•  Why active management can change the tax result 
•  How quickly replenishing the TFSA can change the answer 
•  Why the result may flip depending on market returns 
•  Why this kind of decision needs actual planning, not rules of thumb

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Transcript

Tre 0:00

There are a few times in financial planning where different concepts converge, and I find it really interesting. Today we're gonna talk about whether you should use a TFSA to fund a home purchase, or whether you should leave the TFSA invested and go a different route. Now You know what it's about.

Sierra 0:20

That's kind of interesting.

Tre 0:21

Yeah.

Sierra 0:22

I kind of, I laughed a little and you were like, and I find it interesting. I was like, of course you do. Yeah. Because it's

Tre 0:29

interesting.

Sierra 0:29

But then I was like, oh, I'm interested.

Tre 0:32

Okay. Okay So I'm, first of all, I'm, I'm gonna describe the problem and then, so this is a problem that I had to solve recently. And then we're going to talk through what the. What the solution was. Does that make sense?

Sierra 0:46

Yeah. Do you love it when clients come to you and they're like, I have this complicated question and I don't know what the answer is. Are you just like, yes.

Tre 0:54

I, yeah, I like it when I also don't know the answer.

Sierra 0:57

Yeah.

Tre 0:57

Right. So when I have to then be like, that's a really interesting problem. Let's, let's take a look and see what makes sense and why that would make sense and

Sierra 1:05

Yeah.

Tre 1:06

Yeah. Absolutely. That's, that's the,

Sierra 1:08

I feel like that's your

Tre 1:09

favorite, that's the puzzle part. Yeah. Absolutely. Yeah. That's, that's your favorite. That's why I like, like stuff that when it gets complicated and it's like, I, I don't know the answer. Let's find, let's find out together. Is that weird? I don't know.

Sierra 1:25

So lame. I love it.

Tre 1:27

Okay, so here's the problem. So an individual is looking to purchase a house and they are following a lot of other stuff that I teach. And so they're comfortable with holding a mortgage. Which is great for them, but we are deciding whether we leave the tier, so the person doesn't have enough money inside of just their non-registered account to pay for the home outright.

Sierra 1:51

Mm-hmm.

Tre 1:51

And then do the, the mortgage and

Sierra 1:54

debt,

Tre 1:55

things like that.

Sierra 1:55

structured tax efficiencies.

Tre 1:58

Yeah. That stuff.

Sierra 1:59

Hey. Hype me up.

Tre 2:01

Oh, we're done. Yay. You just say random words and you're like, I know there was something vaguely about this at one time in the past.

Sierra 2:10

I know something. so

Tre 2:14

Please describe it then.

Sierra 2:15

You have to. Like use the mortgage amount to reinvest. You can't, like if you take out a loan and it's for your house, you have to pay tax on it. Tax on it a certain way. But if you pay that off,

Tre 2:31

So you pay for the mortgage with, you pay for the interest with after tax dollars. If it's for your home, if it's for, if the loan is for personal consumption, you pay for it after tax dollars, you pay the interest. And keep going.

Sierra 2:46

Is that what I said or

Tre 2:47

Kind of, yeah.

Sierra 2:48

Okay. You're just clarifying. Yeah. Okay. Because I was like, I have no idea. And then so what you do is the old CRA switcheroo, that's what I'm calling it now. They should just take that as the new name anyways, Uh, so you just pay off your mortgage with the money you have. In your like non-registered account or whatever, like you said, and then you take out that same amount that you paid. It's just a paper trail. You just take it back out. But you say this is for investing.

Tre 3:22

No, you actually need to invest it. Why the wink? It's not, you're not tricking the government.

Sierra 3:28

You kind, I feel like you are. No. You're not, but it's just stupid.

Tre 3:34

You need to borrow the money to invest. Yes, and the investment needs to,

Sierra 3:37

but it's like I have, it's just a, it's stupid. It's like you, they need that specific like trail.

Tre 3:44

Yeah, you need to borrow to invest.

Sierra 3:46

But you do you know what I'm saying? It's

Tre 3:47

like I understand what you're saying but the paper trail is important 'cause otherwise.

Sierra 3:51

You just didn't like the wink. You don't like it when I wink anyways. Like

Tre 3:56

You you a weird, weird moments. It's a little creepy. Nope. Okay. Okay. I didn't expect this. The, the problem. Oh gosh. Okay. So the pro,

Sierra 4:11

I told myself I was gonna be serious in this one. I'm like, oh, I just wanna be like professional.

Tre 4:17

Here you are. hahh...

Sierra 4:18

Okay. Keep going. Okay.

Tre 4:19

So the problem, let me reiterate. The problem was that the individual didn't have enough in their non-registered accounts to pay for the home outright. Uh, but they did have enough if they combine into their non-registered accounts and their TFSAs.

Sierra 4:34

Okay.

Tre 4:35

Okay.

Sierra 4:35

Yeah.

Tre 4:35

So the question was, do we only half do it? So do we only use a non-registered account that will leave a small amount owing on the mortgage. Well, not a small amount, like 250, $300,000 is left owing on the mortgage. And then do that strategy with a smaller part of the mortgage, or do we utilize all of the TFSAs and the non-registered account, pay the mortgage off entirely, and then you'll be pulling money out of the mortgage during the mortgage switcheroo". But that has to go into a non-registered account. Which means that that individual doesn't have TFSAs until they replenish it.

Sierra 5:19

And when would that be?

Tre 5:20

Well, okay, so that was, that's the, that's the base of the problem.

Sierra 5:23

Right. 'cause there's those other little pieces. It's like eventually it will be replenishable.

Tre 5:30

Yes.

Sierra 5:30

Right.

Tre 5:30

You'd be able to replenish it. But how long?

Sierra 5:31

But you'd need to know how long.

Tre 5:33

Right. So this is where the, a convergence of multiple different concepts in financial planning really come together. Because if they, so the first route we, we would call it the TFSA inclusive route. That's where they use TFSAs. Then, we'll call it the, the non-registered only route when they don't use TFSAs. Okay. Okay. So if they go with the TFSA inclusive route, it means that the amount that they'll be able to deduct from their income due to the interest owing on the mortgage is going to be higher. And that higher amount is gonna be for as long as they're investing those funds. Okay. Okay. If they go for the non-registered only route, it means that the money that's left in their TFSAs is growing tax free forever.

Sierra 6:22

Mm-hmm.

Tre 6:23

And but the amount that they'll be able to deduct in interest is lower.

Sierra 6:28

Okay.

Tre 6:29

Okay.

Sierra 6:29

The amount we would be able to deduct in interest for their mortgage,

Tre 6:33

for their mortgage will be lower. Okay. Yeah, yeah. Because $300,000 of it will be for the purchase of the home, so there's no, there's no offsetting that interest. Okay.

Sierra 6:43

Yeah.

Tre 6:43

So the things that mattered in this situation was how quickly this individual would be able to replenish their TFSAs. That was a key, a key concept. The second one was how were the funds invested?

Sierra 6:56

Okay.

Tre 6:56

So in order for this to work, you have to have a, a much higher risk tolerance and you should be, if not a hundred percent equity, you should be like almost a hundred percent equity, for it to make sense.

Sierra 7:08

Yeah.

Tre 7:08

Especially where with interest rates when they're a little bit higher, et cetera. The other thing about it was the, the more guaranteed nature of the of being able to write off the interest. So that is a almost a gain that's offset by your taxable income.

Sierra 7:25

Yeah, this is getting complicated.

Tre 7:27

Right? There's lots to it. So with the taxable income side, so that's now another piece of the puzzle that depending on what your taxable income is and your tax bracket depends on in this scenario what the right decision would be. Oh, there's more.

Sierra 7:43

Look at how happy you're though. You're like, oh, there's more. Oh, there's more. You're happy. I'm like, okay, that's enough. I'm just picking one out of a, it's like eeny meeny miny moe.

Tre 7:56

Absolutely. Then the other thing is the way that this money is invested. So we talked about tax drag in the last episode.

Sierra 8:03

Yeah.

Tre 8:04

So if you are picking an investment with high tax drag, that also becomes an issue. If you're doing this type of. Doing this type of strategy because high tax investments should be in non-registered accounts. Sorry, shouldn't be in non-registered accounts. They should be in the TFSA and the RSP.

Sierra 8:23

Oh yes. Right.

Tre 8:24

So it means that there, if this person was using. Like active management, well then it would mean more, it changes things. Because, because of this thing.

Sierra 8:35

Yep.

Tre 8:36

So there were a few things there, that made a big difference. Ultimately though, do you wanna know what the answer was for this person?

Sierra 8:44

No. Just kidding, of course!

Tre 8:46

Okay. Well you see you guys in the next one. Bye. Bye.

Sierra 8:52

Can you imagine the viewership is just

Tre 8:56

Nope.

Sierra 8:57

Unsubscribe.. Unsubscribe.

Tre 8:58

Yeah. So in, in this specific case, it made more sense, which actually surprised me. It made more sense to utilize the TFSAs and replenish them over the following three years.

Sierra 9:13

I kind of was okay. I originally, that was my first thought, because you get the room back. But yeah, then when you added all those other things, I was like.

Tre 9:24

Well, I actually thought that the, the earnings from the TFSA would outpace it.

Sierra 9:31

Oh.

Tre 9:32

Like if you have $300,000 in your TFSA. I mean, you, you never get those years back, right? Yeah, because, so with this individual, it was because they could replenish it within a pretty short amount of time. It made a lot more sense. If this was replenishment over 10 years, I don't think it would've made as much sense.

Sierra 9:54

What is, what do you mean by replenishing over three years? Is that how long it takes for them to get the room back?

Tre 10:00

No, that's just how long it takes.

Sierra 10:02

How they would take

Tre 10:02

They would take to re... To max out their TFSA.

Sierra 10:10

But then. If they're taking the money back out from a mortgage or not a mortgage, sorry.

Tre 10:19

But it is a mortgage. But you're gonna ask, why wouldn't they just put it back in the TFSA?

Sierra 10:22

Yeah.

Tre 10:22

Because in order for the investment, in order for you to be able to deduct the interest as an expense, you need to have to pay tax on the income from that investment. So within, you cannot borrow to invest inside of a RSP or a TFSA, because there's no income on it.

Sierra 10:47

Gotcha.

Tre 10:48

So it has to be inside of a non-registered account

Sierra 10:50

for specifically that,

Tre 10:52

for that strategy to work for, you'd better deduct the interest as an expense.

Sierra 10:56

Okay.

Tre 10:56

Because imagine, everyone would do that.

Sierra 10:58

Yeah. I was like, that sounds great.

Tre 11:00

This is a great idea.

Sierra 11:01

This is easy. Why doesn't everybody just do financial planning? That's

Tre 11:06

Because you would borrow the money, put it into a TFSA, make your 7-8% a year tax free, and then deduct all the interest. Great.

Sierra 11:17

Sounds good to me.

Tre 11:18

CRA would have an issue with that and people like me would exploit that to the ninth. Holy. Yeah. No, so you can't do that, so,

Sierra 11:25

okay.

Tre 11:26

It, it's up to them. So there's, but there is two ways. This is was an interesting part as well. There were two ways that that individual could replenished there T TFSAs. One of them is through income, but the other one was actually through the income that the non-registered account,

Sierra 11:43

oh my gosh

Tre 11:44

generates. Right. So once you pay tax on that, that's fair game. You don't have to keep that, that income invested. So if you're using a dividend paying, like the dividends that are coming off the investment, you can take that money and put it into your TFSA and that's absolutely fine.

Sierra 12:00

Yeah. Again, it's like, it's crazy. This is just a game.

Tre 12:04

Oh yeah. Pretty

Sierra 12:05

much. This is literally just a board game, a strategy game sometimes. I really do think that I'm like. No wonder you like it so much. Everybody knows how annoying you are at those games. Everyone knows how annoying you are at Monopoly.

Tre 12:19

Yeah, I'm sorry. If The thing about Monopoly is that it was made to be unfair.

Sierra 12:27

That's why it's called Monopoly.

Tre 12:29

Yeah. It was made to be, it was made to be unfair. It was. So,

Sierra 12:32

but you've made some people very mad at I, wow. Maybe they're listening.

Tre 12:38

That's why I don't... I don't play

Sierra 12:39

I refuse. I've, I've actually refused to play.

Tre 12:43

Yeah. I don't play anymore.

Sierra 12:45

Yeah.

Tre 12:45

It's not worth it.

Sierra 12:46

But sometimes you bring it up, you're like, anybody wanna play? And I'm like,

Tre 12:48

Yeah. cause I still like the game. I just don't play it with people. It's just not worth the fallout.

Sierra 12:58

Oh boy.

Tre 12:59

Yeah. Okay. So yeah, that was, so that was a, a really interesting, interesting little case for me, I guess to,

Sierra 13:06

Yeah. Like a little case study... puzzle.

Tre 13:08

Yeah. To work through. It sounds way easier than it took me a lot longer than it sounds like to, to, to figure this out. What you, what ended up happening though, when you projected it out like 20, 30 years, is that the individual with that left the TFSA. That didn't use a TFSA, So left the TFSA in there to grow. They ended up with slightly higher, like TFSA over that, that time. So they, they ended up with, with a higher TFSA, which meant that their. Spending, I guess in retirement could potentially be more. But the, potentially be more part, I can't underestimate how important that is. So when you, when you compared it, the individual that did use the TFSA, they simply had more money to invest over the course of their lifetime. Because I did it in a, in an environment where the choice was simple. They didn't, both people spent exactly the same amount. So if it wasn't, if it didn't go to taxes. It was invested and saved. Because you have that tax deduction, it meant that that individual could just save more.

Sierra 14:30

Mm-hmm.

Tre 14:30

And that made up for that, that gap in the TFSA, but that's heavily dependent on the returns of the TFSA. So I'm assuming that. You know, everything was great for those years, and it was, it was great.

Sierra 14:47

Yeah.

Tre 14:48

Then it was, it was leaning more towards just not using the TFSA. As soon as you say, okay, let's say we have one of those three years is not a great year, or then the math completely

Sierra 14:59

flips

Tre 14:59

completely, flips because the, the interest side. Being able to write that off was, was for a significant amount of time, and that really adds up. It's, it's almost like a, you can suddenly do a $20,000 RSP contribution every single year to reduce your income by $20,000 for the as long as you have that mortgage. It makes a big difference when it comes to the amount of money that you have to spend and stuff like that. So

Sierra 15:28

Yeah.

Tre 15:29

Yeah. That was the, that was, that was my findings, so it was an interesting one. I was pleasantly surprised, so I thought we'd talk about it.

Sierra 15:38

Fair enough.

Tre 15:39

It's my podcast. I get to talk about whatever I want.

Sierra 15:42

It's my,

Tre 15:42

Even if it's a little nutty.

Sierra 15:43

If I can't even speak. My podcast, my rules.

Tre 15:46

Exactly. Yeah. Okay. Anything else from that one?

Sierra 15:50

Nope.

Tre 15:51

All right. Well I guess this is a shorter episode then.

Sierra 15:54

Yeah, it was good.

Tre 15:56

It was good 'cause it was shorter.

Sierra 15:58

It was just good.

Tre 16:02

All right, we'll see you guys in the next one.

Sierra 16:03

Bye.

Tre 16:05

Bye. Thanks for listening to this episode of the Plain English Finance Podcast. Tre Bynoe certified Financial Planner. Chartered Investment Manager is a financial planner with TCU Wealth Management and Aviso wealth. You should always consult with your financial, legal, and tax advisors before making changes. This podcast is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any securities. The views expressed are those of the individual and are not necessarily those of Aviso Financial Inc. Mutual funds and other securities offered through Aviso wealth, a division of Aviso Financial, Inc.