HOW
TO GET THE CANADA REVENUE AGENCY TO PAY YOUR ALIMONY
Requirements for this to apply:
- Must be in the 50.30 % tax bracket
or greater (annual income of $58,500 or greater in N.S.)
- Must be required by legal divorce
decree to pay annual alimony to an ex-spouse. The more alimony
payable the better the plan works.
Actual Case: - January 16, 1991
- January 16, 1996
- Ex-wife, (a Halifax area lawyer,
earning $115,000 per annum) was the family bread winner, and
upon divorce SHE is ordered by the courts to pay her ex-husband
alimony of $1000 per month.
Solution:
- Ex-wife borrows $132,000 from the
bank at 10% interest, twenty year amortization, monthly
payment of $1142.
- Puts $12,000 into a money market
mutual fund and uses this to pay her alimony for the next
year.
- Invest $120,000 outside the
RRSP in 4 foreign content mutual funds.
- $30,000 - BPI American
Small Companies
- $30,000 - Fidelity
Growth America
- $30,000 - Templeton
International Stock
- $30,000 - Trimark
Fund
- End of year one the ex-wife
will get a 50.3% tax refund for the tax deductible interest on
the money borrowed to invest, (120,000 x 10% interest=12,000
x 50.3% tax refund=$6036).
- She'll also get a 50.3% tax
refund for the tax deductible alimony paid, ($12,000 x
50.3%=$6036). Total annual tax refund of $12,072.
- The ex-wife then takes the $12,072
tax refund and replenishes the money market fund to pay
the next twelve months alimony. She continues to do this for
five years.
- At the end of five years the
$120,000 invested originally has grown to $293,373
- $63,396 - BPI American Small Companies
- $79,832 - Fidelity
Growth America
- $69,730 - Templeton
International Stock
- $80,415 - Trimark
Fund
(average annual compound return
of 19.98%). The ex-wife makes a one time settlement offer
to her ex-husband of $120,000, and the ex-husband signs a satisfaction
piece to waive any future claims to any alimony.
- The ex-wife takes the remaining
$173,373 and pays off the loan, (which know has a principal
balance owing of $107,505) and walks away with the excess, less
the capital gains tax for 1995. Thus Revenue Canada has
paid her alimony and helped her get rid of her ex-husband.
Borrowing to invest is not suitable for everyone. You should be fully aware of the risks and benefits associated with using borrowed money to invest since losses as well as gains may be magnified.
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