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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