Ross’ parenting priorities are the same as those of his parents when they raised him: “First, I taught them to be thoughtful; Second, I raised them with a work ethic, and third, I taught them to save money and not spend it. “
His older daughter is going to university in a year and tuition is funded by an RESP. “If upper limits make sense, I might buy her a house in the second year and let her manage the tenants. Cash flow can keep her rent lower if she handles it well. “
This is exactly what we imagined when our own daughter went to the University of Guelph a decade ago, but as I confessed on the podcast, we moved away and ended up renting her for a few years – to our final mutual regret.
Matthew Ardrey, investment advisor and vice president of Toronto-based TriDelta Financial, says there are two main routes to accessing capital: debt or equity. At BOMAD, what matters is what is cheaper.
Most parents have their own homes, so they can get a secured line of credit at an interest rate that is a function of the prime rate: 2.45% at time of publication. Most secured lines range from prime to prime + 1%, so he’s using prime + 0.5% in his example.
“With a debt rate of 2.95%, we know what the parent company would have to make on its after-tax shares to be better off with debt than with stocks,” says Ardrey. Given a total return of 6% for an individual with a tax bracket of 50% (excluding the preferential rates on dividends and capital gains), the after-tax return would be 3%. That’s about the break-even point for that person. If the after-tax return is lower, equity is preferred; and vice versa, with a higher after-tax return, preference is given to debt.
Other factors are where and how the portfolio is invested. If it is a TFSA, there is no tax consideration for the return component; If it’s an RRSP, the tax can be so criminal that it doesn’t make sense to use the money on a large withdrawal. If the account is taxable, then embedded capital gains should also be considered.
On the debt side, the greatest risk is rising interest rates. If future interest rates rise, it will affect the debt-equity comparison and the affordability of borrowing for parents.