Discover how high-net-worth families can leverage credit for tax efficiency.
When thinking of groups that need to borrow money, Canada’s high-net-worth families might not come to mind. Yet for them, preserving wealth is about more than just asset growth. It’s also about prudent tax planning, and credit can play a significant role, says Gerry Dimakopoulos, vice president and head of credit for RBC Private Banking Canada.
“Borrowing against investment portfolios or real estate can create liquidity without selling and realizing capital gains.”
RBC Private Banking can provide custom credit solutions that allow individuals to leverage their existing assets without triggering a taxable event, he explains. Other strategies involve borrowing against your illiquid assets (like real estate) to invest in more liquid ones like a diversified portfolio of stocks, bonds and other securities1. Interest costs are generally deductible against taxable income.
Often, the greater the wealth, the more complex the client needs, and that typically includes credit, says Kim Mason, executive vice president and head of RBC Private Banking Canada. In addition to using credit for tax efficiencies, these solutions can help clients diversify wealth assets or facilitate other large acquisitions.
“Every family is different, and that’s why private banking takes a truly customized approach, bringing in credit specialists who are able to recommend the right products for a family’s long-term financial goals,” she says.
RBC Private Banking clients benefit from a dedicated private banker and a credit specialist who can tailor borrowing structures to meet a client’s unique tax considerations. Through their private banking team, clients can also access specialized financial, tax and legal professionals within RBC’s Family Office Services group, who work closely with clients, their private bankers and other advisors to advance an overall financial plan that makes sense long-term.
“This is a relationship business where your private banker should have deep awareness of your family’s wealth objectives,” Ms. Mason says.
From the start, private banking involves in-depth discovery. It leaves no aspect of family finances unexplored to create a detailed portrait of realities and opportunities, from growing wealth to managing taxes. Only then are credit solutions considered, says Mr. Dimakopoulos.
Solutions are tailored to client circumstances and objectives. For instance, a family might need liquidity to purchase a vacation property in the United States. “But their challenge is that most assets are illiquid, like real estate holdings in Canada.”
To illustrate another strategy in action, consider someone who has a $2-million mortgage on their house and owns $4 million in liquid assets. They can use the liquid assets to pay off the mortgage on the house at the term maturity. This clears the debt. Then, they can re-apply to refinance the equity on the house, for example by taking out a new mortgage or a line of credit secured against the value of the property. Now they can use those funds to invest in income-producing assets, such as a portfolio of marketable securities1.
The benefit? “The client can claim the interest on the investment loan as a tax deduction,” explains Mr. Dimakopoulos.
In this scenario, credit isn’t just a source of borrowing; it’s a strategic tool. This usage effectively converts what was once non-deductible mortgage interest into deductible investment loan interest. While it is important to consider other potential impacts, such as capital gains that may result from the sale of liquid assets, the approach here preserves invested capital, enhances tax efficiency and keeps the client’s wealth working for them1.
High-net-worth families or business owners with significant corporate assets tend to be familiar and even comfortable with lending solutions. But even sophisticated clients often discover new credit strategies by working with a private banker.
For example, Immediate Financing Arrangements (IFAs) include purchasing permanent life insurance and using the policy as collateral for a loan, which can then be invested in other assets. The interest costs are often tax deductible. Upon death, the loan is repaid from the tax-free benefit.
“An IFA allows families to unlock liquidity, preserve investments and, more importantly, ensure there is an efficient passing of assets to the next generation,” says Mr. Dimakopoulos.
Whether it’s with an Individual Retirement Arrangement (IRA) or a mortgage for a U.S. property, private bankers always ensure the lending solution fits the family and that it’s well understood by its decision makers, Ms. Mason notes.
“Nothing is ever risk-free, so it’s incumbent on credit specialists to help clients ensure upsides and potential risks are well understood and within a client’s risk tolerance.”
Additional credit solutions are available based on the family organizational structure. With certain wealthy clients, the family assets are owned by a trust entity as part of tax and estate planning. “At RBC Private Banking, we have the capability to lend to a trust, depending on the trust structure and if certain conditions are met,” Mr. Dimakopoulos says.
Other times, the ownership structure of a trust is organized so that each asset is held by a different corporation. “We have the option of having one entity set as the borrower and to have multiple asset classes, owned by different entities, used as collateral to secure the loan. This flexibility can be very beneficial to the client to implement as part of a tax planning strategy.”
No matter the strategy, credit decisions can work best when they’re made in concert with RBC Private Banking’s specialists, RBC Family Office Services, a client’s own independent legal, tax and estate planning advisors, and family office, if they have one.
“Private banking is really about dedicated relationship management,” Ms. Mason says. “At its heart, it’s collaborative, built on trust and requires a deep understanding of our clients.”
Discover how RBC Private Banking can help you leverage credit to achieve your wealth goals.
This article was originally published in The Globe and Mail .
1Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.
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