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investing exchange

An illustration of a house on one end of a lever, or see-saw, with a dollar sign on the other.Getty Images/iStockphoto

Investing Exchange brings couples together with financial advisers in an exchange of opinion over saving and investment strategies.

In this exchange, we meet a professional British Columbia couple in their 40s. Adrianna feels they can take on more debt than Chester is comfortable with. Both want to know whether to borrow and invest, or pay off debt.

As professionals in their 40s with good jobs, a young family and a $2-million house in British Columbia's Lower Mainland, Chester and Adrianna have only a few differences of opinion when it comes to their financial future.

"We have had some good debates when deciding on purchasing our homes, with me always the one more driven by emotion," says Adrianna. (The couple's names have been changed for this story.) She's the one who says, "I want it – let's make it work!"

Both of them are executives in financial services, so they're well-versed in the decisions they need to consider when they see their adviser. They've saved nearly $162,000 to educate their children, who are both under 10. Together the couple has a bit more than $1-million in Registered Retirement Savings Plan and Tax-Free Savings Account funds, plus another $1-million in shares in a private company.

Their $2-million house in the Vancouver area has a $600,000 mortgage. They would like to pay this down as fast as they can.

At the same time, they would like to upgrade their home, borrowing and taking advantage of current low interest rates and locking in as soon rates begin to rise. Here is where their opinions can differ, according to Adrianna. Whenever they have bought and sold homes, it is Chester who tries "to reconcile the large mortgage we have to take on," she says.

"I can usually get him to come around once I ask him to 'run the numbers' and remind him of our savings to date. For him, it's more the fear of … 'what would we do if one of us could not work for some reason.' " My reply has always been: 'We can't live afraid of what might happen – worst case scenario, we'd sell.' "

Another issue that affects the couples' finances is that Chester is a U.S. citizen, though he has always worked in Canada. Unlike virtually every other country in the world (including Canada), the United States requires its citizens to file tax returns no matter where they live and work, and U.S. law treats tax breaks such as TFSA gains differently than we do.

This is an issue for Chester because he has TFSA funds. In addition, he is not allowed to claim a foreign tax credit on his U.S. return for the taxes he pays in Canada on his investment income. He keeps up on his U.S. tax filing, but this wrinkle "has effectively resulted in double taxation."

One option for Chester is to renounce his U.S. citizenship – he and Adrianna and the children live in British Columbia anyway. But this can be costly and complicated. In any case, "I want to retain the right to make Hawaii my permanent home after I retire," he says, joking about the move but not about keeping his citizenship.

What's the best way for Chester and Adrianna to reconcile their financial issues – paying down their mortgage versus borrowing and dealing with U.S. taxation?

"I have worked with this family for about nine years," says Heather Hesson of Marlow Hesson Wealth Partnership Group, TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc., which is a subsidiary of The Toronto-Dominion Bank. "They have sufficient cash flow to address all their major planning goals, including savings and debt reduction. They have been able to aggressively pay down their mortgage while maximizing savings.

"Right now they are restructuring their debt," she explains. "Given the current world economic situation with an artificially low interest-rate environment and buoyant financial stock markets, we recommend a balance of maximizing savings while maintaining their focus on debt reduction."

Ms. Hesson and her fellow investment adviser, Mark Marlow, recommend that the couple use a line of credit secured against their home, splitting it into two facilities. "Part of the interest payments will be tax deductible as it qualifies as an investment loan," Ms. Hesson says.

"Because they are considering upgrading their home, we recommend that they have another insurance review [life and disability] to ensure that sufficient coverage is in place to cover the additional debt," she adds.

On the investment side, Ms. Hesson says they should take maximum advantage of all tax sheltered plans available – RRSPs, Registered Education Savings Plans for their children and TFSAs – despite the tax issues the latter raise in Chester's case.

Because his TFSA is taxable in the United States, Chester should avoid most Canadian mutual funds and exchange traded funds within this and other taxable accounts, focusing on active Canadian shares, Ms. Hesson says:

"Many U.S. citizens have come to the conclusion that the costs associated with [TFSAs] outweigh the benefit of the Canadian tax savings. We don't have any concerns with having a TFSA, as our client complies with the reporting requirements."