Cash or Credit? The Smarter Way to Fund a Big Purchase

A new vehicle, renovation, boat, cottage project or other large purchase often comes with the same question – should I pay for it outright, or should I finance it?

If you have money available in your investment accounts, paying cash can seem like the obvious choice. Why pay interest if you don't have to?

But before making a large withdrawal, it's worth looking at the bigger picture. Where the money comes from can be just as important as how much you need.

Not All Withdrawals Are the Same

Depending on the account, accessing your investments can have very different consequences:

RRSPs and RRIFs
Withdrawals are taxable income and may be subject to withholding tax and account fees. If you need a specific amount after tax, you may have to withdraw considerably more to get the cash you need. A large withdrawal can also increase your overall tax bill, as the tax withheld may not cover the full amount ultimately owing. Once withdrawn, you also lose the future tax-deferred growth on those investments.

TFSAs
Withdrawals are tax-free, but you're giving up potential tax-free growth on those funds. Your TFSA contribution room is added back, but not until the following calendar year.

Non-Registered Accounts
Selling investments may trigger capital gains and increase your taxable income, creating a potential tax cost when raising cash.

In all cases, the cost of a withdrawal can extend beyond simply having less money invested.

When Financing Can Make Sense

Financing some or all of a purchase may allow you to avoid a large taxable withdrawal, manage capital gains more gradually, keep more of your money invested and maintain greater flexibility.

But financing isn't always the better choice. The interest rate and total borrowing cost matter — and so does your ability to comfortably take on the payment.

It's About Comparing the Real Costs

Instead of simply asking, "Do I have enough money to pay cash?", consider:

"What is the most efficient way to pay for this?"

We look at:

• Cost of borrowing: What is the interest rate and total financing cost?
• Monthly cash flow: Can you comfortably afford the payment without affecting regular spending or savings?
• Existing debt: What other loans, mortgages or credit payments are you carrying?
• Available credit: Will you still have access to credit for an unexpected expense?
• Source of funds: Would the money come from an RRSP/RRIF, TFSA, non-registered account or cash savings?
• Tax consequences: Would accessing the money create taxable income or capital gains?
• Investment impact: What potential future growth are you giving up by taking the money out?

A Simple Example

You're buying a $30,000 vehicle and have two options: withdraw the money from your TFSA or finance it for five years at 2.99%.

If the $30,000 stays invested and earns an average 6–8% annually, after five years it could grow to approximately $40,000–$44,000— or $10,000–$14,000 of potential tax-free growth.

Financing the same $30,000 at 2.99% would cost approximately $2,300 in interest, with payments of about $539 per month.

That doesn't automatically make financing the better choice. Investment returns aren't guaranteed, while loan interest is a known cost. The monthly payment also needs to fit comfortably within your cash flow and other financial obligations.

Talk to Us Before You Move the Money

If you're considering a significant purchase, we can help you compare the options and determine which account to use, how much to withdraw and whether financing some of the purchase makes sense within your overall financial plan.

A large purchase doesn't have to derail a good financial plan — but how you pay for it matters.

This document is provided for general informational purposes only and offers ahigh-level discussion of certain topics. It is not intended to constitute, and should not be relied upon as, legal, tax, estate planning, investment, or other professional advice. You should obtain independent professional advice tailored to your specific circumstances before making any decisions. iA Private Wealth Inc. and its advisors do not provide legal or tax advice.

This material has been prepared by Jessica Perry Senior Wealth Advisor with Adamson Wealth Group at iA Private Wealth Inc., and does not reflect the views or opinions of iA Private Wealth Inc. Although the information is derived from sources believed to be reliable, its accuracy and completeness cannot be guaranteed and it can change at any time. This document does not constitute an offer or solicitation of any kind and may not be applicable to all individuals.

Products and services provided by third parties, including by way of referral, are fully independent of those provided by iA Private Wealth Inc. Products offered directly through iA Private Wealth Inc. are covered by the Canadian Investor Protection Fund, subject to exception. iA Private Wealth Inc. does not warrant the quality, reliability or accuracy of the products or services of third parties. Please speak to your advisor if you have any questions.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and a business name under which iA Private Wealth Inc. operates.

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