A client was going through a difficult time, and needed $350,000 to pay out his/her ex, for a relationship split.
If the client borrowed $350,000 to pay out his/her ex, this borrowing is used for private purposes, so no tax deduction is available. So $0 tax refund.
We advised this client that his/her LTC owed the shareholders $300,000, being money they had introduced over the last 10 years. So we helped the client borrow $300,000 in the LTC, and helped put in place the correct Company minutes and documentation, plus assisting with his/her bank.
The interest on the $300,000 is now deductible. At 6% interest, this is $18,000 extra tax deduction per year and at the top tax rate of 33%, this saves our client $5,940 in additional tax each year.
Unfortunately the $50,000 is still personal borrowings, but we managed to move the client's position, legally, from no tax deduction to $5,940 benefit per year!
This is a common situation, and when I review each client's financial statements, I look at the opportunity to borrow more that is tax deductible in rental entities, to then be used to reduce personal debt where there is no tax deduction. This saves our clients thousands in tax every year!
Ross Barnett - January 2015