Some investors borrow money to invest. That might sound like risky business (cue Bob Seger’s “Old Time Rock and Roll”) , but there's a specific strategy behind it, and in the right conditions, it can actually generate income. It's called a margin carry trade.
Here's how it works, why some investors use it, and what you need to understand about the risks.
What's a margin carry trade?
It's a strategy where you borrow money through a margin account at a relatively low interest rate and invest it in assets that pay you a higher return — typically dividend-paying stocks or ETFs. The goal is to earn more from your investment than you're paying to borrow, so you can collect the difference.
In Canada, there's also a tax angle: The interest you pay on money borrowed to earn investment income is tax-deductible, which makes the strategy even more attractive on paper.
How it works
Step 1: Borrow on margin Your brokerage extends a margin loan based on the value of your existing holdings. The interest rate on that loan is your cost of carry, i.e., what it costs you to borrow.
Step 2: Invest in higher-yielding assets You put the borrowed money into dividend-paying stocks or ETFs with a yield that exceeds your borrowing rate. The bigger the gap between what you earn and what you owe, the better.
Step 3: Collect the spread Each quarter (or month, depending on the investment), you receive dividend income that's higher than the interest you're paying, creating positive cash flow.
Step 4: Deduct margin interest at tax time The CRA allows you to deduct interest paid on money borrowed to earn investment income. This lowers your effective borrowing cost and widens your spread even further.
A hypothetical example
Let's say you have a $50,000 debit balance in a margin account, an annual income of $150,000, and you're investing in Ontario. Here's what the math might look like.
Input | Value |
|---|---|
| Margin debit balance | $50,000 |
| Margin interest rate | 3.95%* |
| Portfolio dividend yield | 5.50% |
| Marginal tax rate (Ontario, ~$150k income) | ~43.41%** |
Gross income and costs
Dividend income earned: $50,000 × 5.50% = $2,750
Margin interest paid: $50,000 × 3.95% = $1,975
Net cash flow before tax: $775
Tax treatment on dividends
Canadian eligible dividends are taxed more favourably than employment income, thanks to the gross-up and dividend tax credit mechanism.
Step | Amount |
|---|---|
| Actual dividends received | $2,750 |
| Grossed-up amount (×1.38) | $3,795 |
| Federal tax @ 26%** marginal tax rate on grossed-up amount | $986.70 |
| Federal dividend tax credit @15.02%** on grossed-up amount | ($570.01) |
| Ontario tax @ 11.16%** marginal tax rate on grossed-up amount | $423.52 |
| Ontario dividend tax credit @ 10% on grossed-up amount | ($379.50) |
| Total tax on dividend income | $460.71 |
| Effective tax rate on dividends | ~16.75% |
That's significantly lower than the ~43.41% marginal rate on employment income, which is a big part of why this strategy appeals to higher-income investors.
Tax savings on margin interest
Step | Amount |
|---|---|
| Margin interest paid | $1,975 |
| Tax savings from interest deduction (at 43.41%) | $857.35 |
| After-tax cost of borrowing | $1,117.65 |
| Effective interest rate | ~2.24% |
Net result
Metric | Amount |
|---|---|
| Dividend income | $2,750.00 |
| Tax on dividends | (460.71) |
| After-tax dividend income | $2,289.29 |
| After-tax cost of borrowing | ($1,117.65) |
| Net after-tax profit | $1,171.63 |
| After-tax return on borrowed capital | ~2.34% |
Why it works
There are three distinct advantages when this strategy is firing on all cylinders:
A positive spread. A 5.50% yield against a 3.95% borrowing cost gives you a 1.55% gross spread before tax — that's the foundation of the whole trade.
Preferential dividend tax treatment. Eligible Canadian dividends are taxed at ~16.75% in this example, compared to ~43.4% on employment income. You keep more of what you earn.
Deductible interest. The CRA's interest deductibility rule cuts your effective borrowing rate from 3.95% to ~2.24%.
The risks (and they're real!)
This strategy amplifies both gains and losses. Before you consider it, make sure you understand what can go wrong.
Margin calls. If your holdings drop in value, your broker may ask you to deposit more money — or sell positions — to maintain your margin.
Dividend cuts. The income you're counting on isn't guaranteed. Companies can reduce or eliminate dividends, especially during downturns, which is often when your portfolio is also losing value.
Rising interest rates. Margin rates are variable. If rates go up, your spread shrinks. If they go up enough, the trade stops making sense entirely.
Concentration risk. High-yield stocks tend to cluster in specific sectors: utilities, REITs, energy. If one sector takes a hit, your whole portfolio might feel it at once.
Capital losses. A stock yielding 5.50% that drops in market value by 15% has cost you more than you earned. Dividend income doesn't offset a significant decline in the underlying investment.
Tax deductibility conditions. The CRA requires that borrowed money be used to earn income from a business or property. If you invest in non-dividend-paying growth stocks, the interest may not be deductible.
Tax treatment varies by security type: The example above assumes all income is eligible Canadian dividends. Not all broad-based ETF distributions are eligible for dividend tax credit and may be taxed differently.
Practical tips if you're considering this strategy
Now that you know that margin carry trades are not for every investor or situation, make your next move with these best practices in mind.
Diversify across sectors. Don't concentrate in one industry just because the yields are high.
Consider broad-based ETFs. Canadian dividend ETFs can reduce single-stock risk while maintaining eligible dividend treatment.
Check the fund facts. It’s important to see whether it holds foreign securities. Canadian dividend ETFs may not exclusively hold Canadian stocks. Some hold U.S. or international equities. Unlike eligible Canadian dividends, which benefit from the dividend tax credit, distributions from foreign holdings are taxed as regular income at your full marginal rate.
Know your margin call threshold. When it comes to margin, it’s about recognizing your limits. Understand your brokerage's margin requirements and keep a buffer.
Track your interest payments. You'll need documentation to claim the deduction on Line 22100 of your T1 return.
Reassess regularly. If rates rise or yields compress, the math changes. Be ready to change your strategy.
* Assumed Generation client margin rates. Wealthsimple’s margin interest rate is Prime-0.5% for Generation clients, Prime-0% for Premium clients, and Prime+0.5% for Core clients. Wealthsimple's margin account prime rate is 4.45% for CAD and 6.75% for USD as of March 05, 2025. Subject to change. Annualized rates, calculated daily, charged monthly. All investments involve risks. See wsim.co/marginaccount for details."
** Marginal tax rate of 43.41% = Federal marginal rate: 26.00% + Ontario marginal rate: 11.16% + Ontario surtax adjustment: ~6.25%**, Federal dividend tax credit at 15.0198% of grossed-up amount, Ontario dividend tax credit 10% of grossed-up amount per Ontario Taxation Act
