High-Interest Debt First, Always
Pay off expensive debt like credit cards before investing — a guaranteed 20% return beats any savings account.
A guide, not advice.
This page explains general rules. Do your own research, confirm your numbers with the CRA (your My Account and Notice of Assessment are the official record) or the other official sources listed at the end, and talk to a qualified professional before acting.
Plain English
Think of it this way: if your credit card charges 19.9% interest, paying off $1,000 of that debt saves you $199 per year — guaranteed, risk-free. No TFSA or RRSP investment can promise you 20% returns. So pay off expensive debt first. But if your only debt is a mortgage at 3%, it usually makes more sense to invest in your TFSA or RRSP instead, because stock markets have historically returned 7–10% per year over the long run. The breakpoint is roughly around 5% — above that, debt paydown starts to win.
You have $5,000 in credit card debt at 19.9% and $5,000 to invest. Paying off the card saves you $995/year guaranteed. Investing $5,000 in a TFSA at an expected 7% return earns $350/year — and that's not guaranteed. Pay the card first. But if your only debt is a $300,000 mortgage at 3.5%, putting $5,000 into a TFSA earning 7% ($350/year) beats the $175/year you'd save on mortgage interest.
Show the analysis
Non-deductible consumer debt interest (credit cards at 15–29.9%, personal lines at 7–12%) represents a guaranteed after-tax cost. Eliminating it produces a risk-free return equal to the interest rate. Canadian mortgage interest on a primary residence is non-deductible, so the comparison is direct: mortgage rate vs. expected after-tax registered account returns. Historically, diversified equity portfolios in registered accounts (tax-sheltered) have returned 7–10% nominal over 20+ year periods. At mortgage rates below ~5%, the expected investment spread is positive. Above 5%, the risk-adjusted advantage narrows or inverts.
Credit card: $5,000 at 19.9% = $995/year guaranteed cost. TFSA at 7% expected: $5,000 × 7% = $350/year (uncertain). Net advantage of debt paydown: $645/year. Mortgage: $5,000 extra on 3.5% = $175/year saved. TFSA at 7%: $350/year expected. Net advantage of investing: $175/year (with market risk). Break-even point: approximately 5% debt rate vs. 7% expected return with risk premium.
Edge cases
- If debt is tax-deductible (e.g., investment loan for a non-registered portfolio), the effective after-tax interest rate is lower — this shifts the math toward investing.
- Student loans under the federal RAP (Repayment Assistance Plan) may have subsidized interest — factor in government assistance before accelerating repayment.
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Where this information comes from
This page is based on publications from the CRA, last checked against them on . The full list is below, and the official source always takes precedence over anything written here.
It is a general guide, not financial, tax or legal advice. Do your own research, confirm your own numbers in CRA My Account or with the official source, and talk to a qualified professional before making a decision. Canadian Financials is independent and is not affiliated with or endorsed by the CRA or any government.
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