Not to state the obvious, but whenever an investment is being made, the "nuts and bolts" is your return on investment. Analyzing the rate of return on an investment is the primary factor in any decision. Ideally, once the actual mechanics of investment and side "benefits" are factored out, the goal is to be able to analyze the pure financial return.
Usually the biggest problem faced in analyzing various investments is comparing the Present Value of an investment to a series of payments that may be made or received in the future. When considering the purchase of a large equity, for example, you might be looking at what series of payments are required to purchase the asset. You can also reverse this and ask, "What amount of money is equivalent to this series of payments?"
Ultimately, the Present Value of an Annuity is the way to make these comparisons equal.
Fundamentally, the Present Value of an annuity is an amount of money that should, in theory, be equivalent to a series of payments. There is, for example, technically no difference between $1064.94 today and $100 a month for a year, at an interest rate of 1% per month. Grant you, most people would be happier with the money now, but that is what interest does - it compensates you for waiting on your money.
You can fire up a spreadsheet and calculate the Present Value as long as you have the monthly payment, interest rate, and number of periods. Alternatively, you can calculate any one of those missing four variables - and the key is usually to understand what that rate would be in order to compare the investments.
Finally, the taxable implication is really just an adjustment to the rate of return.
Imagine the following three scenarios:
- You can invest $100 per month in a savings account returning 6% per year (yeah, right!)
- You can pay down $100 per month of credit card debt with 6% interest rate
- You can pay down $100 per month of mortgage debt that is due in a year at 6% interest.
(Obviously the rates are fictional - the goal is to show they are the same).
Scenarios 1 & 2 are really just two sides of the same coin. Using the Future Value formula in Excel = FV(0.5%, 12, -100), you get $1233.56. In scenario 1, you would have $1233.56 in your bank account. In scenario 2, your bank would have $1233.56 from you, and you would have $100 less debt per month. They are equivalent transactions.
Scenario 3 is really just a variation on scenario 2, localized to the United States. Because the interest is tax deductible, however, the rate of 6% isn't really accurate. Assuming you had a 25% tax bracket, you'd actually be getting back one quarter of your interest. Put another way, 7.5% mortgage interest costs you as much as 6% credit card debt.
This is how you compare apples and organges - just turn everything into an annuity or a lump sum, using Present Value calculations.
Finally, quick rule of thumb - if you owe taxes in both Canada and the US, your Canadian taxes are probably higher than your American ones. As such, any tax incentives will be concomitantly higher. If you only can only use Canadian tax incentives, then look to those incentives, other things being equal.
