# Writing off investment interest



## GregoryWong (Aug 11, 2011)

Hey everyone,

Been reading the forum for a while and it has lots of great info.

Hopefully a quick question - If I have an outstanding amount on my credit line, then borrow more money from my credit line to invest, then pay off a portion of the credit line, can I still write off the interest for the full investment amount at the end of the year?

Scenario:

1.) Outstanding amount - $3000
2.) Borrow $5000 to invest from Credit Line
3.) Put $2000 towards credit line

At year end I will have $6000 outstanding on my credit line. Can I write off the interest for the $5000 I used for an investment or how does it work?

Thanks,

Greg


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## Homerhomer (Oct 18, 2010)

To make it clear and easy to follow I would suggest having seperate lines of credit, one personal and one for investments. If CRA comes asking the paper trail will be easier to follow and they will not reject it.

And the investments have to be in non registered accounts, can't write off interest expense against TFSA or RRSP.


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## GregoryWong (Aug 11, 2011)

Nice call, that would make the paper trail a lot cleaner. Thanks!

Good to know about the TFSA and RRSP as well.


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## the-royal-mail (Dec 11, 2009)

I don't like shell games.

Borrow to invest? No!

You will still be paying interest on anything you borrow, regardless if you are able to "write it off".

Pay the debt and work with cash savings for investments.


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## andrewf (Mar 1, 2010)

It seems like you don't really understand how this works. I recommend you do some more research on things like what records need to be kept and what kind of securities are eligible. Do this before jumping in.


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## GregoryWong (Aug 11, 2011)

andrewf said:


> It seems like you don't really understand how this works. I recommend you do some more research on things like what records need to be kept and what kind of securities are eligible. Do this before jumping in.


Exactly why I asked the question 

It gives me a starting point of what I need to research before starting something like this.


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## Eclectic12 (Oct 20, 2010)

GregoryWong said:


> Exactly why I asked the question
> 
> It gives me a starting point of what I need to research before starting something like this.


Here are some URLs to "prime the pump":
http://www.taxtips.ca/personaltax/investing/interestexpense.htm
http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

Plus you can search the threads here on CMF that already exist on this topic.


That said, I agree with The-Royal-Mail - Payoff the debt and make sure you have an emergency fund first. 

A couple of benefits are that:
a) if only investments are on the line of credit, the financial institution will take care of the bookkeeping (i.e. if only eligible investments are on the LoC, it's easy to report from the statements what the interest charges are).

b) if the investments drop, there is only one debt to worry about instead of multiple.



Finally - based on my own experience as well as other postings:

1) Make sure you also research how investments are taxes are reported and calculated. A common issue is to buy an ETF, stock or Trust that pays return of capital (RoC) as part of the payment. The RoC part reduces the amount of interest that can be claimed - unless appropriate steps are taken. 

2) Review whatever bookkeeping system used to make sure it will handle the documentation requirements. An audit is not a good time to be collecting info from scraps of paper to try to prove something to Canada Revenue Agency. 

3) Consider the work required during the year. RoC paid once a year can be easy to deal with where RoC paid monthly can be more work. Not being aware of RoC plus the tax implications could be a nightmare if audited.

4) Take your time to make sure the nuts and bolts are clear. A lot of people miss that the commissions paid to buy/sell are not tax deductible. This means they should not be included in the LoC - unless one wants the work of figuring out how much to reduce the interest charges to compensate.


Cheers


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## cardhu (May 26, 2009)

GregoryWong said:


> If I have an outstanding amount on my credit line, then borrow more money from my credit line to invest, then pay off a portion of the credit line, can I still write off the interest for the full investment amount at the end of the year?


Nope ... all payments toward a commingled debt are applied on a prorated basis ... in your example, that ratio is 62.5% deductible to 37.5% non-deductible ... so initially, while your total balance outstanding is $8000, you’d be able to deduct the interest on $5000, but as you make each payment toward principal that amount of deductible debt would be reduced ... by yearend, if you haven’t taken any additional borrowings, your $2000 payments toward principal would have been applied $750 toward the non-deductible portion, and $1250 toward the deductible portion, so your year-end balance would reflect $3750 deductible debt, and $2250 non-deductible. Note that this remains true regardless of whether you made a single lump sum payment of $2000, or 20 incremental payments of $100 each. 

It may sound as if it might be difficult to calculate the amount of deductible interest in this case, but it isn’t. In your example, the deductible interest is simply 62.5% of the total interest charged during the period, regardless of the size and frequency of your payments. 

This is the reason that commingling of deductible and non-deductible debts is not recommended ... commingling makes it impossible to optimize your debt repayments in the most tax-efficient pattern. Always try to keep your leverage borrowings separate from your other finances, as homer suggested. 



eclectic said:


> the commissions paid to buy/sell ... should not be included in the LoC - unless one wants the work of figuring out how much to reduce the interest charges to compensate.


Not true ... there’s no reason to keep the commissions separate from the LOC, and there’d be nothing to figure out ... there’s no impact on interest deductibility either way. 



eclectic said:


> A common issue is to buy an ETF, stock or Trust that pays return of capital (RoC) as part of the payment. The RoC part reduces the amount of interest that can be claimed - unless appropriate steps are taken.


This is true, but only if the ROC distributions are drawn from the investment pool and spent on other things. Therefore, the same solution that worked for the guy who said _“Doctor, it hurts when I do this!”_, also works flawlessly in this scenario ... if it hurts when you do that, then don’t do that ... it is very easily managed, though I agree that one must know about it, before one can manage it. 



eclectic said:


> RoC paid once a year can be easy to deal with where RoC paid monthly can be more work.


Its only more work if the money is being removed from the investment pool and spent on other things. If you’re not doing that, then it makes no difference whether the distributions are annual or monthly. The amount of work involved is the same either way ... zero.


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## Eclectic12 (Oct 20, 2010)

cardhu said:


> Nope ... all payments toward a commingled debt are applied on a prorated basis ... in your example, that ratio is 62.5% deductible to 37.5% non-deductible ...
> 
> 
> 
> ...


Commissions don't have an impact on interest deductability?
I'd like to hear how this works.

My understanding is that the interest expense from the LoC is reported on Line 221 of the tax return, as an Interest Expense. CRA explicitly says in their writeup for this tax line:



> You cannot deduct on line 221 any of the following amounts:
> ...
> brokerage fees or commissions you paid when you bought or sold securities. Instead, you use these costs when you calculate your capital gain or capital loss. For more information, see Capital Gains.


A lot of other sites say similar such as:
http://www.taxtips.ca/personaltax/investing/interestexpense.htm

So if commissions are included the LoC - my understanding is that the non-deductible portion of the LoC would increase proportionately.


As for RoC - the reason I posted this comment is that a fair number of people I've talked to are using the payments to pay off their mortgage or other such things, which would qualify as being drawn from the investment pool.


As for leaving the RoC in the investment account means zero RoC work, I can see what you mean for the interest loan, where the RoC portion is left in the investment account. 

However - one still has re-calculate the Adjusted Cost Base (ACB) to check if it has become zero or negative. If it had, the RoC payments are reported as a capital gain. The more frequent the RoC is paid, the more re-calculations - unless one is reasonably certain the ACB will still be positive.

http://www.jamiegolombek.com/articledetail.php?article_id=816
http://howtoinvestonline.blogspot.com/2010/07/return-of-capital-separating-good-from.html


Though if one is leaving the distributions in the investment account, the "work" is a function of RoC - not the interest expense.


Cheers


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## cardhu (May 26, 2009)

Eclectic said:


> CRA explicitly says ...


Eclectic ... the passage you quoted relates to carrying charges ... that has nothing to do with deductibility of interest. Including commissions in a loan amount does not affect deductibility one way or the other. As long as the investment purchased is eligible for deductible interest, so too is the commission. 



> _As for RoC - the reason I posted this comment is that a fair number of people I've talked to are using the payments to pay off their mortgage or other such things, which would qualify as being drawn from the investment pool._


Yeah, it’d be a problem in that case ... I agree that its something worth knowing... my point was that it is extremely easy to manage. 



> _However - one still has re-calculate the Adjusted Cost Base (ACB) .... _


Of course, but the OP asked about deductibility of interest, and I framed my comments in that context ... the trials and tribulations of calculating ACB have no bearing on deductibility of interest.


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## Eclectic12 (Oct 20, 2010)

cardhu said:


> Eclectic ... the passage you quoted relates to carrying charges ... that has nothing to do with deductibility of interest. Including commissions in a loan amount does not affect deductibility one way or the other. As long as the investment purchased is eligible for deductible interest, so too is the commission.
> 
> [ ... ]


Line 221 is for "Carrying Charges and Interest Expenses". So the sections and bullets are a mix of both.

For example, a different bullet in the same section also says that interest from a loan to contribute to an RRSP/TFSA is not deductible - so the interest and other items are all grouped together.

With both types in the same bullet, I'm not so sure this is an "either/or" situation. I'll have dig up the interpretation bulletin as I seem to recall it was more specific. 


Returning to the commissions - so you are saying that in an investment loan scenario, the commissions paid to buy/sell, when included in the loan:
a) are tax deductible, against income.
b) any interest generated the commissions are also tax deductible, against income.

Now add that the same commissions are capital gains tax exempt.

This seems generous on CRA's part to allow an expense that is capital gains tax exempt to also be written off against income.


Cheers


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## cardhu (May 26, 2009)

Eclectic12 said:


> so you are saying ….


Wow … NO… obviously that is neither what I said, nor what I am saying … it is your misinterpretation. 

You are confusing carrying charges with deductible interest expenses … they are both recorded on the same line, but they are separate items subject to separate rules … you are also confusing the commission itself, with interest on a loan … the passage you quoted refers (a) to the commission itself, and (b) to carrying charges … it says nothing at all about interest. 

There is no need to keep commissions separate from an investment loan … their inclusion does not impact deductibility of interest on that loan … as long as the investment purchased is eligible for deductible interest, so too is the commission.


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## Square Root (Jan 30, 2010)

cardhu said:


> Wow … NO… obviously that is neither what I said, nor what I am saying … it is your misinterpretation.
> 
> You are confusing carrying charges with deductible interest expenses … they are both recorded on the same line, but they are separate items subject to separate rules … you are also confusing the commission itself, with interest on a loan … the passage you quoted refers (a) to the commission itself, and (b) to carrying charges … it says nothing at all about interest.
> 
> There is no need to keep commissions separate from an investment loan … their inclusion does not impact deductibility of interest on that loan … as long as the investment purchased is eligible for deductible interest, so too is the commission.


While I respect your obvious knowledge in tax matters, you could certainly be a little more respectful of others on this forum.


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## praire_guy (Sep 8, 2011)

Commissions are not deductable. It is added/ subtracted from the purchase/ sale price. 

Cardhu your statements are somewhat unclear. Your last statement sounds like you are saying the Actual commission becomes deductable if you are borrowing to invest. 

But I think you mean that the interest on money borrowed to invest includes the commission as well as the actual security. 

I.e stock purchase is 1000 dollars and commission is ten bucks you can borrow 1010 and write off all the interest. 

I think square root was trying to say that you can only claim interest on 1000 and the commission would have to add the 10 bucks on your own. 

I always thought that commissions had to be paid out of pocket.


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## cardhu (May 26, 2009)

SQRT ... I am baffled by your comment ... I think _“Wow”_ was well within the bounds of reason.


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## cardhu (May 26, 2009)

Praireguy ... you are correct, commissions are not deductible from income ... however, no one has suggested that they are, and in any event it is irrelevant to the topic at hand. 

I don’t agree that my posts were unclear at all ... I see nothing in any of them that could reasonably be construed as suggesting that brokerage commissions are deductible from income under any circumstances, borrowing or otherwise ... the phrases “interest deductibility”, or “deductibility of interest”, or some such variation were sprinkled liberally throughout each of my posts ... to the point of redundancy, or so I thought ... nevertheless, I will rephrase that last statement, at the bottom of this post. 

Yes, you’ve captured the essence of the discussion ... if you borrow $1010, of which $10 is commission, Eclectic (not sqrt) is saying that only 99% of the interest would be deductible, and I am saying that 100% of the interest would be deductible ... in my case it might be more like a $10,003 transaction, of which $3 is commission, in which case E would argue that only 99.97% of the interest would be deductible. 

It was also suggested upthread that if I’m right, it would be rather generous of CRA ... again, I disagree ... on a $10 commission, as in your example, the amount of the tax deduction pertaining to the commission would be $0.30 per year (at 3%) ... a deduction of $0.30 yields a reduction in the tax owing, of somewhere in the range of $0.06 to $0.14 ... per year ... (ON rates) ... on the $3 commission in my example, the reduction of tax revenue would be somewhere in the range of 2 cents to 4 cents per year ... hardly generous. 

OK, here’s that clarification, shown in blackline so you can see the edits. 
_“There is no need to keep commissions separate from an investment loan in order to maintain full interest deductibility … their inclusion does not impact deductibility of interest on that loan … as long as the investment purchased is eligible for deductible interest, so too is the commission eligible for deductible interest._


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## praire_guy (Sep 8, 2011)

I figured that's what you were trying to say. 

Eclectic is right in that it would be generous of cra to allow commission deduction AND interest on money borrowed to pay for the commission. 

This is not the case so yes you are right but eclectics definition of your "right"is wrong. 

Bottom line commission is not deductable , but interest on money used to pay for the commission is. 


But check out this link:

http://www.taxtips.ca/personaltax/investing/interestexpense.htm


I read it as not being able to deduct carrying charges of the commission. 

Cra says "most" interest You pay on money you borrow for investments. 

"most". Typical vaguely worded stuff by cra that can mean different thing,s. 

I'm gonna give them a call just to confirm.


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## Eclectic12 (Oct 20, 2010)

cardhu said:


> Wow … NO… obviously that is neither what I said, nor what I am saying … it is your misinterpretation.
> 
> You are confusing carrying charges with deductible interest expenses … they are both recorded on the same line, but they are separate items subject to separate rules … you are also confusing the commission itself, with interest on a loan … the passage you quoted refers (a) to the commission itself, and (b) to carrying charges … it says nothing at all about interest.
> 
> There is no need to keep commissions separate from an investment loan … their inclusion does not impact deductibility of interest on that loan … as long as the investment purchased is eligible for deductible interest, so too is the commission.



*grin* -- I thought there had to be something I was missing.

Thanks for the clarification.


Cheers


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## Eclectic12 (Oct 20, 2010)

cardhu said:


> SQRT ... I am baffled by your comment ... I think _“Wow”_ was well within the bounds of reason.


I guess it depends on whether there is trust built up and what type of "Wow" one reads into the text.
*grin*


That's where being tired ... having your eye skip over some text ... the person behind the counter just have you a double-double when you wanted two regulars etc. can bleed over into reading the text.


Cheers


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## Four Pillars (Apr 5, 2009)

cardhu said:


> SQRT ... I am baffled by your comment ... I think _“Wow”_ was well within the bounds of reason.


Seriously? Cardhu, you are the most condescending person on these forums by a mile and a half. I can't believe you are surprised by Sq Rt's comment.


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## cardhu (May 26, 2009)

FP said:


> Seriously? Cardhu, you are the most condescending person on these forums by a mile and a half. I can't believe you are surprised by Sq Rt's comment.


Of course seriously! You’re not wrong very often, FP, but you’re wrong about this. I’m not even in the ball park. I can think of several true contenders for the title you mentioned but forum decorum prevents me naming them. I don’t engage in insults, name-calling or personal attack. Yes I was surprised by SQRT’s comment, and am even more surprised by yours. Please go easy on the slander.


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