# Is Interest on Loans Deposited to TFSA Tax Deductible?



## alexei (Jul 2, 2012)

If I borrow say 5000 at 3% and deposit the money into a TFSA for investment purposes, will I be able to write off the interest payed on the principle?

My understanding is that this works with margin brokerage accounts. 

Also do you have any advice on how (what kind of paperwork) to keep track of these interest payments for tax purposes. For instance if I were to borrow from a credit card how would I show that this money was used specifically for investments?


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## Causalien (Apr 4, 2009)

alexei said:


> If I borrow say 5000 at 3% and deposit the money into a TFSA for investment purposes, will I be able to write off the interest payed on the principle?
> 
> My understanding is that this works with margin brokerage accounts.
> 
> Also do you have any advice on how (what kind of paperwork) to keep track of these interest payments for tax purposes. For instance if I were to borrow from a credit card how would I show that this money was used specifically for investments?


No.

That's what I read somewhere.

Question is, how are people going to track this? You take out a loan, send it to your margin account and sell a put for the amount
Then do a direct stock transfer to TFSA of another brokerage at some random time in the future. All hidden within 100s of transactions per month. Even you are not sure.


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## doctrine (Sep 30, 2011)

No, the interest is not tax deductible. The same goes for RRSP loans. It is up to you to track and prove your loan remains tax deductible, and if CRA finds out otherwise, be prepared for big penalties.


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## Cal (Jun 17, 2009)

No. You are already getting a tax break in the TFSA. They won't give you another one on it. (same for rrsp as mentined above)

You may not want to use your cc for investment loan usage. See your bank rep regarding a HELOC or LOC.

I think there are already a few threads on this though, the search function may help you gain more information.


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## sharbit (Apr 26, 2012)

As Causalien stated it is not deductable.

TFSA + RRSP are legally seperate entities that don't pay tax on their gains (and there are no breaks on their losses/expenses). The margin accounts you mention are titled to "you" and the point of the tax break is to allow you to offset your expenses against your gains as a business would. Typically you should be able to trace the borrowing of funds to the purchase of the investment. The investment should also have a resonable expectation of profit (ie pays dividends). If you don't have any securities in a non tax sheltered investment account you shouldn't be claiming investment expenses. This would be an instant red flag.

Lastly, (for many reasons) don't borrow from your credit card to invest. The recommended way to do things is to keep the "investment loan" seperate from all other loans. If you accidently mix it you risk loosing all deductability.


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## wayne (May 2, 2015)

*Indirect margin use for TFSA*

OK, So by the letter of the tax code borrowing from margin for investment purchases in a TFSA is not tax deductible. This is outlined pretty clearly in; http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

I agree with the comments on credit. Any source of credit should be clearly identifiable; separate LOC or specific loan with purpose and under no circumstance should anyone use a credit card for such purposes. Easiest simply to set up a margin account IMO.

Now, let us say an individual has a margin account with some odd $50,000 of investments and no margin currently extended. They hold a TFSA with ample contribution room in the same brokerage. They liquidate say $20,000 of the investments to raise cash and then transfer that cash to their TFSA account. They then repurchase the investments previously liquidated using margin. How long would you think they should wait to repurchase the liquidated securities to keep CRA happy?

Thanks,
Wayne


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## Eclectic12 (Oct 20, 2010)

The only reason I can think of to wait is where there is a capital loss for some of the investments which one wants to claim in the same tax year as the sale was made.
http://www.taxtips.ca/personaltax/investing/taxtreatment/shares.htm

One can avoid this by buying alternatives (ex. sell TD bank shares for a loss and buy BNS shares to replace them).


The key here to keeping CRA happy for deducting investment loan interest is that one has to be able to connect the money borrowed to the investments (pay special attention to return of capital payments!).
http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm



*PS*

Where one likes the investments and there is a capital gain ... why sell and incur extra fees?
Transfer them "in-kind" to the TFSA ... it will be treated the same as selling but one will have the shares in the TFSA. Just make sure to sell anything that is in a loss position and wait the required time to avoid the superficial loss.

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


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## wayne (May 2, 2015)

Thanks for the links. I did not realize that I could access the dividend cash without risking margin deduction eligibility.

So it sounds like there is no time constraints on the process. I could even perform the round trip transactions as a swing trades and try to have a little fun in the process.

Per connecting borrowed funds to investment, I would think this is pretty straight forward and self evident in a margin account. The non-sheltered portfolio is currently generating dividend income.

Per transfer in kind, I see little advantage to this. The commissions incurred from online discount brokers these days are minimal (less than 0.5% round trip on 20K). You are still responsible for the tax on any cap gains crystallized on the securities transferred in. Finally I would prefer to hold a different risk grade inside the TFSA from that in the non-sheltered account.

The only other consideration I can see at this point is to assess whether or not the added profit is worth the risk exposure of the margin account being more sensitive to any form of pullback. The worst outcome I can see here is having to unwind the TFSA positions at a loss to cover a margin call. I would not receive any cap loss on those. That would only transpire under another major meltdown similar to the one we had in 2009 though.


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## Eclectic12 (Oct 20, 2010)

wayne said:


> ... Per transfer in kind, I see little advantage to this.
> 
> The commissions incurred from online discount brokers these days are minimal (less than 0.5% round trip on 20K). You are still responsible for the tax on any cap gains crystallized on the securities transferred in.


Sorry for the delay ... but YMMV.

In my case, the 2009 drop had cut the capital gain sizeably where I knew the income would keep flowing and the investment would recover. Result was next to now CG from the deemed disposition, no sell/re buy fees and taxable income become tax free.

Then too, by calling the broker for the transfer late in the day - I could choose what the transfer price was from the entire day's range.




wayne said:


> ... Finally I would prefer to hold a different risk grade inside the TFSA from that in the non-sheltered account.


That would also change what one decides to do.




wayne said:


> ... The only other consideration I can see at this point is to assess whether or not the added profit is worth the risk exposure of the margin account being more sensitive to any form of pullback. The worst outcome I can see here is having to unwind the TFSA positions at a loss to cover a margin call. I would not receive any cap loss on those.


Whereas I figured worst case was losing my job, being unable to find another one and having to cover living expenses, borrowing expenses and having to wind up the investment position at a loss.


Cheers


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