# Investment loan & distributions



## windar2001 (Dec 21, 2010)

I'm planning on using my HELOC to buy long term investments. I'll be buying ETFs in an investment account and don't plan on using that money, i.e. no selling. At least 50% of the assets will be from the NYSE. In order to do that, I'll be opening 2 non reg accounts, one in cdn $ and another one in us$. The money from the loan will go directly to the 2 accounts in appropriate proportions according to my asset allocation. I will also have 2 other accounts in which to move the distributions and other excess savings into. Assume these accounts will have the same asset allocation.


Now...I want to keep my loan interest fully deductible.

I've read that dividends should be moved out. However, I'm a bit confused after looking at XIU distributions for 2009, I see 7 types of distributions... I'd like to buy shares with the distributions to keep compounding.

So... which distributions should I keep in the loan accounts and which should I move to the extra accounts? How will that affect the ACB of the assets in the loan accounts? Any impact on the loan interest being deductible?


I've always separated cdn and us$ accounts in the past and I believe keeping the loan money separated from everything else will make it easier at tax time. But if I'm going in the wrong direction by using 4 accounts please correct me!


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## Eclectic12 (Oct 20, 2010)

@windar2001:

Re:I'm planning on using my HELOC to buy long term investments. I'll be buying ETFs in an investment account and don't plan on using that money, i.e. no selling. At least 50% of the assets will be from the NYSE. [ ... ] 

So far so good ... 


Re: Now...I want to keep my loan interest fully deductible.
I've read that dividends should be moved out. However, I'm a bit confused after looking at XIU distributions for 2009, I see 7 types of distributions... I'd like to buy shares with the distributions to keep compounding.

This does not make a lot of sense to me - I'll have to check out the 7 types.

Regular dividends are okay. The type that I've read that would be a problem is a Return of Capital (RoC) dividend. To keep the full amount of the loan tax deductible, two options are available:
a) re-invest the RoC dividend amount in an eligible investment.
b) pay back the loan for the amount of RoC payment plus accrued interest. 

As long as you can re-invest more than the RoC payment, the loan is still 100% deductible.


Re: So... which distributions should I keep in the loan accounts and which should I move to the extra accounts? 

Do you have an article for this? 

The only movement required that I've read of is:
1) to repay the RoC portion + interest of the loan if you go with 
option b) above. 
2) to repay the matching portion of the loan + interest when you sell without re-investing the original amount. Examples - sell RY to pay for vacation requires repaying the RY amount on th loan plus interest. 


Re: How will that affect the ACB of the assets in the loan accounts? 

RoC reduces your ACB. When the ACB hits zero or negative, the RoC payments are reported as capital gains and if ACB is zero or negative when sold, the capital gain is 100%.


Re: Any impact on the loan interest being deductible?

The RoC payments are not deductible as they are included in the ACB calculations.

Another thing that will affect the deductibility is including the broker comissions on buy/sell.
The commissions are not deductible.


Re:I've always separated cdn and us$ accounts in the past and I believe keeping the loan money separated from everything else will make it easier at tax time. But if I'm going in the wrong direction by using 4 accounts please correct me! 

It will make it easier but it's more the loan portion and tying it to the investments that's more critical, IMHO. 

Can you show that when $X was borrowed, the matching amount of eligible investments were bought? When RoC payments were received, can you show they were dealt with? When the investments were sold, was the appropriate amount of the loan plus interest repaid? 

Another tip - for any US based investments, make sure the broker files the correct US paperwork to reduce the US withholding tax. A Canada-US treaty says it should be 15%. Without the paperwork, the US will take 30%. You can file for the foreign tax credit to help with the original 15% but if the 30% is taken, then that's 15% that is lost.

http://www.irs.gov/pub/irs-pdf/fw8ben.pdf


Here are some RoC links that could be helpful:
http://howtoinvestonline.blogspot.com/2009/01/etfs-and-mutual-funds-calculating.html
http://howtoinvestonline.blogspot.com/2010/07/return-of-capital-separating-good-from.html


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## windar2001 (Dec 21, 2010)

I probably misunderstood this:

http://taxtips.ca/stocksandbonds/borrowtoinvest/transferdividends.htm

It says that the ACB stays constant if you do that...

Let me explain what I understand... When a security distributes something (dividend, other income, interest, etc.), you have to declare it and pay taxes on it. Now if you move out all the distributions except the RoC and buy securities in another account, your ACB for the entire loan tied account doesn't change. I would use the RoC to buy additional securities in the loan tied account to get back to 100% invested and 100% deductibility.

Is that right? 


Now the commissions. If I pay 1000$ + 10$ and then sell it for 1500$ - 15$, then my ACB is 1010$ and my capital gain is 475$? The link you mentioned says that the ACB is purchase minus fees... 


You also mention that commissions are not deductible, does that mean I have to put extra money in the account to pay for them?


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## Eclectic12 (Oct 20, 2010)

windar2001 said:


> I probably misunderstood this:
> 
> http://taxtips.ca/stocksandbonds/borrowtoinvest/transferdividends.htm
> 
> ...


I haven't heard of anything like the tip talks about. I can only guess that somehow the interest charged is based on what's in the account. This would explain the need to remove the dividends.

In any case, if I assume the tip is valid, your understanding as explained is correct.

My confusion with the tip is that as far as I know, a RoC payment would affect the ACB, not regular dividends. RoC is your originally loaned money being paid back to you, thus requiring re-investment or re-paying the RoC amount to keep 100% of the loan tax deductible.

As well, everything else I've read said that the key was to have a clear paper trail to show loan amount -> stock shares so that it is clear the borrowed money was used to hopefully have income. 


As for comissions, your calculation of the capital gains is correct.

Capital Gain = (Proceeds - Expenses) - ACB
475 = (1500-15) - (1000 + 10)


And yes, the comissions will have to be added to the brokerage account from a source other than the loan. The key here is that the comissions are not deductible so whatever method you use, they can't be in whatever the interest is being calculated on.

In my case, I'm writting cheques on a HELOC account used for leverage investing only. I make sure the cheque is for the cost without the comission so I can report the interest, as-is on my tax return.


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## windar2001 (Dec 21, 2010)

I think I'll just keep all the distributions in and reinvest in the same securities. It will save me the trouble of two extra accounts. It also means I'll have to put in an extra ~30$ to buy everything the first time...

Thanks for the help!


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## Eclectic12 (Oct 20, 2010)

windar2001 said:


> I think I'll just keep all the distributions in and reinvest in the same securities. It will save me the trouble of two extra accounts. It also means I'll have to put in an extra ~30$ to buy everything the first time...
> 
> Thanks for the help!


It will certainly keep things easier as if there are RoC payments, most of the time - re-investing should take care of the RoC to keep the loan 100% deductible. The RoC will still have to used to re-calculate the ACB because if it hits zero, any RoC paid after this happens has to be reported as a capital gain.

As for the tip about removing dividends, I'm hoping someone who is more of a tax expert will post something. If not, I have to call CRA in a couple of weeks anyway so I'll add this to my list of questions.


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