# What is the Most Efficient Method of Borrowing?



## mordko (Jan 23, 2016)

I don't have any debt but am considering opening a line of credit, maybe for 150K. The idea is that I would use it to fund minor investment projects which have a high probability of return, like installing solar panels.

Right now we are looking at a line of credit from the Investment Group. Unlike mortgage, there is complete flexibility in terms of repayments which is nice but the rate is a bit higher than with closed mortgages (2.95%). I don't have the T&Cs yet but the agent mentioned something about "all in one". 

Is anyone familiar with the product? What are the problems with it?

Suggestions, comments welcome - thank you.


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## Dilbert (Nov 20, 2016)

I know nothing about the one you mention. But, FWIW, I will say I have a HELOC with TD at their prime +0.3%, so that means 3% at the moment. The thing I like about it is the convenience of it being tied within my bank accounts and web broker all together.

When I took it out about six years ago, I asked for $150K and they practically begged my wife and I to take $400K. Ultimately, we were glad we did as we were able to help our kids when they were building a home with a short term loan.


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## mordko (Jan 23, 2016)

Right... My bank (HSBC) offered Prime +0.5%, which means 3.2%. Like you say, it's convenient, but they charge you extra $250 a year on a $100K borrowing. Also, HSBC charges $350 for someone to check out your house + lawyers fees up front. I would have gone with HSBC had it not been for these 2 really stupid charges up front. IG claim that they don't have any up front fees.


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## none (Jan 15, 2013)

say that again -- $250 a year on 100,000. 

That's trivial


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## mordko (Jan 23, 2016)

It is, but better off in my pocket. Still, I would be OK with that had it been the only delta.

The ~$500 up front fee I am not at all fond of; that gets charged whether I use the loan or not. Also, HSBC will charge something similar at the end - to "discharge" you. Not sure if IG has any discharge costs; something to find out.


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## birdman (Feb 12, 2013)

You may first wish to think if you want a floating rate or a fixed rate due to interest rate risk. Floating rate is normally cheaper but if rates go up your costs go up. For fixed rate your term and rate are fixed. I'm not here to discuss which way rates will go but I am at the age when I recall the prime rate peaking at 22.75%. How would you like to pay that on $150,000. Of course this seems unlikely but an increase in rates could always occur.


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## Dilbert (Nov 20, 2016)

Don't recall why, but TD waived the legal and the cost of the home valuation....it didn't cost anything!


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## mordko (Jan 23, 2016)

@frase - I consider the delta between a floating and fixed rate to be the cost of insurance. If rates were to jump up, I would simply repay the loan; in other words I will be "self-insured". 

Also, I am not aware of any HELOCs which have a fixed rate. The whole point is that they are "open" lines of credit and have variable rates - unless I am missing something.


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## mordko (Jan 23, 2016)

Dilbert said:


> Don't recall why, but TD waived the legal and the cost of the home valuation....it didn't cost anything!


That would make a lot of sense when it's bloody obvious that the price of the house is many times that of the loan. This is exactly what's pissing me off about HSBC's offer.


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## GreatLaker (Mar 23, 2014)

TD has a deal to waive set-up costs on a HELOC, at prime +0.5. I have a HELOC with Scotia at prime +0.5. Originally it was called Total Equity Plan, as I paid down my mortgage I could borrow up to the original balance of the variable mortgage at prime -.85 (way back). Never even used it. 

Mordko you said Investment Group... you mean Investors Group? Sounds like an interesting product, but with that firm I would read the T&Cs several times, upside down, sideways and backwards.


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## mordko (Jan 23, 2016)

Yes, Investors Group, IGM. Haven't come across them before... What's the backstory?


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## redsgomarching (Mar 6, 2016)

Dilbert said:


> Don't recall why, but TD waived the legal and the cost of the home valuation....it didn't cost anything!


generally banks can forgo the need for an appraisal and can loan you up to 80% of equity based on MPAC.

op, heloc is probably your best bet for a low rate. basically anything my parents want to finance immediately they just use that and its pretty cheap (mom works at the bank so basically the rate is 1.95%)


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## GreatLaker (Mar 23, 2014)

mordko said:


> Yes, Investors Group, IGM. Haven't come across them before... What's the backstory?


I am not familiar with the account you mentioned but as a financial firm and mutual fund provider they were very predatory... selling their own funds with high MERs, both front and back end loads on some funds, a strong presence in small towns with a "trust us we'll take care of you" strategy that is the opposite of the DIY, self-directed, low-cost approach. They are slowly adapting to the times, but the fact that they finally discontinued their deferred sales charge funds this year says a lot about their approach to fees.

http://www.theglobeandmail.com/glob...s-among-the-highest-in-canada/article4248318/
https://www.investorsgroup.com/en/m...les-charge-purchase-option-to-be-discontinued


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## mordko (Jan 23, 2016)

Wow. Thanks GL - interesting little article in the Globe. 

All I want is a HELOC but they did insist on me meeting their "financial advisor" for 1.5h to get "an independent view of my financial affairs". Told them wasn't interested but the agent insisted. I think she is travelling from Windsor (!), so that will be a nice 8-hour return trip for her.


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## larry81 (Nov 22, 2010)

I have a HELOC at prime+0% with TD, fit my needs.


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## mordko (Jan 23, 2016)

^ presumably its old (?)


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## Beaver101 (Nov 14, 2011)

mordko said:


> Wow. Thanks GL - interesting little article in the Globe.
> 
> All I want is a HELOC but they did insist on me meeting their "financial advisor" for 1.5h to get "an independent view of my financial affairs". Told them wasn't interested but the agent insisted. I think she is travelling from Windsor (!), so that will be a nice 8-hour return trip for her.


 ... I would be interested in hearing how you will keep the leech at bay from doing a free-no-obligation "complete" financial review - keep us posted. 

PS: Don't worry about the 8 hour return trip - she probably hasn't been out of Windsor for awhile or that she needs to visit someone in your town, maybe a wedding?


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## mordko (Jan 23, 2016)

Will do - could be fun. Last time it was an RBC advsor/er. In the end she got really cheesed off with me and said that not only will I be losing out on the most amazing mutual fund manager, who is guaranteed to beat the market, but also on her own valuable financial advice. Of course, she wasn't advising on anything; just pushing her own overpriced products.


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## birdman (Feb 12, 2013)

Mordko, you are correct in your assumptions and I misunderstood your comment on"solar panels" and assumed that your were considering an investment, installation, or something close to maybe 150,000. and perhaps somewhat locked in. It was unclear that you had access to other monies to pay out the line of credit if rates went up.


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## My Own Advisor (Sep 24, 2012)

mordko said:


> Wow. Thanks GL - interesting little article in the Globe.
> 
> All I want is a HELOC but they did insist on me meeting their "financial advisor" for 1.5h to get "an independent view of my financial affairs". Told them wasn't interested but the agent insisted. I think she is travelling from Windsor (!), so that will be a nice 8-hour return trip for her.


She will be schooled by you! I guess just play the game so you can get your money. I'll be interested in what they say after they discuss your "financial affairs". She might be like..."damn...maybe I should be taking advice from you?"...

You can just smile back


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## Parkuser (Mar 12, 2014)

This may be slightly off topic, but only slightly.

I am always and consistently in red in my margin account. The amount of margin is such that even if my account goes to almost half (as it happened in 2008, RY went down to $28, etc.) I would not get a margin call. I buy mostly dividend paying stocks so the loan is being paid back automatically. I regularly shuffle my living expenses money back and forth to my margin account. When the amount borrowed goes below certain threshold I buy more stock on margin. The margin interest can be written off, so in effect I pay only half. But when I have a larger expense, say renovations or a new car, I borrow from my margin account at half the rate. At over k$100 the margin interest rate at TD Waterhouse is 3%, so one would effectively pay 1.5%. No other fees, complete flexibility.

I am doing it for over 20 years. I do not see anybody suggesting such a strategy. I wonder if I am missing a serious danger here, apart from investing in the stock market I would anyway?


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## dotnet_nerd (Jul 1, 2009)

I do exactly the same thing Parkuser, in my IB account. Permanently in the red, but my dividends and covered call premiums more than cover the margin interest. _Significantly more_. 

I've never had a margin call problem.


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## mordko (Jan 23, 2016)

@Parkuser,

That is a *REALLY* good point. All I need to do is borrow on margin at 2.5% in the Questrade account and withdraw the money. Just need to figure out the system. Say, my margin account is at $600K and is invested in bland index ETFs - presumably circa $100K borrowing would be pretty safe? 

And no need to mess with the HELOC. What the heck was I thinking???


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## mordko (Jan 23, 2016)

Strike that ^. It's *Prime plus* 2.5% at Questrade. That's too high.


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## Parkuser (Mar 12, 2014)

If I understand BofM table correctly, k$100 margin debit rate with k$500plus account is 2.85% (U$ 4.5%). I wonder, why Questrade is much different from TD or BofM?

Added: People talk about the margin account like this was a very dangerous thing. It is if used for gambling. But if you have a diversified k$600 paying 3% dividend and you borrow k$100 at 3% then your margin interest is k$3 but your dividends are k$18, so both your margin interest and the loan are being paid without any need for a new money. The margin call risk is really small.


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## larry81 (Nov 22, 2010)

mordko said:


> ^ presumably its old (?)


i switched from traditionnal mortrage to heloc in february.

worth mentionning that i have multiple accounts at td and always negotiate them to the penny.


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## mordko (Jan 23, 2016)

@Larry - Interesting. 

Let's see if I can get anywhere with HSBC and if their "Premier" status is worth anything. Also might be worth touching base with Questrade; I have >>$1M with them between different accounts.


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## andrewf (Mar 1, 2010)

frase said:


> You may first wish to think if you want a floating rate or a fixed rate due to interest rate risk. Floating rate is normally cheaper but if rates go up your costs go up. For fixed rate your term and rate are fixed. I'm not here to discuss which way rates will go but I am at the age when I recall the prime rate peaking at 22.75%. How would you like to pay that on $150,000. Of course this seems unlikely but an increase in rates could always occur.


If we went from 2% to 22% prime in a short time frame, the economy would collapse anyway (real estate market would be a smoking ruin).


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## andrewf (Mar 1, 2010)

mordko said:


> Wow. Thanks GL - interesting little article in the Globe.
> 
> All I want is a HELOC but they did insist on me meeting their "financial advisor" for 1.5h to get "an independent view of my financial affairs". Told them wasn't interested but the agent insisted. I think she is travelling from Windsor (!), so that will be a nice 8-hour return trip for her.


Don't let them anywhere near your assets.


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## andrewf (Mar 1, 2010)

mordko said:


> @Parkuser,
> 
> That is a *REALLY* good point. All I need to do is borrow on margin at 2.5% in the Questrade account and withdraw the money. Just need to figure out the system. Say, my margin account is at $600K and is invested in bland index ETFs - presumably circa $100K borrowing would be pretty safe?
> 
> And no need to mess with the HELOC. What the heck was I thinking???


Nothing beats interactive brokers margin rates. Starts at 2% for the first $140k then declines to 1% for amounts over $1.4mm.
https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2


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## humble_pie (Jun 7, 2009)

Parkuser said:


> If I understand BofM table correctly, k$100 margin debit rate with k$500plus account is 2.85% (U$ 4.5%). I wonder, why Questrade is much different from TD or BofM?
> 
> Added: People talk about the margin account like this was a very dangerous thing. It is if used for gambling. But if you have a diversified k$600 paying 3% dividend and you borrow k$100 at 3% then your margin interest is k$3 but your dividends are k$18, so both your margin interest and the loan are being paid without any need for a new money. The margin call risk is really small.




sorry i'm not getting your math ... you have 600k + you borrow 100k, so now it's 700k ... dividends are now $21,000, no?

however the dividends on the borrowed amount are only $3,000. I don't know any application that would write off total aggregated dividends against one relatively small loan.

when loan rate & current investment income rate are the same - in this case 3% - the risk is big that a market drop will, in time, cause some of the dividends to be cut back or even eliminated.

.


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## humble_pie (Jun 7, 2009)

mordko said:


> Strike that ^. It's *Prime plus* 2.5% at Questrade. That's too high.



that seems strange

most broker clients borrowing 100k are getting prime. Plain old basic prime. Nothing higher.

.


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## birdman (Feb 12, 2013)

andrewf said:


> If we went from 2% to 22% prime in a short time frame, the economy would collapse anyway (real estate market would be a smoking ruin).


Yes it would and it did and I was on the front lines when it happened. Do I think it will happen in the near future - No. On the other hand I saw many lose everything. I had one client who personally owed the bank 2.25 million at Prime plus 1% and can you imagine the monthly interest payment (he survived). The high rates did stop inflation in its tracks. One does not forget these things. Chart below in case one is interested.
http://www.tradingeconomics.com/canada/bank-lending-rate


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## Parkuser (Mar 12, 2014)

humble_pie said:


> sorry i'm not getting your math ... you have 600k + you borrow 100k, so now it's 700k ... dividends are now $21,000, no?...
> .


In your broker account you have equities part (k$600 paying 3% dividend, as an example) and a cash part. This is where your dividends go. In a margin account you can borrow from the cash part, to buy something, make it negative, say k$100. So you still have k$600 dividend paying investments, with dividends going into your cash part, but simultaneously your broker charges interest on your loan and takes some of it. If your dividends are *much larger* than your loan interest then you are paying off both interest and your margin debt. In my example, after a year you generate k$18 dividends, you pay k$3 interest on the margin loan and you reduce your loan by k$15 to k$85. But where it is interesting, now you margin interest (k$3) can be legitimately declared on you tax return as cost of money borrowed to invest. If you maintain large ratio between the debt interest and the dividends, keep a conservative portfolio, watch it, it is a relatively safe way to borrow money at low cost.


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## humble_pie (Jun 7, 2009)

Parkuser said:


> In your broker account you have equities part (k$600 paying 3% dividend, as an example) and a cash part. This is where your dividends go. In a margin account you can borrow from the cash part, to buy something, make it negative, say k$100. So you still have k$600 dividend paying investments, with dividends going into your cash part, but simultaneously your broker charges interest on your loan and takes some of it. If your dividends are *much larger* than your loan interest then you are paying off both interest and your margin debt. In my example, after a year you generate k$18 dividends, you pay k$3 interest on the margin loan and you reduce your loan by k$15 to k$85. But where it is interesting, now you margin interest (k$3) can be legitimately declared on you tax return as cost of money borrowed to invest. If you maintain large ratio between the debt interest and the dividends, keep a conservative portfolio, watch it, it is a relatively safe way to borrow money at low cost.




nae nae laddie. Isna how it works.

you can't borrow from a cash account. You can only borrow funds from a broker in the margin account.

presumably you are talking about unregistered accounts only. You can't direct a broker to pay the dividends into this account or that account. Broker is going to pay dividends into the account that held the stock on the X date.

i'm sticking to my pov. $700k total portf including $600 settled, $100k borrowed. dividends totaling $21,000 but only $3000 in dividends can be attributed to the borrowed $100k.

can this account afford to borrow $100k? certainly it can. But let's not mentally re-dress the window into something it's not.

.


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## Parkuser (Mar 12, 2014)

humble_pie said:


> nae nae laddie. Isna how it works...


OK, once again. We are talking only about a margin account, by definition unregistered. My TDDI account shows me two* numbers, one number is called Cash (I called it cash part) the other called Investments (I called it equities). When my Investments pay a dividend then my Cash goes up by the amount of the dividends. Now the most important thing, where you get confused. When I borrow from my Cash *I do not have to buy any shares*. What I do I just transfer the money from the margin account to my checking/saving account. And now I can pay off my credit card, buy a car, pay for the renovation, or buy solar panels. Now my Cash goes negative by the amount I've transferred, but my Investments stay the same.

I am not good at explaining, 40 years working in a lab does it to you. But the OP got it at once.

* actually 4, there is Margin (how much I can borrow additionally) and Total value (current value of my investments - used margin), but never mind.


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## humble_pie (Jun 7, 2009)

Parkuser said:


> OK, once again. We are talking only about a margin account, by definition unregistered. My TDDI account shows me two* numbers, one number is called Cash (I called it cash part) the other called Investments (I called it equities). When my Investments pay a dividend then my Cash goes up by the amount of the dividends. Now the most important thing, where you get confused. When I borrow from my Cash *I do not have to buy any shares*. What I do I just transfer the money from the margin account to my checking/saving account. And now I can pay off my credit card, buy a car, pay for the renovation, or buy solar panels. Now my Cash goes negative by the amount I've transferred, but my Investments stay the same.
> 
> I am not good at explaining, 40 years working in a lab does it to you. But the OP got it at once.
> 
> * actually 4, there is Margin (how much I can borrow additionally) and Total value (current value of my investments - used margin), but never mind.




lol u are not borrowing from your cash, you are borrowing on margin from your broker, who is holding the inventory of securities as collateral.

look closely at your account figures. There's a limit to your potential borrowing. Some brokers call it "buying power" but the big green does not use this term.

we're back to the basics once again. Can a $600k account sustain a margin loan of $100k? overwhelmingly, it can.

did the borrowed $100,000 suddenly earn $21,000 in dividends? transparently, it did not.

.


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## GreatLaker (Mar 23, 2014)

OK, so please help out a relative newbie. How exactly do you borrow from a margin account?

Say I have a "Cash" account at TDDI (their term for non-registered) with ~$400k, but no margin account. I need $100k temporarily as a bridge loan between buying a new principal residence and then selling my existing residence. I won't need a mortgage once my existing place sells, so banks don't like giving a conventional bridge loan. My other alternative is to borrow against an existing HELOC on this place, but I would have to get the limit increased.

Can I just tell TDDI to open a new margin account, do an in-kind transfer of securities (BMO & Vanguard ETFs) from my cash account to the margin account, then borrow cash by transferring it out to my linked chequing account?

I would only need the money for maybe 30-60 days, and would still leave some other securities in the cash account. Sounds too good to be true.

Thanks.


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## james4beach (Nov 15, 2012)

dotnet_nerd said:


> I do exactly the same thing Parkuser, in my IB account. Permanently in the red, but my dividends and covered call premiums more than cover the margin interest. _Significantly more_.
> 
> I've never had a margin call problem.


I think the margin loan is a doable idea. At IB you can borrow at 2.0% ... collateral are the stock positions.

Beware that IB implements a real-time margin call. If there is ever a margin call, they can start liquidating your positions immediately. One danger is something like a flash crash, if your stock or ETF suddenly drops 80% in a flash crash, it's possible IB will liquidate your position to meet a margin call, locking in what were otherwise totally temporary losses.

But using the margin account as a line of credit is totally doable. The only line of credit I use is my margin brokerage.


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## james4beach (Nov 15, 2012)

andrewf said:


> Don't let them anywhere near your assets.


If we're talking about Investors Group, I second that. Stay away from them.

A few years ago I decided their fees were too high and told them I am withdrawing everything. They refused to follow my clear instruction. They stalled by requiring me to write letters of explanation -- I almost had to go to a lawyer.

Fast forward a couple years. Because of that experience (which I shared with everyone in my family) and their high fees, the rest of our family decided to withdraw all their assets as well. In total we have withdrawn over $2 million from Investors Group.


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## humble_pie (Jun 7, 2009)

Parkuser said:


> This may be slightly off topic, but only slightly.
> 
> I am always and consistently in red in my margin account. The amount of margin is such that even if my account goes to almost half (as it happened in 2008, RY went down to $28, etc.) I would not get a margin call. I buy mostly dividend paying stocks so the loan is being paid back automatically. I regularly shuffle my living expenses money back and forth to my margin account. When the amount borrowed goes below certain threshold I buy more stock on margin. The margin interest can be written off, so in effect I pay only half. But when I have a larger expense, say renovations or a new car, I borrow from my margin account at half the rate. At over k$100 the margin interest rate at TD Waterhouse is 3%, so one would effectively pay 1.5%. No other fees, complete flexibility.
> 
> I am doing it for over 20 years. I do not see anybody suggesting such a strategy. I wonder if I am missing a serious danger here, apart from investing in the stock market I would anyway?




ok now i see what you're doing. 20 years already!

i'm not an accountant but my understanding is that monies borrowed for investment purposes *must* be 100% invested in stocks that have a tangible investment return, in order that such borrowed monies may be deducted. In other words, these borrowed monies are to be invested in stocks that pay dividends or bonds that pay interest.

a gray zone is stocks that do not pay dividends, where the hope is that there will be capital gains. Again, i'm not an accountant, but my understanding is that with such stocks, in certain cases the CRA boundaries could be stretched a little. But only a little.

however my understanding - keep-in-mind-that-i'm-not-an-accountant-etc - is that borrowing for personal use such as paying for house renovations, buying solar panels, cars, trucks or toothpaste is strictly off limits as an investment carrying cost deduction. IE one can borrow from the broker - after all, prime at 3% is not a bad rate - but one cannot deduct the cost of such borrowing.

if you have been doing this for 20 years, success may be due to the fact that you've never been audited. Over two decades, the mixup between your personal use of the borrowed funds & your investment use of the borrowed funds must amount to an absolute forensic nightmare.

still, it's not a sound strategy & that's probably why folks don't suggest it on here.


.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I think the margin loan is a doable idea. At IB you can borrow at 2.0% ... collateral are the stock positions ...
> 
> But using the margin account as a line of credit is totally doable. The only line of credit I use is my margin brokerage.



of course it's a good idea to borrow on margin from the broker, their rates will often be better than bank rates.

what's permeating through this thread is something additional that doesn't seem quite right though.

it's the rather brazen suggestion that borrowing for personal reasons should be deducted as investment carrying costs. This i submit is definitely not in the CRA's viewfinder.

.


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## james4beach (Nov 15, 2012)

GreatLaker said:


> How exactly do you borrow from a margin account?
> 
> Say I have a "Cash" account at TDDI (their term for non-registered) with ~$400k, but no margin account. I need $100k temporarily as a bridge loan between buying a new principal residence and then selling my existing residence. . . . Can I just tell TDDI to open a new margin account, do an in-kind transfer of securities (BMO & Vanguard ETFs) from my cash account to the margin account, then borrow cash by transferring it out to my linked chequing account?


Your current "cash" account (an account number ending with 'A') can't be used for any margin borrowing. Your first step would be to open a new margin account, or pair of Canadian and US accounts depending on what kind of securities you want to put in them. In the new account application you would agree that your securities will be used as collateral for any loans.

Once your new margin account is open, yes you would transfer the securities from your cash account to the margin account. If these are both non-registered, there is no taxable event. Pretty simple stuff there.

You now have $0 in your old cash 'A' account, and your new margin account has $0 cash and 400k in securities = 400k account value.

Then you'd transfer 100k out of your margin account to your chequing account. Your margin account now has -100k cash, 400k securities = 300k account value. You have borrowed $100,000 from the broker and TDDI will charge you something like 3.9% interest.

There are some risks that go along with this, definitely the margin call issue and the broker's power to liquidate any of your positions if needed to meet a margin call. An additional risk is that the moment you use any margin loan, your securities will no longer be "segregated". The broker can use them for other purposes, like lending your shares to hedge funds etc. This puts you at a bit more risk of losses in case the brokerage collapses.

Once you repay the margin loan (and bring your cash balance back to zero or higher) the broker is no longer free to use your shares for those other purposes. These "fully paid for securities" will again be marked as segregated in your monthly statements.


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## Parkuser (Mar 12, 2014)

GreatLaker said:


> OK, so please help out a relative newbie. How exactly do you borrow from a margin account?
> ...
> I would only need the money for maybe 30-60 days, and would still leave some other securities in the cash account. Sounds too god to be true.
> 
> Thanks.


I am neither a financial advisor nor a financial adviser. So I do not take any responsibility for anything. But essentially yes. It all depends how marginable your investments are. But you can check it on the web (at TDDI under Trading -> Margin&Concentration limits). You also have to sign a paper stating that they can sell your investment without asking you, to cover the margin. This part one does with shaking hands. (So it's better not to relay on wisdom of a random guy on the web and educate oneself.) But they would not do it on a whim, without giving you time.

When you have money they give you money, when you do not have money they take your money away. This is the world we live in.


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## humble_pie (Jun 7, 2009)

GreatLaker said:


> OK, so please help out a relative newbie. How exactly do you borrow from a margin account?
> 
> Say I have a "Cash" account at TDDI (their term for non-registered) with ~$400k, but no margin account. I need $100k temporarily as a bridge loan between buying a new principal residence and then selling my existing residence. I won't need a mortgage once my existing place sells, so banks don't like giving a conventional bridge loan. My other alternative is to borrow against an existing HELOC on this place, but I would have to get the limit increased.
> 
> ...




it's true you can borrow from the broker for any purpose whatsoever. What you are describing above appears to be a normal, routine, everyday action with a margin account. It should work easy as, well, pie.

where some folks in this thread are going wrong imho is that they're claiming that all such borrowings - including personal use borrowings - are deductible as investment carrying costs. I'm-not-an-accountant but i'm fairly sure that this practice is not allowed.

a slight obstacle in your case might be the $400k account. I'm not sure where the TD threshhold is for who gets prime rate & who gets prime plus a fraction. Threshhold might be around $500k.

best of luck, if you are looking for bridge financing, a broker who knows you already will be your easiest, fastest, least bureaucratic source for a loan. Probably the cheapest, too.

.


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## james4beach (Nov 15, 2012)

Overall, margin loans are a pretty sweet thing!

I forgot to mention another risk. At any time, the broker may decide that a security no longer qualifies for margin. This can happen on a security that becomes very volatile... if the prices are swinging all over the place, the brokers no longer think it's good collateral. The broker can also get more nervous about broad market volatility and increase the 'margin requirement' on all securities.

So you might find yourself in a position where you made a valid margin loan, well within limits, but then the broker changes their mind and demands a higher 'margin requirement'. This can produce a margin call.

This actually happened to me once with Interactive Brokers. They declared that one of my securities was no longer eligible for margin, with 1 business day notice. Those kind of events can come out of the blue. I had to liquidate some shares due to this.


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## humble_pie (Jun 7, 2009)

Parkuser said:


> I am always and consistently in red in my margin account ... *I regularly shuffle my living expenses money back and forth to my margin account. When the amount borrowed goes below certain threshold I buy more stock on margin. The margin interest can be written off, so in effect I pay only half. But when I have a larger expense, say renovations or a new car, I borrow from my margin account at half the rate*. At over k$100 the margin interest rate at TD Waterhouse is 3%, so one would effectively pay 1.5% ...
> 
> I am doing it for over 20 years.




AFAIK the above is incorrect & misleading. It's even possible that you might be exhorting cmffers to commit tax fraud.

possibly you might wish to consider being more careful on here?

.


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## Parkuser (Mar 12, 2014)

humble_pie said:


> ...
> 
> it's the rather brazen suggestion that borrowing for personal reasons should be deducted as investment carrying costs. This i submit is definitely not in the CRA's viewfinder.
> 
> .


I am on a deadline, I will do anything to not do the work. 

I sell k$30 worth of equities and buy a car. Then I go to the bank, borrow k$30 and buy the same dividend paying equities. They lend me the money because I agree to give them access to my much larger brokerage account as a collateral. Can I legitimately deduct the cost of the loan on my tax return? What say you?


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## andrewf (Mar 1, 2010)

^Only if there was no outstanding debt used to finance those equities initially. Using the margin account as collateral is a red herring. It does not matter what assets are used to secure the loan, but rather to which use the borrowed funds are put.


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## mordko (Jan 23, 2016)

humble_pie said:


> ok now i see what you're doing. 20 years already!
> 
> i'm not an accountant but my understanding is that monies borrowed for investment purposes *must* be 100% invested in stocks that have a tangible investment return, in order that such borrowed monies may be deducted. In other words, these borrowed monies are to be invested in stocks that pay dividends or bonds that pay interest.
> 
> ...


I know little about borrowing on the margin but here is a simple fact which I do know: Interest on money borrowed to install solar panels can be deducted against income generated from selling the resulting electricity. The same would apply to interest on loan used to finance a truck which generates income as part of your business. 

Whether I can borrow from a margin account for this purpose and then claim the interest vs income from sold electricity - that I am not sure about. Certainly can be done if I borrow on HELOC.


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## mordko (Jan 23, 2016)

OK, so based on what andrewf said, borrowing from the margin account isn't an issue as long as the borrowed money is used for the purpose which generates income. Makes total sense.


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## humble_pie (Jun 7, 2009)

mordko said:


> I know little about borrowing on the margin but here is a simple fact which I do know: Interest on money borrowed to install solar panels can be deducted against income generated from selling the resulting electricity. The same would apply to interest on loan used to finance a truck which generates income as part of your business.


of course. These are valid business expenses.





> Whether I can borrow from a margin account for this purpose and then claim the interest vs income from sold electricity - that I am not sure about. Certainly can be done if I borrow on HELOC.


question to ask a CA. 


park has never mentioned borrowing on margin from a broker to fund equipment or any other costs of running a business. What he has described is a scheme for transmogrifying everyday personal expenses such as cars & home renovations into the narrow definition of "investments" that are deemed eligible for borrowing deductions by the CRA.

.


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## andrewf (Mar 1, 2010)

I think the solar panels are a bit dicey. Given that most of the power would be directly consumed by you, I think it's personal consumption.

^I think Park is quite mistaken. Potentially very lucky not to have been audited thus far.


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## james4beach (Nov 15, 2012)

What if I open a new brokerage account and only ever transfer 300K into it. Inside, I buy 400K of securities. Totally separate from the brokerage, I decide to do some random personal things with 100K cash.

How is that margin borrowing and interest expense not legitimate for tax deduction? In this scenario, I did not ever withdraw cash from the brokerage.


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## humble_pie (Jun 7, 2009)

^^

keep in mind that "business" deductions are only allowed for a very few years, unless the business is actually earning positive profits.

business losses in new micro-businesses are limited to what these days? two years? three years?

.


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## mordko (Jan 23, 2016)

andrewf said:


> I think the solar panels are a bit dicey. Given that most of the power would be directly consumed by you, I think it's personal consumption.


No, 0% of electricity will be consumed by me. Nor is it "a bit dicey" - deducting interest under such schemes is exactly by the book and routine.


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## james4beach (Nov 15, 2012)

I'm leaning towards park's view on this. I don't see how his usage of it differs from the scenario I described in post #54

If I take 100k cash out of the brokerage, I am NOT "borrowing 100k for personal use". Rather, I am borrowing 100k for stock investment.


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## dotnet_nerd (Jul 1, 2009)

james4beach said:


> I'm leaning towards park's view on this. I don't see how his usage of it differs from the scenario I described in post #54
> 
> If I take 100k cash out of the brokerage, I am NOT "borrowing 100k for personal use". Rather, I am borrowing 100k for stock investment.


Yes...provided you can provide CRA with a clean paper trail. If the 100k gets muddied into your chequing acct and you buy a car, take a trip, then buy stock - it becomes murky.


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## james4beach (Nov 15, 2012)

dotnet_nerd said:


> Yes...provided you can provide CRA with a clean paper trail. If the 100k gets muddied into your chequing acct and you buy a car, take a trip, then buy stock - it becomes murky.


Hmm, that's a good point. The evidence of the flow of cash might make a difference here in what CRA considers legitimate... i.e. what's the intended purpose. If I put 300k in a brokerage and buy 400k of stock, then clearly my intention was to invest.

However if I start with 400k in my brokerage and withdraw 100k, then directly spend it on personal purchases, that looks different.


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## humble_pie (Jun 7, 2009)

james4beach said:


> What if I open a new brokerage account and only ever transfer 300K into it. Inside, I buy 400K of securities. Totally separate from the brokerage, I decide to do some random personal things with 100K cash.
> 
> How is that margin borrowing and interest expense not legitimate for tax deduction? In this scenario, I did not ever withdraw cash from the brokerage.



nobody said your above-described margin expenses would not be legitimate investment-related deductions. You could have $10 million outside your margin account & still the above-described margin costs would be legitimate, imho.

what's being wondered about is something far more complex. A scheme in which cash, borrowings, securities, cars, home renovations & other personal-use expenditures are continuously rotated among a margin account, "a bank," a credit card facility & outside vendors of products & services. The whole being written off as investment expenses.

.


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## james4beach (Nov 15, 2012)

humble_pie said:


> what's being wondered about is something far more complex. A scheme in which cash, borrowings, securities, cars, home renovations & other personal-use expenditures are continuously rotated among a margin account, "a bank," a credit card facility & outside vendors of products & services. The whole being written off as investment expenses.


You're right. That sounds like it could be inappropriate.


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## andrewf (Mar 1, 2010)

mordko said:


> No, 0% of electricity will be consumed by me. Nor is it "a bit dicey" - deducting interest under such schemes is exactly by the book and routine.


Maybe I misunderstood what you are talking about. I assumed you were talking about installing panels on your residence, and using a net billing strategy to earn income.


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## GreatLaker (Mar 23, 2014)

james4beach said:


> ...





Parkuser said:


> ...





humble_pie said:


> ...


Thanks a bunch james4beach, Parkuser and humble_pie. Very helpful. I'll apply for a margin account.

I had heard of borrowing against a margin account but never needed to so did not investigate the specifics. The investments I would borrow against would be ZCN and VUN which I don't see on TD's list of securities with increased margin requirement.

TD margin interest rate for the Presidents Account (aka Donald Trump account) is 3% for >$100k, although rate is higher for smaller amount and non Presidents Account. Details here: https://www.td.com/ca/products-services/investing/td-direct-investing/accounts/rates.jsp

P.S. I'm glad humble_pie is not a CRA auditor. Or maybe secretly she is. :biggrin:


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## mordko (Jan 23, 2016)

andrewf said:


> Maybe I misunderstood what you are talking about. I assumed you were talking about installing panels on your residence, and using a net billing strategy to earn income.


It is the residence. There are different schemes you can use. The one I have in mind involves selling electricity to the grid for crazy prices which are guaranteed for 20 years. There is no connection to consume any of the electricity you generate; your own house would still be supplied from the grid.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I'm leaning towards park's view on this. I don't see how his usage of it differs from the scenario I described in post #54
> 
> If I take 100k cash out of the brokerage, I am NOT "borrowing 100k for personal use". Rather, I am borrowing 100k for stock investment.




no, in post # 54 you specifically said you would take nothing out of the brokerage account. You said you would inject 300k while buying $400k worth of securities by using margin.

then you said you'd have another amount outside the brokerage that was never injected, which you'd spend on personal use goods & services.

obviously with a margin account, even one that is already margined to some extent, an investor can still withdraw funds. 

the loop that was described included the party repeatedly selling securities to generate cash, then withdrawing cash to purchase personal use products or services, then borrowing an identical amount of money (apparently not from the broker but from a bank) to replace the stock that had been sold to generate the cash in the first place. Rinse & repeat across 20 years.

notice that such a portfolio grows weaker, not bigger or better. Securities once held in outright ownership become margined securities. Not one centime of value has been added. If, during a shuffle strategy, the stock in question were to rise in price, then investor has lost $$ by having to re-buy it.

who knows, the above might be a loophole that still exists, idk.

.


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## Parkuser (Mar 12, 2014)

humble_pie said:


> what's being wondered about is something far more complex. A scheme in which cash, borrowings, securities, cars, home renovations & other personal-use expenditures are continuously rotated among a margin account, "a bank," a credit card facility & outside vendors of products & services. The whole being written off as investment expenses..


You make me look like President of the United States. But say I have a large margin account. I borrow k$20 and buy a dividend paying security. Then I get a paycheck k$5. My bank pays nothing so I transfer it to the margin accnt to temporarily REDUCE my margin debt. After 2-3 weeks I have to pay my CC bills and I take some or all of it back. I do it every month. So at the end of the year my interest on money borrowed I deduct is LESS than otherwise. Why would RC object to that?


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## humble_pie (Jun 7, 2009)

mordko said:


> It is the residence. There are different schemes you can use. The one I have in mind involves selling electricity to the grid for crazy prices which are guaranteed for 20 years. There is no connection to consume any of the electricity you generate; your own house would still be supplied from the grid.




good grief. They keep complaining about Wynne on here. Some of us remember how haroldCrump used to battle against ontario hydro like richard the lion-heart.

not being from ontario i never thought anything about it or took a position. But upon seeing the above i have a position now. Crazy prices guaranteed for 20 years? no conditions, like the grid needs power? yes, they have got to be certifiable in ontario after all. Starkers.

.


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## Parkuser (Mar 12, 2014)

humble_pie said:


> the loop that was described included the party repeatedly selling securities to generate cash, then withdrawing cash to purchase personal use products or services, then borrowing an identical amount of money (apparently not from the broker but from a bank) to replace the stock that had been sold to generate the cash in the first place. Rinse & repeat across 20 years.
> 
> notice that such a portfolio grows weaker, not bigger or better. Securities once held in outright ownership become margined securities. Not one centime of value has been added. If, during a shuffle strategy, the stock in question were to rise in price, then investor has lost $$ by having to re-buy it.
> 
> ...


Please, do not go into overdrive. I do not believe RC can object to selling an investment property, buying it back using a loan and then claiming the interest on the tax return. This is why I used it as a hypothetical parallel example. andrewf rightly stated that using a brokerage as a collateral is a red herring here. But I still do not understand his first sentence. I would appreciate some elucidation. 

In reality by keeping margin debt on the same level one does not sell any securities. Because the debt is continuously reduced by dividends one has to keep buying additional dividend securities. A DRIP. Your account actually grows. So when from time to time you take some money for a personal use one can argue, successfully I hope, that one is actually withdrawing dividends already taxed. RC could object that you are withdrawing money and NOT selling, i.e. not triggering a taxable event. But would they?


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## humble_pie (Jun 7, 2009)

My Own Advisor said:


> She will be schooled by you! I guess just play the game so you can get your money. I'll be interested in what they say after they discuss your "financial affairs". She might be like..."damn...maybe I should be taking advice from you?"...
> 
> You can just smile back




you are joking, right?


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## andrewf (Mar 1, 2010)

GreatLaker said:


> Thanks a bunch james4beach, Parkuser and humble_pie. Very helpful. I'll apply for a margin account.
> 
> I had heard of borrowing against a margin account but never needed to so did not investigate the specifics. The investments I would borrow against would be ZCN and VUN which I don't see on TD's list of securities with increased margin requirement.
> 
> ...


IB is considerably cheaper. TD's margin rates are more like HELOC rates.


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## hboy54 (Sep 16, 2016)

Hi:

I don't see the government as a benevolent force, so I run this stuff conservatively.

I know which securities I held the last time I had zero margin, and thus can prove that there is no loan against. So if I need spending cash, I journal these sorts of shares to my cash account before selling. Selling in the margin account could be interpreted as paying down the loan and then borrowing for personal consumption.

Ditto for dividends. If recieved in the margin account, could be interpreted as paying down the loan. So as long as I have good margin, I journal over some shares such that the dividends land in the cash account. Now I have "clean" money coming in that I can spend on personal consumption, or explicitly pay down margin.

I really do not see the desire to tempt CRA here. Sure other's interpretations may be correct and mine may be incorrect, but it costs but a bit of tme to arrange things as above. A vaccine against​ future possible CRA troubles.

Hboy54


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## Parkuser (Mar 12, 2014)

Thanks HB54, very helpful.


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## humble_pie (Jun 7, 2009)

andrewf said:


> IB is considerably cheaper. TD's margin rates are more like HELOC rates.



it's true that IB's margin rates are better by a mere 1%. But convenience is a huge factor.

the bridge financing borrower above has said he's at TD. He's borrowing for a few weeks only. At 1% difference on $100k, the additional charge at the big green would amount to less than $200 for a couple of months. 

surely you know what's involved in opening a new broker account these days, at a place where they don't know you. At the TD, he has the money with a 2-minute phone call. Zero costs, they'll open a margin account & journal the assets pronto. 

at IB, a new investor/borrower faces weeks of applying, repairing application to make it all tickety-boo, costs of transferring assets from TD to IB (one hears that IB doesn't pay account transfer fees) (current transfer fees with taxes run north of $150)

i can't see any IB benefit for this particular exercise ...

.


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## Eclectic12 (Oct 20, 2010)

Parkuser said:


> ... But say I have a large margin account. I borrow k$20 and buy a dividend paying security. Then I get a paycheck k$5. My bank pays nothing so I transfer it to the margin accnt to temporarily REDUCE my margin debt. After 2-3 weeks I have to pay my CC bills and I take some or all of it back. I do it every month. So at the end of the year my interest on money borrowed I deduct is LESS than otherwise.
> 
> Why would RC object to that?


Because part of what is required to have it deductible is to show the money was not used for other purposes, such as CC bills. As soon as the two are mixed, the question seems to become what CRA decides is reasonable.



> *Use of borrowed money
> *1.28 Subparagraph 20(1)(c)(i) requires that *to be deducted, interest be payable on borrowed money used for the purpose of earning income from a business or property ...
> 
> Direct or indirect use
> 1.29 In Bronfman Trust, the Supreme Court of Canada stated that, "[t]he text of the Act requires tracing the use of borrowed funds to a specific eligible use...." The SCC also stated that, "[t]he onus is on the taxpayer to trace the borrowed funds to an identifiable use which triggers the deduction." ... *


*
http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s3/f6/s3-f6-c1-eng.html#p1.28

Should CRA decide the pre-payment then CC payment then re-payment netted out to something "reasonable" - then you are okay. 

http://www.advisor.ca/tax/tax-news/undo-interest-deductibility-mistakes-141569


Most people writing off interest do not want to take the chance of CRA coming to a different conclusion so they will strive to cash dam or keep only valid expenses within one account. From the same link ...




Cash damming
1.34 Taxpayers may segregate (typically in separate accounts) funds received from borrowed money and funds received from other sources. Funds from other sources might include funds received from operations or other sources that are otherwise not linked to money previously borrowed. This fund segregation commonly referred to as cash damming, makes it easier for taxpayers to trace borrowed money to specific uses.

Click to expand...


Cheers*


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## kcowan (Jul 1, 2010)

humble_pie said:


> ^^
> 
> keep in mind that "business" deductions are only allowed for a very few years, unless the business is actually earning positive profits.
> 
> ...


In my experience, that is true. However at the other end, they allow many years of losses. I did it for 6 years.

Also Mordko, make sure to record the meeting wit the gal. Tell her that you will need to review it because these things are SOOOO complicated!


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## Parkuser (Mar 12, 2014)

Eclectic12 said:


> ...
> http://www.advisor.ca/tax/tax-news/undo-interest-deductibility-mistakes-141569
> ...


Thanks Eclectic for the teachable moment. This is very good. The example you are commenting on, wouldn’t it be equivalent to Scenario 3? David is pulling out 0.5k ROC out of 10k investment but erroneously keeps writing off interest on the whole 10k. He can legitimately claim interest only on 9.5k loan. _“And if he’d used the $500 to repay the loan, the interest on the remaining $9,500 would still be deductible (and he would no longer be paying interest on $500 of the loan).”_ In the margin account it happens automatically; the broker charges interest only on funds currently borrowed, not on the original amount. As long as you do not exceed in the monthly money shuffle the original loan amount, you do not sell the investment, or get ROC, everything is legitimate. (Leaving aside the "tainting" business.)

Or do I have it wrong?


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## GreatLaker (Mar 23, 2014)

humble_pie said:


> it's true that IB's margin rates are better by a mere 1%. But convenience is a huge factor.
> 
> the bridge financing borrower above has said he's at TD. He's borrowing for a few weeks only. At 1% difference on $100k, the additional charge at the big green would amount to less than $200 for a couple of months.
> 
> ...


:encouragement:

Went to TD today to get it set up. They require in-person appearance to check ID. Not an issue for me since the branch is 1/2 block away.
They actually convert the existing cash account to margin, which I see as better since I won't have to manage an additional account.

Thanks again!

Edit: Oh yeah, I politely declined the obligatory offer to have one of their wealth management advisers review my portfolio.


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## Eclectic12 (Oct 20, 2010)

Parkuser said:


> ... The example you are commenting on, wouldn’t it be equivalent to Scenario 3? David is pulling out 0.5k ROC out of 10k investment but erroneously keeps writing off interest on the whole 10k. He can legitimately claim interest only on 9.5k loan ...


Somewhat ... though scenario #3 also says


> It’s difficult to fix this mistake.





Parkuser said:


> ... In the margin account it happens automatically; the broker charges interest only on funds currently borrowed, not on the original amount. *As long as you do not exceed in the monthly money shuffle the original loan amount*, you do not sell the investment, or get ROC, everything is legitimate. (Leaving aside the "tainting" business.)
> 
> Or do I have it wrong?


Yes ... you seem to be ignoring that the described process automatically means a tainted loan, where not all of the loan $$$ can be traced to eligible investments.

The Supreme Court said nothing about staying below the original loaned amounts ... just that the $$$ can be shown to be used for an eligible purpose. The description was a $20K loan used for eligible purposed, further reduced by the $5K pay cheque and then *increased for a non-eligible purpose* (i.e. paying off CC debt). As soon as the $$ can be traced to a non-eligible use, it is tainted, regardless of amounts involved.

The broker doesn't know eligible use or non-eligible use ... just that $15k + the CC debt is outstanding, with interest being charged.
For whatever time the non-eligible $$$ exist as part of the loan, the investor will have to exclude the interest charges for it. 

I don't know about you ... but the cost/benefit does not seem worth the extra calculations. Keep in mind that should CRA ask detailed questions, the investor would have to have good notes/calculations.

All it would take to avoid this mess is to use a float from the pay cheque and/or a top up from dividends to cover the CC debt. After all, where one has lots of other income to write the interest cost off against ... what's the rush to pay down the capital?


Cheers


*PS*

I should qualify this view by saying that it depends on whether the CC payment is increasing the loan amount and as I'm not as familiar with margin, if there is a way to get $$$ to pay the CC debt without being charged interest. Between these two aspects, it does not look to me there is a way to avoid losing some interest destructibility.


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## andrewf (Mar 1, 2010)

humble_pie said:


> it's true that IB's margin rates are better by a mere 1%. But convenience is a huge factor.
> 
> the bridge financing borrower above has said he's at TD. He's borrowing for a few weeks only. At 1% difference on $100k, the additional charge at the big green would amount to less than $200 for a couple of months.
> 
> ...


I guess the question is 'most efficient'.

If you are paying HELOC rates, why not get a HELOC and avoid risk of margin call?


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## Eclectic12 (Oct 20, 2010)

GreatLaker said:


> ... They actually convert the existing cash account to margin, which I see as better since I won't have to manage an additional account ...


Interesting ... my cash account is a separate number from the number the margin accounts are part of. 


Cheers


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## mordko (Jan 23, 2016)

kcowan said:


> Also Mordko, make sure to record the meeting wit the gal. Tell her that you will need to review it because these things are SOOOO complicated!


That's a really good idea, kcowan. I'll do that.


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## james4beach (Nov 15, 2012)

IB's margin rates are cheaper than TDDI but I still choose to use TDDI's.

It's because IB also implements a brutal margin call system. It's fully automated and they are well known for this in trading circles ... once you are in a margin violation, in real time, the system starts taking action and liquidating your shares.

I know this first hand -- because IB once decided that one of my marginable securities was no longer marginable. I only had 1 business day to respond to the situation. You can't even transfer in money with 1 day notice! Again... IB is notoriously brutal on margin enforcement. You don't just have to worry about stocks dropping in price, but also have to worry about them changing their policies of what's marginable and for how much. All brokers can change this.

I don't want to tempt fate with IB's highly accurate and literal, real time system. TDDI operates more like a traditional brokerage. The margin situation is evaluated overnight. Their policies on what is marginable is probably more stable and less likely to dramatically change.

They will also probably give you some leeway even if you are in margin violation. Considering all this, I'd rather take the 4.0% at TDDI than the 2.0% at IB. After all, TDDI is a more mature brokerage.


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## GreatLaker (Mar 23, 2014)

Eclectic12 said:


> Interesting ... my cash account is a separate number from the number the margin accounts are part of.


Hmmm... the phone rep and the in-branch advisor said they would convert it. I will wait and see what gets set up.




andrewf said:


> I guess the question is 'most efficient'.
> 
> If you are paying HELOC rates, why not get a HELOC and avoid risk of margin call?


I have bad luck when it comes to the timing of borrowing and investing. If it wasn't for real bad luck I wouldn't have no luck at all.

With HCG and the uncertainty around the non-bank mortgage market in Canada possibly rippling through the rest of the industry I want multiple options. Belt and suspenders on my fisherman's waders plus an inflatable PFD.


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## Parkuser (Mar 12, 2014)

Eclectic, thanks a lot for your comments. I have neither CC debt (I used it as short for everyday expenses), God forbid, nor do I shuffle pay check money every month. I am trying to pick up your brains by describing a clean scenario. I will try to go through the material linked. I gather that even withdrawing dividends from a margin account “taints” the whole margin. Now I understand why HB54 appears to (temporarily?) journal dividend paying investments from the margin account to the cash account. One more question, if you do not mind. In your opinion, does one have to track which equities were bought on margin? Does it matter for tainting? For example you bought BMO with cash, RY on margin. Both pay dividends today RY $500, BMO $450; you withdraw $450. Have you tainted RY margin? Have you tainted other positions bought on margin? As the guy in the commercial says, does it blend?


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## humble_pie (Jun 7, 2009)

Parkuser said:


> ... does one have to track which equities were bought on margin? Does it matter for tainting? For example you bought BMO with cash, RY on margin. Both pay dividends today RY $500, BMO $450; you withdraw $450. Have you tainted RY margin? Have you tainted other positions bought on margin?




my understanding is that a margin position applies to an entire account & to every security it holds or is short.

does not matter which security may have been purchased using margin or which security may have been paid for with cash on hand at time of purchase. Once the margin is impaired, every security in the account is affected.

that's my understanding. It's what permits one smallish privately-owned broker, which offers nothing except margin accounts, to borrow from any & every account that has even a small margin impairment.

.


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## nobleea (Oct 11, 2013)

Comingling deductible and non-deductible amounts is a bad idea. CRA's view is that the deductible amounts are paid off first. Much like a cash advance on a CC.

For example, you have 100K loan which is fully deductible. You borrow another 20K to buy a car. Then you sell stock worth 20K to buy the loan back down to 100K.
You do not have a fully deductible 100K loan anymore. Only 80K of it is deductible. You would have to pay the full loan off, then reborrow and invest it all over.
The sequence of events, as well as the purpose of the borrowed funds is paramount to maintain tax deductibility.
Just because one might have been able to deduct full interest expenses in the past doesn't mean it was a legitimate deduction.
And unlike speeding (I've never got a ticket before), CRA can go back at all your previous returns and request proof of eligibility (whereas the cops can't go back in to your car computer and ding you for speeding that occured in previous years - at least not yet....)


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## james4beach (Nov 15, 2012)

humble_pie said:


> does not matter which security may have been purchased using margin or which security may have been paid for with cash on hand at time of purchase. Once the margin is impaired, every security in the account is affected.


Yes I think this is what the TDDI margin agreement says. Once you use any margin at all, you give the broker the right to lend out ANY shares or otherwise use your any of your shares for business purposes. Similarly, any security is at risk of liquidation in case of margin call.

Any shares that you don't want subject to those risks should be held in a cash only, non margin account. This is what I do; I have a variety of bonds and other valuable shares that I don't ever want the broker to play lending games with. I keep those in cash accounts, even though they would have contributed grandly to my available margin.


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## Eclectic12 (Oct 20, 2010)

Parkuser said:


> ... I have neither CC debt (I used it as short for everyday expenses) God forbid, ...


Sorry for not being clear but to me, a CC bill is a CC debt, whether one pays it off by the deadline or carries some of over to the next bill.




Parkuser said:


> ... nor do I shuffle pay check money every month.


Then can you clarify what you meant in post # 66 that says:


> I have a large margin account. I borrow k$20 and buy a dividend paying security.
> 
> *Then I get a paycheck k$5. My bank pays nothing so I transfer it to the margin accnt to temporarily REDUCE my margin debt. After 2-3 weeks I have to pay my CC bills and I take some or all of it back. I do it every month* ...


This reads to me that the scenario under discussion, regardless of whomever it applies to (or if it is theoretical) - is that the investment loan starts at $20K, is reduced to $15K and then is increased for something that is directly traceable that is not eligible (i.e. the CC bills). If I have missed something, please clarify. 




Parkuser said:


> ... I am trying to pick up your brains by describing a clean scenario.


I am not sure where the confusion lies ... the posted link indicates increasing the loan with $$$ that are directly traceable to an eligible use (ex. buy eligible investments) makes the interest tax deductible. As per the other links, increasing the same loan where the use was not eligible means the loan is tainted, where one would have to calculate (and prove to CRA should they ask questions) that one correctly reduced the interest being deducted to match the eligible part.

At the end of the day, based on what is written for the scenario - it looks to be me to be a tainted loan. 


As for adjusting the scenario to make it clean, one way do so was mentioned in post # 78. 

Another easier way is to reverse the order. Take out $20K investment loan that buys eligible investments, pay CC bills from the pay cheque then use any remainder to pay down the investment loan. This is the bulk of that I do (I also use RoC payments & dividends to pay off the loan).




Parkuser said:


> ... I gather that even withdrawing dividends from a margin account “taints” the whole margin.


... not sure where this idea comes from.

In terms of income from the investments, return of capital (RoC) is the issue. It can be one's own money being paid back to the investor. Dividends are new income where it is fine.



> ... Technically, as you receive ROC distributions, it will decrease the tax deductibility of the investment loan . This can be avoided by using the ROC to pay down the investment loan, then re-investing if desired. Technically, this “should” be the same as simply leaving the ROC distributions in the investment account (confirm with your accountant).
> 
> If you *gain $300 (or any amount) in dividends though, you can withdraw $300 and spend it as you please*.


[http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm/B]


I will respond to the last question separately.


Cheers


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## Eclectic12 (Oct 20, 2010)

nobleea said:


> Comingling deductible and non-deductible amounts is a bad idea. CRA's view is that the deductible amounts are paid off first. Much like a cash advance on a CC ...


I thought I had read something like this ... but wasn't finding the references.

As well, keeping the loan 100% deductible also means the loan provider is doing all the bookkeeping instead of having to make adjustments, with supporting documentation.


Cheers


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## Parkuser (Mar 12, 2014)

james4beach said:


> ... Once you use any margin at all, you give the broker the right to lend out ANY shares or otherwise use your any of your shares for business purposes. ...


What then _segregation_ means to the broker? TDDI says on the monthly statement: _All securities that you've paid for in full, and margin securities above the legal minimum, cannot be used by us in the conduct of our business. _ Is there an unwritten addition to this statement "unless we want to use it in our business?" I looked at the statement. Most of the positions are marked _seg_. The market value of a few without this connotation is closely equal to 1/(0.7) of the margin. Would you interpret it as already borrowed by the broker and sold short or as positions to be sold in the margin call? What is the meaning of the "_seg_" mark?


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## Eclectic12 (Oct 20, 2010)

Parkuser said:


> ... One more question, if you do not mind. In your opinion, does one have to track which equities were bought on margin?


Yes ... if one does not have a list of what was bought, how does one show CRA that the interest from the loan was from buying eligible investments?
Where one holds for a long time, without a list - how does one know what needs to be paid off of the loan when selling some/all of a particular stock?




Parkuser said:


> ... Does it matter for tainting?


I suspect it would depend on whether one buys a non-eligible investment. If the investment is eligible - I can't think of a reason one would leave it on margin without claiming the interest charges.




Parkuser said:


> ... For example you bought BMO with cash, RY on margin. Both pay dividends today RY $500, BMO $450; you withdraw $450. Have you tainted RY margin?


No because dividends are new income that can be spent on anything. The risk here is that one has not done their homework (like scenario #3) where one thinks one is withdrawing dividends but instead RoC is part/all of what was spent. 

Part of my yearly updates is to make sure the portfolio from the loan has not changed what it is paying or if there is nothing paid, has not announced that a policy prohibiting dividends has been released.


Cheers


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## Parkuser (Mar 12, 2014)

Thanks Eclectic. Regarding CC debt, my head was probably spinning from reading in the RC link about use, direct use, and indirect use and wanted to clarify what I meant by CC debt. 
The assumption about withdrawal of dividends for personal consumption tainting the whole margin - this is how I interpret reasons for tainting-avoidance strategy described in #71. (Also recent comments in #86.) Mine original (in retrospect not well-informed) interpretation was thus closer to your well-informed explanations. As I am big on keeping records, and backups, and backups of backups (professional idiosyncrasy) it will be easy to verify if I ever sinned. Thanks again.


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## Eclectic12 (Oct 20, 2010)

Parkuser said:


> ... The assumption about withdrawal of dividends for personal consumption tainting the whole margin - this is how I interpret reasons for tainting-avoidance strategy described in #71.


The fear I read in post # 71 is not dividends but dividends paid to the margin account will be seen a paying down the loan. Essentially instead of withdrawing dividend income which is okay, the withdrawn $$$ could be seen as an increase to the loan. 

I didn't want to deal with margin calls or finer points like this so I kept it simple by using a HELoC that is only used for the investment portfolio (I have other sources for other borrowing needs). Documentation is easy, where what is intended to pay off loan is clear. Plus there's no need to have separate calculations.

The work then boils down to making sure all RoC paid has been paid off and that the investments that make up the portfolio have not changed their policy, affecting their eligibility.


Cheers


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## james4beach (Nov 15, 2012)

Parkuser said:


> What then _segregation_ means to the broker? TDDI says on the monthly statement: _All securities that you've paid for in full, and margin securities above the legal minimum, cannot be used by us in the conduct of our business. _ Is there an unwritten addition to this statement "unless we want to use it in our business?" I looked at the statement. Most of the positions are marked _seg_. The market value of a few without this connotation is closely equal to 1/(0.7) of the margin. Would you interpret it as already borrowed by the broker and sold short or as positions to be sold in the margin call? What is the meaning of the "_seg_" mark?


By definition, if you're using a margin loan it means all your securities are not fully paid for. Once you're in that state, they can start using your shares... but I'm not sure to what extent.

I saw this just a couple months ago. Normally "seg" appears beside all my positions. Then I used a bit of margin, part of a gambit foreign exchange. In the monthly statement, from the various stocks I am holding, one of them had its shares divided into two entries. Some of the share were "seg", and another number of the shares were not.

I think this shows that by using some margin, I gave the permission to start borrowing/lending/rehypothecation my shares, and for whatever reason they picked KXS (the best performer by the way) and non-segregated some of my shares. In the next statement, all shares show as "seg" again.


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## Parkuser (Mar 12, 2014)

james4beach said:


> By definition, if you're using a margin loan it means all your securities are not fully paid for. Once you're in that state, they can start using your shares... but I'm not sure to what extent....


In my case they have not marked _seg_ BCE and RY. Probably the safest and very slow moving. So I gather it means they put them aside as a collateral with 30% safety margin, thus 0.7 ratio. I was always puzzled why sometimes in the statement they split a position in two parts one marked _seg_ and the other not. This then has nothing to do with broker's borrowing and short selling.


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## humble_pie (Jun 7, 2009)

Parkuser said:


> In my case they have not marked _seg_ BCE and RY. Probably the safest and very slow moving. So I gather it means they put them aside as a collateral with 30% safety margin, thus 0.7 ratio. I was always puzzled why sometimes in the statement they split a position in two parts one marked _seg_ and the other not. This then has nothing to do with broker's borrowing and short selling.



me i believe it has everything to do with a broker's borrowing. My interpretation of the above-mentioned non-seg BCE & RY positions is that these are the stocks they can borrow or are borrowing for the nonce. A broker can also change what is seg & what is not seg without notice.

.


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## james4beach (Nov 15, 2012)

Consider that if the broker needs shares, for whatever reason, they might have to borrow them on the open market, where they will pay a borrowing expense in the second hand share lending market.

Or... they can nab them from your account for free


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## mordko (Jan 23, 2016)

OK, so had my meeting with an IG advisor. It was good:

- A young guy; he first started with his sales pitch and how they really care about the investors and how his dad used their mutual funds and liked them so much that he himself chose to work for IG. 

- Very responsive; provided the information I was looking for in advance of the meeting. Actually prior to this guy I had contacted someone else from IG who wasn't responsive so that agent got "fired". 

- Explained that I wasn't really interested in anything except for the line of credit. 

- He asked for my assets/liabilities. I gave him the printout of my portfolio with all the time- and money-weighted returns, etc... Explained that I use the Couch Potato/ETF/indexing approach. 

- He asked for the total MER (0.09%), said that he has nevery seen anyone having their investments in such order and never pushed any of his investment products. So... I am impressed. 

- The product is actually a National Bank "all in one" account. There are no monthly fees. The interest rate is Prime plus 0.25% = 2.95%. No up front fees. The account also allows you to have up to 99 seperate line of credit subaccounts, which could be useful for tracking/taxation. 

- This is better than what I got offered by my bank, so I'll probably go with IG - subject to reconfirming that HSBC won't budge on up front charges and their 3.2% interest rate.


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## andrewf (Mar 1, 2010)

^Is there a 1-time set-up cost for the NB LOC?

Assuming it is a HELOC, not unsecured.


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## mordko (Jan 23, 2016)

^ could be an additional lawyer fee for adding the bank to the title but it won't be more than $200; the lawyer will get back to me shortly. IG will cover the appraisal costs; quite frankly it should take them a minute of browsing to confirm that there is lots of equity. No other costs.


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## Beaver101 (Nov 14, 2011)

mordko said:


> OK, so had my meeting with an IG advisor. It was good:
> ...
> - He asked for the total MER (0.09%), said that he has nevery seen anyone having their investments in such order and never pushed any of his investment products. So... I am impressed.
> ...


 ... glad to hear that it went "good". As for pushing his products, how can he when your MER is .09% - I think he would be embarrassed enough to be able to charge his dad .90% MER. Did he ask you for investment advice (off records of course) or if you were hiring?


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## mordko (Jan 23, 2016)

Beaver101 said:


> ... glad to hear that it went "good". As for pushing his products, how can he when your MER is .09%


Heh... That's actually quite close to the discussion although he did not ask for investment avice 

To be fair to him, my previous discussion of this nature was with an RBC "financial advisor/er" and it was much more painful. She continued pushing her crappy >2% MER products and claiming that the fund manager was guaranteed to secure market-beating returns. The IG chap was much more bright.


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