# Leveraged investing - taxation question



## pness91 (Nov 7, 2012)

I took out a HELOC to invest in stocks that pay dividends.

I took $30,000 and invested in 3 different stocks.

I finally sold one of them and I have capital gains of $450.

I want to buy another stock now. Do I have to invest the $10,450 to have the interest from my 30k loan be entirely tax deductible? Or can I invest the 10k and keep the $450 for purpose other than investing? If I don't want to invest the $10,450 and want the interest from my loan to be entirely tax deductible, do I use the $450 to pay down the principle?


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## FrugalTrader (Oct 13, 2008)

Maybe the accountants can pipe in, but my understanding is that withdrawing capital gains from an investment loan funded account can have tax consequences. Easiest solution would be to withdraw the $450 and pay down the investment loan.


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## andrewf (Mar 1, 2010)

+1. Or reinvest. Do you really need that $450?


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## Homerhomer (Oct 18, 2010)

pness91 said:


> Or can I invest the 10k *and keep the $450 for purpose other than investing?*


You want to seperate investing from your personal expenses, you do not want to mix them up, if you ever get audited you want to be able to show clearly that all the interest expense paid was used strickly for investing. If you don't want to invest $450 I would say pay down the line of credit.
Keeping your records clean and seperate from your personal expenses will go a long way if you ever need to prove the interest expense is 100% deductible.


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## domelight (Oct 12, 2012)

pness91 said:


> I took out a HELOC to invest in stocks that pay dividends.
> 
> I took $30,000 and invested in 3 different stocks.
> 
> ...



1. If the investment you purchased is not capable of realizing a dividend or interest income then you cannot deduct the loan interest period.
-so if the stock you invested in was capable of issuing dividends or interest income (whether you received any during the time you owned it dosent matter)
then the interest on the leverage loan would be deductable.
-if the stock was always capital in nature and only ever was capable of realizing a capital gain or loss then the interest from the leverage loan is not
deductable.


2. To answer your question there is no requirement to reuse the gain portion ( $450 in your example) to service the debt. however the return of capital 
($10,000) is required to be used to repay the leverage loan.


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## Eclectic12 (Oct 20, 2010)

domelight said:


> 1. If the investment you purchased is not capable of realizing a dividend or interest income then you cannot deduct the loan interest period....
> -if the stock was always capital in nature and only ever was capable of realizing a capital gain or loss then the interest from the leverage loan is not
> deductable...


Actually, one of the CRA bulletins explicitly says that as long as the company that issued the shares does not state they will never pay dividends, CRA will accept there is the potential for dividends in the future and allow the deduction of interest. 

A recent example of a company making such as change is Stantec whose shares have been listed on the TSX for many years but only started paying dividends in the last year or so.


The CRA link has been posted here before so a search of CMF should find it. If I get time, I might dig it out from CRA's website.


*Update:*
This is a slightly different wording but says the same thing.



> OTHER INTEREST DEDUCTIBILITY AND RELATED ISSUES
> Borrowing for investments including common shares
> ...Where an investment does not carry a stated interest or dividend rate such as
> some common shares, the determination of the reasonable expectation of income
> ...


From CRA Interpretation Bulletin # IT-533 - Interest Deductibility and Related Issues 
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.txt


Cheers


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## TheRootOfAllEvil (Mar 21, 2011)

From the tax courses I have taken, this is my thought on the topic. The CRA allows the deduction of interest as long as there is a direct paper trail from the loan to a purchase of a stock. If you sell 1 of 3 stocks you can keep the gains, the principle needs to be paid into the line of credit and then repurchased. If the amount only went to a brokerage account and then to another purchase, that may be an issue. It seemed like a silly issue as a lot of people convert their secured lines of credits to mortgages to lower interest. However that would cause a deemed disposition if you want to continue with the interest deductions, otherwise the direct trail from loan to purchase is broken. I would agree, check with an accountant to be certain.


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