# Borrowing from Personal Line of credit to invest



## dowshenko (Sep 11, 2012)

Hi Guys, 

been reading through the forums here and I believe I have the answer however I just wanted to confirm to make sure I completely understand. I was looking at the possibility of using my personal line of credit (PLOC) to invest in some dividend stocks. From my understanding its true that you can deduct the interest from the PLOC if used for investment income, is this the case? I was getting a little confused as if this was the case, what does it matter what the interest is on the money? Don't get me wrong, completely understand that leveraging to invest could be potentially dangerous as it can be advantageous, I was just trying to ensure I completely understood the interest deductions. 

After doing a ton of research and reviewing things on here, I'm thinking about the Smith Manoeuvre and using a HELOC to do some of what I was thinking... just was curious on the PLOC if had the interest deductions. 

Keep up the great work all, these forums are awesome with some great insights.. 

Cheers, 

Chad


----------



## Just a Guy (Mar 27, 2012)

Any interest on borrowed money, for the purposes of investing, is deductible. Make sure the paper trail is clear.


----------



## dowshenko (Sep 11, 2012)

wow, super fast reply! 

Thank you, I thought so. 

Cheers, 

Chad


----------



## Canadian (Sep 19, 2013)

dowshenko said:


> what does it matter what the interest is on the money?


By this, I'm guessing you mean why does the interest rate matter? The interest rate sets a "hurdle" rate for your investments. The higher the interest rate, the higher the hurdle rate. You have to deduct the hurdle rate (your interest rate) from your leveraged returns to calculate your real portfolio return. Leveraging your portfolio at 6% is a lot riskier than leveraging at 3% because your leveraged returns have to be higher to earn a positive real portfolio return.


----------



## Just a Guy (Mar 27, 2012)

Remember as well that you also have to pay tax on the gains of your investment, so the interest rate should be quite a bit lower.


----------



## wendi1 (Oct 2, 2013)

You have to pay tax on the dividends, too. This is not a casual, borrow a coupla grand to max out my RRSP, pay it back with the refund kind of deal. Make sure you know what you're getting into - you could lose everything.

Not to overstate the risks... but, seriously. What would you do if stock markets tanked 30%?


----------



## Brian Weatherdon CFP (Jan 18, 2011)

Simply to answer the question, if you keep a precise paper-trail it works fine for taxation reporting. Easiest by far if you borrow from a distinct account, or in a plan that will provide distinct accounting of the amount borrowed. Don't complicate by borrowing for other (non-tax-deductible) purposes from the same line of credit....as it's unlikely CRA will have the same view as you have when you're trying to establish the tax deductibility.

Reach an accountant if you are going into this in a big way. Tax deductibility should work for dividends but technically could be challenged if your return was only/primarily capital gains. Not that they necessarily check this closely (?). It's worth speaking with someone who is already serving you in a financial manner. 

Can mention too, borrowing at x% and earning x% can still be profitable, depending on various factors. A financial advisor runs illustrations on such matters before ever allowing a client to go into such a leveraged situation. Obviously though there's a vital caution that markets can go down. Eg. 2008/2009 when RBC dropped from $65 to $25; nice to know they didn't cut their dividend, but it would have been aggravating to own something that fell like that at such time. SO you want to do your own diligence, or connect with an advisor who assists in a manner that is suitable to your needs, circumstances, ie. investor personality. 

Remember, slow wealth is good wealth! 
Every success, and do well 
BW


----------



## Canadian (Sep 19, 2013)

wendi1 said:


> This is not a casual, borrow a coupla grand to max out my RRSP, pay it back with the refund kind of deal. Make sure you know what you're getting into - you could lose everything.


Also [while wendi has mentioned RRSPs], the investments must be unregistered. Interest cannot be deducted on money borrowed to invest within a RRSP, RESP, RDSP, or TFSA.


----------



## Eclectic12 (Oct 20, 2010)

dowshenko said:


> ... I was looking at the possibility of using my personal line of credit (PLOC) to invest in some dividend stocks. From my understanding its true that you can deduct the interest from the PLOC if used for investment income, is this the case?
> 
> I was getting a little confused as if this was the case, what does it matter what the interest is on the money? ...


 ... as long as the investments are qualified, the interest is deductible. Some of the common complicating factors include:

a) where more than just investments are on the same account, which complicates both the paper trail as well as runs the risk of reducing the interest deductability more than $ for $

b) selecting investments that pay return of capital (RoC) and not having a plan to keep the loan 100% deductible.

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

and



Brian Weatherdon CFP said:


> ... Tax deductibility should work for dividends but technically could be challenged if your return was only/primarily capital gains. Not that they necessarily check this closely (?) ...


Investments that don't pay interest/dividend income are murky. The Finance dept says they are not allowed but CRA's interpretation bulletin IT-533 "Interest Deductability and related issue", in the "Borrowing for investments including common shares" section states that where there is no interest or dividend rate and there is no policy prohibiting dividends, this is *generally* fine but will be evaluated on an individual basis. Example #9 talks about buying shares for a company that isn't clearing paying interest or dividends but has a policy that these *might* be paid.

http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.html


It is like that having the bulk of the investments paying interest/dividends will help out.


Then too - it likely depends on one's profile as well. I doubt CRA is going to sweat someone making $60K who is writing off $5K compared to someone writing off $35K.


Finally - bear in mind that it's borrowing to invest, regardless of whether it has a special purpose or name such as the SM. Whether it's PLOC, HELOC or bank loan doesn't matter either, the key is paying interest to pay for investments in a taxable account. If interest is from a HELOC where the interest/dividends are being used to pay down the mortgage versus any other form of loan (or use of dividends) doesn't matter.


Cheers


----------



## My Own Advisor (Sep 24, 2012)

wendi1 said:


> You have to pay tax on the dividends, too. This is not a casual, borrow a coupla grand to max out my RRSP, pay it back with the refund kind of deal. Make sure you know what you're getting into - you could lose everything.
> 
> Not to overstate the risks... but, seriously. What would you do if stock markets tanked 30%?


+1

This is why I don't borrow to invest right now. Paying down my mortgage debt is a guaranteed return on investment and holding a basket of dividend stocks, when I have money to invest, provide relatively predictable income.


----------



## dowshenko (Sep 11, 2012)

You guys are awesome, this is all amazing and great details for me to keep in mind with all this. I wasn't planning on leveraging myself to the hills by any means, I just wanted to ensure what I thought was actually correct before I did any of this! 

Noted that is must be in an unregistered account to be able to get the deductions. Also a must on paying the tax on dividends and earnings of course as well Wendi. Nobody likes the tax man... drives me crazy seeing seeing my money go to taxes albeit some for good... =)

Eclectic12 - I plan on using one account for the investments only and nothing else to make a paper trail clear. I'm a huge fan on Milliondollarjourney, thx for the link, no idea how I missed it! Also I am a dividend investor, 99% of my stocks are just that. I do keep a tiny % (literally 1-2%)of my worth to play around with some stocks here and there but that is not the plan here. 

I don't have any debt other than my mortgage. No CC debt, no lines of credit, or anything of the sort. I use credit cards all the time to pay for everything to accumulate the points and its paid off in full at the end of each month. Looking at last year I hit a new personal record and saved 37% of my income and put it towards RRSP's, TFSA, Investments and such. 

I'm in a pretty good place at the moment and looking to invest long long term as I do with all of my investments. Nothing in life is certain, sure the market can drop 30% but I'm betting on the fact that 10, 20+ years later it will be back up to par or better. Housing can drop just like stocks we have all seen it happen... I understand you can't "live" in your stocks and you will always need a home so it makes sense to pay off the mortgage and have the equity there too. That said, I have a few ideas to invest relatively safe, or as safe as I can make it for myself.

I'm maxing out my RRSP's, TFSA already done, so now the extra cash will pay down the mortgage; however I would like to gain access to some of that money to invest. I don't mind having equity in my home but I don't want all my cash wrapped up in it either so I am investing in a few places. 

I'm a slow but steady investor, not looking for huge gains or crazy bets, trying to make it as safe as possible while using the money, equity, or leverage that I can to help accelerate some of that. I absolutely understand and agree that leverage can be a dangerous thing, but I think with the right amount of research and time it could also be a great way to build your wealth too.

Please keep up the great work and conversations here... Its only helping people get better with their finances and choices they can make in the future to build their wealth with a host of ideas!


----------



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

That all sounds pretty good except that you sound determined to borrow to invest. I do not understand why a responsible money manager such as yourself would do something so unnecessary. You don't have to put every penny of your savings towards paying off your house. Why not simply use that money for your investing, keeping in mind you have already invested with TFSA and RRSP monies. It sounds a bit dangerous to be putting so much of your money in investments given what wendi1 said. I would suggest settling down a bit on this and continuing to take part in the thread, do more reading and learning. Take a prudent and careful approach.


----------



## dowshenko (Sep 11, 2012)

the-royal-mail said:


> That all sounds pretty good except that you sound determined to borrow to invest. I do not understand why a responsible money manager such as yourself would do something so unnecessary. You don't have to put every penny of your savings towards paying off your house. Why not simply use that money for your investing, keeping in mind you have already invested with TFSA and RRSP monies. It sounds a bit dangerous to be putting so much of your money in investments given what wendi1 said. I would suggest settling down a bit on this and continuing to take part in the thread, do more reading and learning. Take a prudent and careful approach.


Completely agreed royal-mail! I should have made myself more clear, as I am not determined to borrow to invest and merely looking at some options to utilize cash and equity. I'm just learning and growing with the help of this and other forums so I want to make sure I understand all aspects of what I would be doing. If it was a simple process I was going to get it setup to create that option for me however there is some work there to get stuff like that done. No plans on doing anything just yet! Definitely sitting back and researching different methods and opportunities. 

Cheers, 

Chad


----------

