# Claiming interest expenses



## jumbalaya (Jan 17, 2013)

Hi,

There is a HELOC in my parents' name, but I borrowed the money from them to invest with the promise of paying the interest. Am I allowed to claim the interest expenses on my taxes? There is a monthly payment of that interest, and I can show the "paper trail" to any auditor.

Thanks!


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## jerryhung (Mar 28, 2011)

should be

make sure they also report the income


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## pwm (Jan 19, 2012)

I agree. You are essentially borrowing from them, and paying them the interest. I don't see why CRA would not be OK with it.


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## AltaRed (Jun 8, 2009)

Question is.... can the parents take an interest expense on the HELOC? If not, then the parents get the short end of the stick.


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## jumbalaya (Jan 17, 2013)

I report any income (they're all ETFs) on MY tax return, since I am also claiming the interest expense on my tax return. AltaRed: what do you mean? My parents just opened up the HELOC for me to use (I couldn't qualify as I don't own the home that the HELOC is attached to).


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## AltaRed (Jun 8, 2009)

I assume your parents were the ones to draw the funds from the HELOC and they are the ones to pay interest on the HELOC. I assume you have an agreement with your parents to pay them, not the HELOC directly.


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## twa2w (Mar 5, 2016)

jumbalaya said:


> I report any income (they're all ETFs) on MY tax return, since I am also claiming the interest expense on my tax return. AltaRed: what do you mean? My parents just opened up the HELOC for me to use (I couldn't qualify as I don't own the home that the HELOC is attached to).


I think what Altared is saying is saying is that :
your parents borrowed the money, then lent it to you. You repay your parents and they repay the bank.
From CRA perspective, you claim the interest you pay your parents, and your parents claim the interest income from you on their tax return and they claim the interest expense from the bank. In theory it would be a wash for them.

If CRA asks you for a letter from the bank you would not be able to provide one as the letter would have your parents name on it. Your parents however could get a letter form the bank and they could give you a similar letter. Note that often the final LOC statement for the year has a total of interest paid for the year so may not need a letter.

The problem your parents have is technically they have to claim the interest income but would be unable to claim the interest expense as they did not invest (borrow the funds) with a reasonable expectation of profit.(not sure if that is still the rule from CRA but previously if you borrowed to invest, you could only write off the interest if there was a reasonable expectation of a profit i.e. dividends or capital gains) In your parents case they are borrowing to lend to your with the only income being interest you pay them on the loan to you so no expectation of a profit. This was disputed so not sure if this is still the case. Also even if your parent can claim the income and expense, are they collecting OAS as this could affect the claw-back.

Can you have your name added to the LOC. Really no reason why you can't. The LOC would have 3 names with 2 of the names providing the security. Alternatively the LOC could have been put in your name assuming you qualified from a debt servicing and credit point of view with your parents providing a guarantee and security in support of the guarantee. Of course these scenarios depend on the banks policies. Not all banks will do these sorts of things. 

Hope this makes sense. You may want to make a phone call to CRA to ask how they would treat this.
However that being said I don't see why, if you have a paper trail, that you can eliminate your parents from the equation. CRA may have something different to say if they audit you.

Cheers
J


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## AltaRed (Jun 8, 2009)

I think that IF the parents were getting more in interest from the personal loan than they were paying on the HELOC, then the parents are making a profit and that should satisfy CRA's technical requirements.

That said, as is often the case on forums, the OP's original post is not very clear on what the legal arrangement really is wrt the parents and the HELOC.


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## Eclectic12 (Oct 20, 2010)

The difference in interest rates will have to equal or exceed CRA's prescribed rate, which I believe is still 1%, correct?

Cheers


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## AltaRed (Jun 8, 2009)

Eclectic12 said:


> The difference in interest rates will have to equal or exceed CRA's prescribed rate, which I believe is still 1%, correct?


That is the case for below-market spousal loans but don't think that is applicable here. The loan here is presumably the HELOC at market rate, and presumably the parents are re-loaning the HELOC money at HELOC (or better) rates. 

The OP has not responded to how the loan is structured.


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## Eclectic12 (Oct 20, 2010)

jumbalaya said:


> I report any income (they're all ETFs) on MY tax return, since I am also claiming the interest expense on my tax return.


Since the investments are ETFs, there are two things to keep in mind.

The first is that the RoC portion of any cash payments made needs to be dealt with as spending them on anything other than re-investment or paying down the loan will reduce the amount of the loan interest that is tax deductible.

http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm
Or scenario #3 at the link http://www.advisor.ca/tax/tax-news/undo-interest-deductibility-mistakes-141569.


The second is that at times, ETFs will pay a taxable CG but they won't pay cash and the number of ETF units the investors hold does not change. These are called phantom distributions. 

Where the investor holding the ETF in a taxable account (this is required to deduct the interest charges) and does not know about the phantom distribution, they won't increase their ACB. The end result is paying more capital gains taxes to the gov't than is owed.

http://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/
http://www.theglobeandmail.com/glob...by-phantom-etf-distributions/article18225076/




jumbalaya said:


> My parents just opened up the HELOC for me to use (I couldn't qualify as I don't own the home that the HELOC is attached to).


Does this mean the HeLOC has nothing drawn from it and the investment loan is separate?


Cheers


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## FrugalTrader (Oct 13, 2008)

When you do get around to filing your income taxes, you fill in your investment loan interest expenses on Line 221. More info here:

http://www.milliondollarjourney.com/smith-manoeuvre-and-filing-income-tax.htm


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## jumbalaya (Jan 17, 2013)

hi all, thanks for the replies! 

so the scenario is like this, in principal: HELOC = 100k. Interest payment per month = $292. My parents pay the $292. I pay my parents the $292.

It would be pretty sad if it were the case that they would have to claim interest income on this, as they're just the middleman. It's as if I just paid the HELOC by myself.


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## jumbalaya (Jan 17, 2013)

Eclectic12 said:


> ROC


Yep, I'm all over that ROC... thanks though.

The HELOC is being used to invest.


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## Eclectic12 (Oct 20, 2010)

A lot of people miss it ... so I figured a reminder wouldn't hurt.

Great to know that you are on top of it.


Cheers


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## AltaRed (Jun 8, 2009)

jumbalaya said:


> so the scenario is like this, in principal: HELOC = 100k. Interest payment per month = $292. My parents pay the $292. I pay my parents the $292.
> 
> It would be pretty sad if it were the case that they would have to claim interest income on this, as they're just the middleman. It's as if I just paid the HELOC by myself.


It is not sad. It is the way it has to work. If you declare the interest as an investment expense, your parents MUST declare the interest you pay them as income. CRA is likely to come back at them for this when they figure it out and could charge them with penalites, etc. That said, if the parents declare the interest you pay them as income, they should also claim the HELOC interest as an investment expense (after all they have made an investment in you). However, CRA might disallow that interest expense deduction since your parents do not have reasonable expectations of a making a profit from their investment (in you). To make this work, you should/need to pay your parents a bit more in interest than they pay in HELOC interest. Example: Pay your parents $300.... so that they make a profit of $8 to make it more bulletproof.

The way it is structured now is fraught with danger.


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