# Interest - Capital Gains



## Jack007 (Mar 6, 2010)

I'm trading non-dividend paying stocks in a non-registered account with an investment loan. I'm aware that that the interest are not deductible against "other income" as I'm not receving dividends. 

My question is:
Am I allowed to add the interest paid tothe ACB (adjusted cost base) when calculating capital gains/capital losses.

I'm also subscibing to a "stock-picking newsletter" - can that be included in the ACB?

Thanks in advance for any input. 
Jack


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## Four Pillars (Apr 5, 2009)

You don't need dividends to have a deductible investment loan. If you are using the money for investments in stocks or starting a business etc then it is deductible.


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## bean438 (Jul 18, 2009)

Pillars you need some type of income for your loan to be deductible.

To answer the OP questions, no, and no.


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## FrugalTrader (Oct 13, 2008)

I believe Four Pillars is correct. Providing that the investments have the "potential" to produce income, then the interest on the investment loan should be deductible.


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## andrewf (Mar 1, 2010)

As far as I can tell, potential for capital gains from business activity counts as income. Speculating on the price of art, or gold, is not. Since more and more firms are moving toward returning money to shareholders through share buybacks, this makes sense.

Worst case, most indices pay some (usually small) dividend.


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## MoneyGal (Apr 24, 2009)

There are too many things collapsed in this discussion. Each of these issues is distinct:

- deductability of interest on an investment loan
- how to calculate the ACB for capital gains/losses

Frugal Trader and bean are correct. 

Interest on an investment loan is deductible when the funds are used to purchase securities which are expected to produce income. Dividend income is a form of income. 

The deduction can be taken against all other sources of income and is reported on Line 221 of your tax return. Here's the relevant CRA info.

The relevant distinction is whether you expect the investments you purchased with the borrowed $ to earn income. Not capital gains. There is no distinction for CRA purposes between "investing" and "speculating."


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## humble_pie (Jun 7, 2009)

interest paid on an investment loan is a carrying charge. It is not netted against cost base in any capital gains calculation.

in a situation where there is zero investment income in form of interest or dividends, and zero investment income from capital gains to date because the securities have not yet been sold, ie there is merely anticipation of gains to come, i believe there is provision to carry forward the investment loan interest for a limited number of years. I have never done this, so best to check it out thoroughly. I am pre-supposing that it cannot be netted against employment or business income.

re the newsletter. I believe only market professionals are allowed to claim research & data costs. Not us retail investors.


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## humble_pie (Jun 7, 2009)

interest on investment loan is a deduction against "all other sources of income" ... are you sure MG ??

right away i see a whopping opportunity for tax avoidance. Just borrow enuf so interest payments will take txble income down to zero. Taxpayer - in this case non-taxpayer - would only have to break even on the borrowed funds. Profit would arise from zero tax.

but i have never heard of anybody, ever, doing anything remotely like this.


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## FrugalTrader (Oct 13, 2008)

humble_pie said:


> interest on investment loan is a deduction against "all other sources of income" ... are you sure MG ??


Humble, that is my understanding as well. Interest from an investment loan is a tax deduction.


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## MoneyGal (Apr 24, 2009)

Yes, it is an ordinary deduction, against all income earned in the year. 

There are some significant tax court and Supreme Court cases on this point. CRA can and will disallow the deductions if it is felt they are "abusive tax avoidance," and they will examine the taxpayer's conduct and intent in arranging their affairs.


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## OhGreatGuru (May 24, 2009)

There is a major catch in the fine print to the types of investments that qualify.
From CRA Guide on Line 221:
_most interest you pay on money you borrow for investment purposes, *but generally only as long as you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.* For more information, contact us; and_

Which brings us back to Jackoo7's original question. If his stocks are not expected to pay dividends, his loan interest is not tax deductible. (And in any case has nothing to do with ACB)


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## MoneyGal (Apr 24, 2009)

...I wouldn't really describe that as "fine print."


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## ghostryder (Apr 5, 2009)

OhGreatGuru said:


> There is a major catch in the fine print to the types of investments that qualify.
> From CRA Guide on Line 221:
> _most interest you pay on money you borrow for investment purposes, *but generally only as long as you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.* For more information, contact us; and_
> 
> Which brings us back to Jackoo7's original question. If his stocks are not expected to pay dividends, his loan interest is not tax deductible. (And in any case has nothing to do with ACB)



But it specifically says *"if the only earnings your investment CAN produce are capital gains"*

Notice it does not say "only earnings your investment does produce" or "only earnings your investment currently produces"

Equities always have the possibility of paying a dividend, even if they never have, because the board could declare one if they choose. Unless there is something peculiar and specifc in that class of shares that specifically precludes paying a dividend.

Apple hasn't paid a dividend in 15 years or so. Just because they don't currently does not mean they couldn't tomorrow.

But something like physical gold cannot pay a dividend. Ever.


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## Jack007 (Mar 6, 2010)

Thank you for all the input. I do agree with most of you that as long as there's a potential for dividends the interest should be deductible against "income".

In this specific account I mostly buy options with NO potential for dividends and therefore the interest will not be deductible against "income".

*The question is shouldn't one be able to reduce the capital gain with the amount of the interest paid?*

For instance if you purchase an empty piece of land you my understanding is that you are allowed to "capitalize" all expenses i.e. property taxes, interest etc when calculating the eventual capital gain. These expenses will be added to the original cost of the land and will result in the new adjusted cost base (ACB). The capital gain will be the proceeds of the sale minus the ACB.

Shouldn't the same hold true for investment loans for investment in options?


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