# How to 'split/separate' line of credit



## Hedgehoggy (Aug 12, 2010)

I have a line of credit that currently has a balance for a 'personal' use and I soon plan to use this line of credit for an investment. I was hoping that it could be 'split' into two by the bank for these two different uses but the bank says no because the low interest rate given on the line of credit is due to the higher limit and if I were to lower the limit and open a second line of credit account it would put both accounts at a higher interest rate. Does anyone have any suggestions on how to split or separate these two different uses? 

Thanks so much!


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

I don't get it. A LOC is cash that is theoretically available to you whenever you want. You've identified the want (your investment) - so now all you need to do is move the correct amount of money for your investment into your savings account. Then spend the money. You know the process because you say you have a balance.

You will then need to start making monthly payments on the amount you withdrew, plus on the previous balance (debt) you have.

My bigger concern is that it sounds like you are digging yourself into a deeper hole. If you have a balance (debt) in this account, shouldn't you FIRST be paying that off and reducing the LOC to 0? What am I missing here?


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## Four Pillars (Apr 5, 2009)

Hedgehoggy said:


> I have a line of credit that currently has a balance for a 'personal' use and I soon plan to use this line of credit for an investment. I was hoping that it could be 'split' into two by the bank for these two different uses but the bank says no because the low interest rate given on the line of credit is due to the higher limit and if I were to lower the limit and open a second line of credit account it would put both accounts at a higher interest rate. Does anyone have any suggestions on how to split or separate these two different uses?
> 
> Thanks so much!


You can't share uses in the same LOC. You have to keep debt used for investment purposes separate from other debts. 

Some banks offer LOCs with "sub accounts" which would do the trick. Most don't.

You might try shopping around and opening up a 2nd LOC at a different bank if you can get a good rate. Alternatively, consider using a margin loan at your brokerage.


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## Hedgehoggy (Aug 12, 2010)

The line of credit was initially opened for a business investment (the bank knew this was the reason). When it was paid off we used it for a vehicle loan because of the low interest rate which is half way paid off. The bank knows that we want to use it again for another business investment (which would be paid off in a few years) as I told them when I inquired into 'splitting' the line of credit. The interest on the investment loan is tax deductible but because the interest for both 'purchases' (the vehicle and business loan) would be lumped together I was looking for a way to separate it. 
Thanks.


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

Ah okay. Now I understand better. 

Yes, I agree that you might have to try and get one at another bank. That could be challenging as I don't know how anxious they are to lend to strangers. They may ask you to switch over all your accounts or otherwise charge you a higher rate.


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## Eclectic12 (Oct 20, 2010)

Hedgehoggy said:


> I have a line of credit that currently has a balance for a 'personal' use and I soon plan to use this line of credit for an investment.
> Does anyone have any suggestions on how to split or separate these two different uses?


Hmmm ... if you can get one setup that will charge similar interest it will certainly simplify the bookkeeping. If you can't, just make sure to keep a good paper trail and set of calculations, including detailed notes as to what amounts are designed for 'personal' versus 'investment'.

I don't recall anything on Canada Revenue's site indicating that both are not allowed - just that a good paper trail is required to correctly document which is which. For example, if the total interest charged for the month is $100, $55 is due to the investment and $45 is the personal.

It's also a good idea to review the requirements as people miss that if the shares purchased are for a company that has a stated policy of "no dividends" then the interest is not tax deductable.

http://www.taxtips.ca/personaltax/investing/interestexpense.htm
http://www.cra-arc.gc.ca/E/pub/tp/it533/README.html

Cheers


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## bean438 (Jul 18, 2009)

I have BMO's Readyline with one massive credit line at this point.

I can, at anytime split into 2 or more sub accounts, and customize payment for all of them, i.e interest only, pay off in 3, 5, 10 years etc.


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## Jungle (Feb 17, 2010)

Anyone know if you can split the Scotia STEP into sub accounts?


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## Four Pillars (Apr 5, 2009)

Eclectic12 said:


> Hmmm ... if you can get one setup that will charge similar interest it will certainly simplify the bookkeeping. If you can't, just make sure to keep a good paper trail and set of calculations, including detailed notes as to what amounts are designed for 'personal' versus 'investment'.
> 
> I don't recall anything on Canada Revenue's site indicating that both are not allowed - just that a good paper trail is required to correctly document which is which. For example, if the total interest charged for the month is $100, $55 is due to the investment and $45 is the personal.
> 
> ...


I don't have any links, but I have had conversations with the CRA in the past about this issue.

I believe you are correct that technically you can comingle tax-deductible debt vs non-deductible debt. Calculating the interest payment breakdown should be straightforward.

The problem lies with any payments made to the LOC. If I have a $10k balance, $5k is deductible and $5k is not and I make a $1k payment - how is that payment applied to the loan segments? Is it applied in proportion (50/50) or all to the non-deductible part? (that would be nice) or all the deductible part (gov't would like this). 

This is not clear and from what I've read - it's possible that the CRA could claim that any payments (even just for interest) should be applied to the deductible portion.

I don't know that it has ever happened or if it is even worth worrying about the risk - but that's one reason for not comingling. The other being, that it is FAR easier to keep track of separate loans.


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## bean438 (Jul 18, 2009)

Commingling while "technically" may be allowed, IMO you are setting your self up for a massive head ache.

Not worth it.


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## Eclectic12 (Oct 20, 2010)

Four Pillars said:


> I don't have any links, but I have had conversations with the CRA in the past about this issue.
> 
> I believe you are correct that technically you can comingle tax-deductible debt vs non-deductible debt. Calculating the interest payment breakdown should be straightforward.
> 
> The problem lies with any payments made to the LOC. If I have a $10k balance, $5k is deductible and $5k is not and I make a $1k payment - how is that payment applied to the loan segments? Is it applied in proportion (50/50) or all to the non-deductible part? (that would be nice) or all the deductible part (gov't would like this).


Well ... careful selection of investments also makes it more start-forward.
Trust Units require that the ROC portion is paid back as the ROC is not tax-deductable. Then too, another mistake is to include the commission - the broker lumps it in but since it is an expense that is removed from the capital gains calculation, you can't claim it.

As for proportions - that's another issue.


Finally, even if the separate LOC is 1% more expense, if you are deducting it at tax time, does it really matter? That plus the simplicity of having the financial institution take care of the bookkeeping, makes the separate LOC the way to go.


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## Square Root (Jan 30, 2010)

Be careful on this. CCRA might come after you years from now and disallow a lot of interest. Always document use of funds.


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## w0nger (Mar 15, 2010)

sounds a lot like a SM for a vehicle...


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## Eclectic12 (Oct 20, 2010)

w0nger said:


> sounds a lot like a SM for a vehicle...


SM for a vehicle?

I'm not sure what you mean ....


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## DavidJD (Sep 27, 2009)

This is great. I just set up 4 sub-accounts in my HELOC. One for the 'mortgage', one to remain personal and one each for investment related borrowing and one for a revenue property related expenses. No additional fees and free cheques for each acct. 
I am almost looking forward to doing my taxes next year.

Appreciate the idea suggested in this thead - thanks.


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