Is HELOC or margin interest tax deductible in Canada?

When is interest on borrowed money tax deductible in Canada?

Interest is deductible when you have a legal obligation to pay it and the borrowed money is used to earn income from a business or property, such as dividends, interest or rent (Income Tax Act, paragraph 20(1)(c)). Money used to earn exempt income or to buy a life insurance policy does not qualify.

The CRA applies four tests (Folio S3-F6-C1, paragraphs 1.26 to 1.35 and 1.92):

The security for the loan is irrelevant. A loan secured by your home can be deductible, and a loan secured by your rental can be personal. A margin loan is borrowed money like any other: the same tests apply to what the margin cash bought.

A case stops being simple when one line of credit paid for both investments and personal spending, when investments were sold or returned capital, when a rental was refinanced, or when the money moved through a corporation. Gather the loan agreements, every statement showing each draw and repayment, and the investment or rental records showing where each draw went.

Is HELOC interest tax deductible if I borrow against my home to invest or buy a rental?

Yes, to the extent each dollar drawn goes directly to an eligible use, such as non-registered investments or the purchase or improvement of a rental. The CRA says you can deduct interest on money borrowed to buy or improve a rental property (Guide T4036). That the home secures the line does not matter.

The reverse also holds. If you refinance a rental and spend the new money personally, such as on your own home or a car, the CRA says that interest is not deductible. If the new money goes to a business or other investments, the interest may be deductible against that income (Guide T4036).

A refinance that only replaces an existing loan keeps the old loan's purpose. Money borrowed to repay earlier borrowing is deemed used for whatever the earlier borrowing was used for (subsection 20(3); Folio paragraph 1.99). Only the new money added on top needs its own trace.

If the home itself becomes a rental, see turning a home into a rental.

Which investments qualify: stocks with no dividends, ETFs, corporate-class funds, GICs?

The test is whether the investment could reasonably be expected to produce income when you bought it, not whether it paid any yet (Folio, paragraphs 1.26, 1.27, 1.69 and 1.70).

One line of credit paid for investments and personal spending: how do I trace it, and how do repayments split?

Where borrowed money is mixed with other cash in one account, you may choose which of the account's uses the borrowed money paid for. You cannot link a purchase to a borrowing made after it, though a draw and a purchase on the same day generally raise no timing issue (Folio, paragraph 1.42).

Repayments split in proportion, not by choice. Each principal repayment on a mixed line reduces the investment part and the personal part in proportion, so the original investment share applies to the remaining balance. You cannot direct a repayment to the personal part first (Folio paragraph 1.43).

The cleanest record is a separate line, or a separate sub-account, used only for investing, with every draw going straight to the investment account. Years of mixed draws on one line usually need a draw-by-draw reconstruction.

Can separate accounts or "cash damming" make the interest deductible?

Separate accounts make the trace easier to prove; they do not change what the borrowed money paid for. The CRA accepts that you may restructure borrowings and the ownership of assets to meet the direct-use test (Folio paragraphs 1.33 and 1.34). For example, selling non-registered investments, paying down a personal mortgage with the cash, then borrowing to buy investments leaves a new loan whose direct use is the investments. The folio does not address the general anti-avoidance rule, which can deny a tax benefit from an avoidance transaction (section 245).

Two limits apply:

• The order matters. Borrowing after you already paid for an investment with your own cash does not finance that investment. The new loan finances whatever the new money pays for (Folio paragraph 1.42).
• Rental cash damming is not addressed directly. The folio calls keeping borrowed money apart from money from operations "cash damming" and says it eases tracing (paragraph 1.34), but it does not discuss paying personal costs with rental income while borrowing to pay rental expenses. Whether the interest holds up depends on the records for each draw, and it needs professional judgment.

Is interest on a loan used to pay investment interest deductible, such as a HELOC paying margin interest?

Yes, if the interest on the first loan is itself deductible. Interest on a second loan used to pay interest on a first loan is deductible under paragraph 20(1)(c) on that condition (Folio paragraph 1.82).

Interest on unpaid interest (compound interest) is deductible only in the year it is actually paid (paragraph 20(1)(d); Folio paragraph 1.81). Unpaid interest added to the loan balance is not a payment (Folio paragraph 1.83).

What happens to the deduction after a return of capital, a partial sale or selling at a loss?

The deduction follows the money's current use, so it changes when the investment changes (Folio, paragraphs 1.35 to 1.41).

The loss rule is in section 20.1. For the tax on the sale of a rental itself, see selling a rental property.

Interest charged for December but billed in January: which year do I deduct it?

It depends on the method you regularly follow. On the cash method you deduct interest in the year you pay it, so December interest paid in January belongs to the next year; on the accrual method you deduct interest that accrued for the year (paragraph 20(1)(c); Folio paragraph 1.13). The CRA's line 22100 page describes interest you paid. Use one method every year so no interest is claimed twice or missed. For a rental, the CRA expects the accrual method in most cases, so December interest on the rental mortgage belongs to the year it accrued; the cash method is allowed only if you have almost no amounts receivable or expenses outstanding at year end and the result would be almost the same (Guide T4036).

Prepaid interest is deducted in the years it relates to, not when paid (subsection 18(9)). For a rental, the CRA also spreads a penalty to pay off a mortgage early over the rest of the original term of the loan (Guide T4036). Under the Act, that penalty counts as interest in the later years only up to the interest it replaced, and only while the property it financed, or a replacement, still earns income, so a penalty paid when you sell the rental does not carry on into later years (subsection 18(9.1)).

Can I deduct interest on money borrowed for an RRSP, TFSA or FHSA?

No. Interest is not deductible for any period in which the borrowed money is used to contribute to an RRSP, TFSA, FHSA, RESP, RDSP, registered pension plan, pooled registered pension plan, deferred profit sharing plan or another plan listed there (subsection 18(11)). The rule also reaches a loan that first bought a taxable investment if that investment, or its proceeds, later moves into one of these plans: from then on, the interest stops being deductible.

What else can I claim on line 22100, and what can't I?

Line 22100 holds carrying charges, the costs of owning investments held outside registered plans, not only interest (CRA line 22100).

Where do I claim it: line 22100 or Form T776?

Claim the interest where the income it earns is reported.

Instead of deducting it, you may elect in your return to add interest on money borrowed to buy a rental building, or other depreciable property, to its capital cost, for the year you buy it and up to three earlier years (section 21; Guide T4036, line 8710).

The rest of the rental statement is covered in rental income. This page covers the federal return. Residents of Québec also file a Québec return, which this page does not cover.

Example

These examples are illustrative; all figures are in Canadian dollars.

A HELOC that buys dividend stocks

An investor draws C$100,000 on a HELOC straight into a separate non-registered account and buys dividend-paying shares. At 6%, interest for the year is C$6,000. Every dollar traces to the shares, so all C$6,000 goes on line 22100. If she later sells shares that cost C$20,000 for C$20,000 and spends the cash on a vacation, interest on that C$20,000 stops being deductible.

A mixed line of credit

An owner uses one line of credit for C$50,000 of investments and a C$50,000 car, then repays C$20,000. The repayment reduces both parts in proportion, so C$40,000 of the remaining C$80,000 is investment borrowing. On the CRA's reading (Folio paragraph 1.43), half the interest is deductible, even though the owner meant the repayment for the car loan.

A refinanced rental

A landlord's rental mortgage is C$200,000, all used to buy the rental. She refinances, adding C$150,000 for the down payment on her own home. The new total is C$350,000. Interest on the original C$200,000 stays on Form T776; interest on the C$150,000 is personal, even though the rental secures it.

Different for you?

• A refinanced rental, a line used for years of mixed draws, layered borrowing, or a past deduction you cannot trace: gather the loan statements and draw records and get individual tax help.
• Other rental expenses, a rental loss, or reporting rent: see rental income.
• Your home became a rental, or your rental became your home: see turning a home into a rental.
• You missed the change-of-use election and later sold: see the home-turned-rental election and the later sale.
• You are selling the rental: see selling a rental property.
• You invest or borrow through a corporation, or borrowed personally to lend to your own: the CRA generally allows interest on money lent interest-free to your wholly owned corporation, or by all shareholders in proportion to their shares, where the loan adds to the corporation's capacity to earn income, decided on the facts (Folio paragraphs 1.55 and 1.56); see holding and investment corporations.
• You also file a US return: the US return treats investment interest under its own rules; see Americans living in Canada.
• The loan funds your self-employed business: see business expenses the CRA accepts.
• You claim the home-office share of mortgage interest: see business expenses paid personally.