Investing

HELOC Interest Deduction for Investment

  • Last Updated:
  • Nov 27th, 2017 11:26 am
[OP]
Jr. Member
Oct 21, 2017
153 posts
15 upvotes

HELOC Interest Deduction for Investment

Scenario:
-HELOC loan amount is $150,000 at 3.5% interest rate
-30% tax bracket
-$150k HELOC loan is invested in S&P 500 Index fund
-Interest on the $150k is $5250.

Do you get back all of the $5250 interest during the tax return or do you only get back 30% of the $5250 which is $1575? Does this mean you are still paying $3675 in interest for the $150k HELOC with the effective interest rate at 2.45% after tax deduction?

Thanks
4 replies
Sr. Member
Feb 17, 2012
629 posts
120 upvotes
Toronto
Others can confirm but that's how it works as far as I understand
Deal Addict
User avatar
Dec 14, 2010
4807 posts
4085 upvotes
Borrowig to invest only lowers your cost of borrowing, it doesn't eliminate it. The interest is tax deductible at your tax bracket.

Careful with the SP500 ETF that you choose, since foreign dividends are taxed as income and not eligible for dividend tax credit. Also, not all funds are structured to pay full dividends, some funds will have the 15% withhold tax on dividends. You might want to choose a Canadian dollar hedged fund structured in a way that doesn't penalize you on tax income.

Details on CRA rules about tax deductibility when borrowing to invest : https://www.canada.ca/en/revenue-agency ... ility.html


Rod
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Jr. Member
May 20, 2002
188 posts
25 upvotes
I should clarify. I had dividends from Active income from holdco. Then called the divendeds shareholder loans. Then used the HELOC to repay the shareholder loan back to holdco. Now holdco has 125k more active income to invest prior to the CPCC rules set in.

The 125k was active income.

The interest is not tax deductible in this case.
Deal Addict
User avatar
Sep 19, 2013
1685 posts
494 upvotes
Winnipeg
curiousgeorge1000 wrote:
Nov 25th, 2017 3:31 am
Do you get back all of the $5250 interest during the tax return or do you only get back 30% of the $5250 which is $1575? Does this mean you are still paying $3675 in interest for the $150k HELOC with the effective interest rate at 2.45% after tax deduction?

Thanks
only 30% of interest. basically, you put the interest as deductions.

so say you have $10K of income in the 30% bracket, you would have paid $3000 in taxes. but now you get to deduct $5250 from the $10K, effectively only paying tax on $10K-$5250, thereby saving $1575. get it? you need to declare $5250 in the correct section during tax filing time, so the software does the right calculations for you. i have seen that section but dont remember the section off-hand.

also, you need to careful that your ETFs dont have ROC - return of capital involved, that messes up things). read this article for more info -
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