Investing

take money out of my heloc, lend it to spouse for invest, interest is deductible?

  • Last Updated:
  • Nov 8th, 2017 9:06 pm
[OP]
Newbie
Aug 4, 2017
64 posts
36 upvotes

take money out of my heloc, lend it to spouse for invest, interest is deductible?

Say I have a property on my name with HELOC $230k limit.
If I take $100k out, lock it with my lender at 2.79% for two years, and lend it to my spouse.
She invests that money on dividend ETF and pays me back interest with CRA determined rate 1%,
which is $1k a year. Then I need to pay income tax for the $1k.

Now my question is :
Is the interest generated from $100k ( which I borrow from my HELOC) tax deductible?

On paper, I borrow the money $100k for getting interest income , admittedly low at 1%.
This fits the CRA requirement for borrowing money for investment purpose, generating income, not only capital gain.
THerefore it should be tax deductible, or am I wrong?
12 replies
[OP]
Newbie
Aug 4, 2017
64 posts
36 upvotes
jerryhung wrote:
Nov 4th, 2017 7:00 pm
Why don't you invest yourself instead ?
Then it's tax deductible for sure
= Smith maneuver

I think spouse lending also works, but why?
My marginal tax rate is 43%~47% depending on company bonus
eligible dividend income tax rate is 30%
if I invest the money myself,
assuming dividend return rate is 4%, the net return is
gross return 4 x 0.7 - borrow cost 2.79 * ( 1- 0.43) = 1.21 percent

Now my spouse in the near future will be in the lowest tax bracket and dividend income is pretty much tax free
therefore the net return
gross return 4 - borrow cost 2.79 * ( 1- 0.43) + 0.43 ( I pay the income tax on the interest she pays me)
= 1.98 percent

This way is more than 50% higher return
I will call CRA on Monday to ask this question
[OP]
Newbie
Aug 4, 2017
64 posts
36 upvotes
rodbarc wrote:
Nov 4th, 2017 8:23 pm
Some details here:

http://www.taxtips.ca/personaltax/lend- ... -child.htm


Rod
Thanks for the link.
However it's not the information I'm looking for.
My question is basically down to this :
if I borrow from my HELOC for creating interest income by lending the money to my spouse for 1% return (approved rate by CRA)
will CRA allow my borrowing cost to be deductible?
Jr. Member
Jun 25, 2012
117 posts
33 upvotes
Vancouver
gtx1050 wrote:
Nov 5th, 2017 12:04 am
Thanks for the link.
However it's not the information I'm looking for.
My question is basically down to this :
if I borrow from my HELOC for creating interest income by lending the money to my spouse for 1% return (approved rate by CRA)
will CRA allow my borrowing cost to be deductible?
No, attribution rules would apply in this case. If it were joint-title, joint-LOC, and spouse used money to also pay interest - no issue I believe. There was a technical interpretation released by CRA on this many years ago.
Deal Addict
User avatar
Dec 14, 2010
4304 posts
3260 upvotes
gtx1050 wrote:
Nov 5th, 2017 12:04 am
Thanks for the link.
However it's not the information I'm looking for.
My question is basically down to this :
if I borrow from my HELOC for creating interest income by lending the money to my spouse for 1% return (approved rate by CRA)
will CRA allow my borrowing cost to be deductible?
Sounds like the strategy described here? http://financialpost.com/personal-finan ... es-to-come

Need to evaluate if the rules on CRA website didn't change: https://www.canada.ca/en/revenue-agency ... ility.html


Rod
Everything about my Investing and automated Trading strategies to boost your income: https://boostyourincome.ca
Newbie
Nov 20, 2006
72 posts
37 upvotes
Toronto
stockboy88 wrote:
Nov 5th, 2017 12:36 am
No, attribution rules would apply in this case. If it were joint-title, joint-LOC, and spouse used money to also pay interest - no issue I believe. There was a technical interpretation released by CRA on this many years ago.
imho you are confusing two cases
gifting or giving money to spouse to invest
lending money to spouse getting paid on CRA defined interest, attribution not apply

you are talking abt first where attribution applies
the op is talking abt second
Sr. Member
User avatar
Sep 19, 2013
951 posts
269 upvotes
Winnipeg
I understand your question completely. However, I do not know the answer. You need to check with an accountant.

However, here is my thinking and I maybe wrong. Common sense tells me that your interest for HELOC would not be tax deductible. Reason is at the outset, your investment is not made with the purpose of earning money. Yes, it is earning 1% fixed, but you are paying 2.79% to the bank. So clearly, there is no "intention" to earn +ve income. In lot of CRA cases, the judgements have been made based on "intention". So I am almost certain, this would be audited and I am not sure it would rule in your favour. Let us know what you find.
Deal Addict
Apr 22, 2014
2733 posts
386 upvotes
Oshawa, ON
amitdi wrote:
Nov 8th, 2017 1:25 pm
I understand your question completely. However, I do not know the answer. You need to check with an accountant.

However, here is my thinking and I maybe wrong. Common sense tells me that your interest for HELOC would not be tax deductible. Reason is at the outset, your investment is not made with the purpose of earning money. Yes, it is earning 1% fixed, but you are paying 2.79% to the bank. So clearly, there is no "intention" to earn +ve income. In lot of CRA cases, the judgements have been made based on "intention". So I am almost certain, this would be audited and I am not sure it would rule in your favour. Let us know what you find.
so why not just charge your spouse 2.8%? it's deductible for them because they will use for the purpose of investing.
our country is doomed with all this spaghetti of rules.
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Sr. Member
User avatar
Sep 19, 2013
951 posts
269 upvotes
Winnipeg
eldeejay wrote:
Nov 8th, 2017 1:48 pm
so why not just charge your spouse 2.8%? it's deductible for them because they will use for the purpose of investing.
our country is doomed with all this spaghetti of rules.
charging your spouse higher results in higher overall tax because OP will have to show the spouse interest as income.
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Jan 27, 2007
4840 posts
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Peterborough
gtx1050 wrote:
Nov 5th, 2017 12:04 am
Thanks for the link.
However it's not the information I'm looking for.
My question is basically down to this :
if I borrow from my HELOC for creating interest income by lending the money to my spouse for 1% return (approved rate by CRA)
will CRA allow my borrowing cost to be deductible?
No. You cant borrow at a higher rate and lend out at a lower rate, leading to a net tax benefit. A transaction like that would be gaar'd if reviewed.

You are talking a variation of what is discussed here:

https://www.google.ca/amp/s/beta.theglo ... e15659225/

But instead of having the funds on hand, you intend to borrow at a higher rate than the rate at which the funds are lent out. Not gonna fly.
[OP]
Newbie
Aug 4, 2017
64 posts
36 upvotes
dutchca wrote:
Nov 8th, 2017 8:46 pm
No. You cant borrow at a higher rate and lend out at a lower rate, leading to a net tax benefit. A transaction like that would be gaar'd if reviewed.

You are talking a variation of what is discussed here:

https://www.google.ca/amp/s/beta.theglo ... e15659225/

But instead of having the funds on hand, you intend to borrow at a higher rate than the rate at which the funds are lent out. Not gonna fly.
Thanks for the reply
you are right
i called CRA last monday
that is exactly what they told me

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