Interest deductible for HELOC used for precon property?

hank755 wrote: ↑ I'm getting some conflicting answers. For those whom have done it, is the interest tax deductible from a HELOC that is used for a deposit for a preconstruction property? If so, how do you designate it as such on your tax return?

Thanks!

Sounds complicated as to deduct HELOC interest you need to invest in an income-generating investment, but the condo won't be generating any income for you for many years. I'm curious of the answer as well.

This old thread may be informative: using-loc-deposit-investment-pre-construction-1111418/

See the Income Tax Folio here: https://www.canada.ca/en/revenue-agency ... html#p1.25

Under subparagraph 20(1)(c)(i), for interest to be deducted, it must be on "borrowed money used for the purpose of earning income from a business or property". Whether the purpose test is met in a particular situation is a question of fact.

The interpretation of the term purpose was addressed by the Supreme Court of Canada in Ludco Enterprises Ltd. et al. v The Queen , 2001 SCC 62, 2001 DTC 5505 as follows:

... [T]he requisite test to determine the purpose for interest deductibility under s. 20(1)(c)(i) is whether, considering all the circumstances, the taxpayer had a reasonable expectation of income at the time the investment was made.

TL;DR: I'm sure you can take a filing position that you expect to earn rental income (ie: qualifying income from property) on the condo.

I believe you can capitalize the interest and add it to the ACB of the condo, you will not be able to expense it on your current tax return.
Best to confirm with your accountant.

Would you please confirm that as it is a pre-construction property that you actually haven't closed on it yet? If so, the challenge is when would the CRA consider that your investment started? Was it when you signed the PA and made the deposit or is it when you actually close on the property. As others have mentioned, that is one best asked to your experienced accountant.

ahlaker wrote: ↑
TL;DR: I'm sure you can take a filing position that you expect to earn rental income (ie: qualifying income from property) on the condo.

If you attempted this, there could be all sorts of problems if plans changed and when condo was finally completed it was not rented out but actually sold, or decided to move in as a principal residence. Would need to re-assess multiple previous tax years and subject to interest owed or penalties on deductions that shouldn't have been done in the first place.

As the above poster said, capitalizing interest and adding to ACB seems to be the proper way to proceed, and was also advised in the older thread linked to on same topic.
Can start deducting interest directly from income starting in the tax year you actually rent out the unit.

rob444 wrote: ↑ If you attempted this, there could be all sorts of problems if plans changed and when condo was finally completed it was not rented out but actually sold, or decided to move in as a principal residence. Would need to re-assess multiple previous tax years and subject to interest owed or penalties on deductions that shouldn't have been done in the first place.

Why would you need to reassess? The law is clear: the taxpayer needs to have "reasonable expectation of income at the time the investment was made". If the taxpayer has met this burden, which is a matter of facts and circumstances at the time of the investment, then life is good. No?

rob444 wrote: ↑ As the above poster said, capitalizing interest and adding to ACB seems to be the proper way to proceed, and was also advised in the older thread linked to on same topic. Can start deducting interest directly from income starting in the tax year you actually rent out the unit.

Sure - that's an approach to take and generally speaking what folks would advise. I spoke to a colleague and that was his first thought: "these are soft costs that are capital". I personally disagree and if it was me, I'd take a filing position that says something like this:

I've acquired an asset and I've used borrowed funds to acquire it. The asset is a firm commitment to acquire a condominium unit in the future. I believe I will earn income from property on this asset at some point. The funds were used to acquire an asset, the purpose of which was to earn income.

I personally believe this position has merit, and others can feel free to disagree. To the best of my knowledge neither the TCC nor the SCC have weighed in on this particular topic so it's a grey area (ie: not a slam dunk one way or another). I think you could make an analogy to using borrowed money to purchase stock options (or similar derivative instruments). In that case I think it's pretty standard practice that you can deduct the interest paid.

ahlaker wrote: ↑ Why would you need to reassess? The law is clear: the taxpayer needs to have "reasonable expectation of income at the time the investment was made". If the taxpayer has met this burden, which is a matter of facts and circumstances at the time of the investment, then life is good. No?

We are just guessing. Ultimately it comes down to how the CRA would view this in a potential audit.

Simply being able to declare now "I intend to use this for a rental", could open the door to abuse of the interest deduction rule if you can just change your mind at the last minute. What "facts and circumstances" at the time of investment CRA could possibly ask for to prove the deductions were legitimate, I have no idea. Personally I think you could run into problems should you suddenly decide to sell or live in the condo instead of renting it out despite your best intentions at the beginning, and CRA decides to audit you on it.

It would be great if there was a case on record of this exact situation and what the ruling was, but I've never seen before.

I'm not familiar with loan interest destructibility on stock options, but fundamentally not sure it can be compared to real estate. With stock options the end resulting stocks are qualifying investments in all cases. With real estate the investment could be income generating, could be capital gains only if you sell, or could be a principal residence.

As you said, lots of grey area.

senasena wrote: ↑ I believe you can capitalize the interest and add it to the ACB of the condo, you will not be able to expense it on your current tax return.
Best to confirm with your accountant.

I'm planning to sell a condo that I bought pre-con in 2016. I need to plan well ahead to reduce the capital gain tax. This would be ideal for my situation if the interest on the pre-con deposit taken from HELOC can be used to add to the cost of purchasing. I'm wondering what document should I retain? I only have proof that the cheques for paying the deposit were taken from a HELOC account, and my HELOC balance was always higher than the pre-con deposit amount (never paid off, but had a few portions going back and forth from revolving to fixed). I originally planned to add some interest to the closing cost as well but realized the money was taken out from a chequing account, so I guess it won't be eligible right?

pandorazw wrote: ↑ I'm planning to sell a condo that I bought pre-con in 2016. I need to plan well ahead to reduce the capital gain tax. This would be ideal for my situation if the interest on the pre-con deposit taken from HELOC can be used to add to the cost of purchasing. I'm wondering what document should I retain? I only have proof that the cheques for paying the deposit were taken from a HELOC account, and my HELOC balance was always higher than the pre-con deposit amount (never paid off, but had a few portions going back and forth from revolving to fixed). I originally planned to add some interest to the closing cost as well but realized the money was taken out from a chequing account, so I guess it won't be eligible right?

Speak to accountant.
If audited the separation and clarity of the accounting for interest on the purchase will play a role in this being rejected or accepted, however I would say claim it and deal with it if CRA asks.

senasena wrote: ↑ Speak to accountant.
If audited the separation and clarity of the accounting for interest on the purchase will play a role in this being rejected or accepted, however I would say claim it and deal with it if CRA asks.

I agree. It's very hard to separate the interest I guess I would have to give an reasonable estimation.

pandorazw wrote: ↑ I'm planning to sell a condo that I bought pre-con in 2016. I need to plan well ahead to reduce the capital gain tax. This would be ideal for my situation if the interest on the pre-con deposit taken from HELOC can be used to add to the cost of purchasing. I'm wondering what document should I retain? I only have proof that the cheques for paying the deposit were taken from a HELOC account, and my HELOC balance was always higher than the pre-con deposit amount (never paid off, but had a few portions going back and forth from revolving to fixed). I originally planned to add some interest to the closing cost as well but realized the money was taken out from a chequing account, so I guess it won't be eligible right?

Speak to an accountant as CRA may deem that you are flipping the condo and you would not be eligible to claim capital gains. Claiming capital gains is a major error that many tax payers make when selling properties.

skeet50 wrote: ↑ Speak to an accountant as CRA may deem that you are flipping the condo and you would not be eligible to claim capital gains. Claiming capital gains is a major error that many tax payers make when selling properties.

I have already spoken to an accountant but was never mentioned such caution. It's an income generating property which I paid tax on any positive cash flow.