Personal Finance

Using HELOC for TFSA or Margin

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  • Feb 10th, 2021 9:35 am
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[OP]
Jr. Member
Jul 31, 2009
140 posts
35 upvotes

Using HELOC for TFSA or Margin

I know the general consensus is if you are going to use leverage to invest, it is more tax efficient to do so in a non-registered account. I asked a similar question on reddit and now did a bit of the math for it. We have a fair amount of room available in our TFSAs (about 90k combined).

For the foreseeable future, it is a one or the other for me. I am thinking of getting a fixed rate loan in my HELOC at around 1.5-1.65% and paying it off over 10-15 years. My preference to reduce risk is to invest in broad ETFs vs a handful of Canadian dividend stocks. Having ETFs in a non-reg account complicates things at tax time and distributions are not always in the form of dividends. As far as I understand the advantage, you get a dividend tax credit (based on gross up) and you can deduct interest amount from your taxable income. I ran a few scenarios for one year only to keep things simple. This is going to be a long term hold and as the HELOC loan is paid off, the amount of interest available for a tax credit will be reduced in subsequent years.

If my math is correct, the non-reg only comes out ahead if you have a higher interest rate to deduct. That being said, It makes no sense to use a 3% loan when I have a lower rate available. In the end, the numbers are not that different. My preference is the TFSA as it makes it easier to invest in ETFs and not worry about distribution implications. More of a set it and forget it situation. The main advantage for a non-reg account would be if I was going for high yield and to offset any capital losses. This will be a 10+ year investment before I even think about touching it so capital losses for broad market ETFs are unlikely.

Anyone see anything missing here? See attached table. Thanks :)

TFSA_vs_Margin.jpg
8 replies
Jr. Member
User avatar
Aug 14, 2020
158 posts
144 upvotes
Hamilton, ON
Following - this is super interesting to me. I want to see where this discussion goes. Thanks for starting this thread.
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Getting a mortgage is like writing a test...except you're allowed to work with someone who knows the answers!

Kirby Reschny
Mortgage Agent
Real Mortgage Associates (FSRA #10464)
Jr. Member
User avatar
Aug 14, 2020
158 posts
144 upvotes
Hamilton, ON
My first questions are:
With reference to taxes on ETF's in a Non reg account, why is that level of complication concerning? Don't the T-slips cover the taxes owing?
Second question, I know that cap gains play a part in the non-reg accounting eventually, but one of the benefits of buy and hold is that those cap gains get deferred indefinitely. I'm not sure how I expect you to depict this in the calculation, so I'm bringing you a problem but not offering a solution Smiling Face With Sunglasses.
_



Getting a mortgage is like writing a test...except you're allowed to work with someone who knows the answers!

Kirby Reschny
Mortgage Agent
Real Mortgage Associates (FSRA #10464)
Jr. Member
Dec 8, 2020
108 posts
97 upvotes
your calculations are OK on the basis that you can continuously achieve the returns/capital gains (watch for volatility/corrections) & that the interest rates & your tax rate remains constant.

the question is can you find non-volatile consistent growth investments to give you the results that you've plugged into the chart?

thinking outside the box, is it possible .... with $50k in a non-registered margin account at 1.65%, draw the max margin money to put into a TFSA, use the returns from the TFSA funds to pay the margin, otherwise you need to top up the margin with funds to pay the interest
.............................................

set a limit, play within it.
[OP]
Jr. Member
Jul 31, 2009
140 posts
35 upvotes
aeromortgage wrote: My first questions are:
With reference to taxes on ETF's in a Non reg account, why is that level of complication concerning? Don't the T-slips cover the taxes owing?
Second question, I know that cap gains play a part in the non-reg accounting eventually, but one of the benefits of buy and hold is that those cap gains get deferred indefinitely. I'm not sure how I expect you to depict this in the calculation, so I'm bringing you a problem but not offering a solution Smiling Face With Sunglasses.
From what I have read, how you pay tax on etf distributions depends on the structure and can get complicated. It requires quite a bit of tracking for foreign withholding tax/credits, adjusting cost base for return on capital and then add in that you may buy units a few times a year. Many ETF distributions I am looking at would not fall under eligible dividends so claiming the interest tax deduction would be in question. I think investing in a few dividend stocks for taxable account makes more sense, but riskier IMO.
Jr. Member
User avatar
Aug 14, 2020
158 posts
144 upvotes
Hamilton, ON
OK, that makes sense. I would prioritize things differently. I would use a sheltering priority, filling RRSP/TFSA room first - Interest Bearing > International > US > Canadian. I wouldn't put international, interest bearing or even US in a Non-Reg account. I would put Canadian dividends in a Non Reg account, and if that's the case it's easier for me to track a single Canadian market index ETF or Canadian Dividend ETF than it is to track multiple different stocks.

I acknowledge that I am an amateur at this and may be missing something - which is why I wanted to follow this thread in the first place.
_



Getting a mortgage is like writing a test...except you're allowed to work with someone who knows the answers!

Kirby Reschny
Mortgage Agent
Real Mortgage Associates (FSRA #10464)
[OP]
Jr. Member
Jul 31, 2009
140 posts
35 upvotes
porticoman2 wrote: your calculations are OK on the basis that you can continuously achieve the returns/capital gains (watch for volatility/corrections) & that the interest rates & your tax rate remains constant.

the question is can you find non-volatile consistent growth investments to give you the results that you've plugged into the chart?

thinking outside the box, is it possible .... with $50k in a non-registered margin account at 1.65%, draw the max margin money to put into a TFSA, use the returns from the TFSA funds to pay the margin, otherwise you need to top up the margin with funds to pay the interest
The chart was just to get an idea of how the dividend tax credit and interest credit would work out. I think most ETFs like XAW, VGRO, VEQT, TEC or a combination of these should give at least a 7% total return. 7% is what I use for my planning purposes and I usually exceed it when averaging over the long term.

Also I'm not sure about taking 50K in margin and then putting into a TFSA. To claim the interest deduction, the funds needs to be linked to an income bearing investment (usually Dividends or Interest) in a taxable account. I guess this brings me back to the interest. My biggest issue is I feel limited in what I can invest in if I go the non-reg route and this would be to claim $825 in interest costs which amounts to less than $250 in tax savings. This is for my case and what I am trying to do, others will have a different scenario. I'll probably go the TFSA route unless there is something I am totally missing here. If I had no TFSA room, I'd definitely go for a non-reg account with some bank stocks and ENG/FTS/AQN.
[OP]
Jr. Member
Jul 31, 2009
140 posts
35 upvotes
aeromortgage wrote: OK, that makes sense. I would prioritize things differently. I would use a sheltering priority, filling RRSP/TFSA room first - Interest Bearing > International > US > Canadian. I wouldn't put international, interest bearing or even US in a Non-Reg account. I would put Canadian dividends in a Non Reg account, and if that's the case it's easier for me to track a single Canadian market index ETF or Canadian Dividend ETF than it is to track multiple different stocks.

I acknowledge that I am an amateur at this and may be missing something - which is why I wanted to follow this thread in the first place.
I think this is the route to go. Canadian Dividend stocks for sure in a Non-reg account. US div payers in RRSP to avoid withholding tax.

I am an amateur as well which is why I posted. Hopefully someone more knowledgeable than myself will chime in :)
Newbie
Jul 8, 2019
57 posts
56 upvotes
If you use borrowed money from a HELOC (or anything else) for a TFSA, you will NOT be allowed to deduct the interest (carrying charges) from your taxes that you pay on the HELOC.

Basic principle is that interest deductions can only be used against taxable income. The expectation from CRA is that (for you to be able to deduct the interest) borrowed money used in this manner must be for investments that have a reasonable expectations of a yield (that is taxable) in the year the deduction is made. Most people using HELOC for investments will be to purchase investments in taxable account with some dividends or distributions paid out, to satisfy the CRA and deduct the HELOC interest.

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