[Fain]

I know the the interest on a loan for investment purposes is tax deductable. So interest from my margin account is clearly so.

BUT what about let's say if a friend lends me $5,000 at 10% for an investment loan shall we say. Am i allowed to deduct the interest($500) from my taxable income??? Does this work on a personal level or just with big companies?

 

[bean438]

It doesn't matter who lends you the money, but only what is the current use of borrowed funds.
However you may have trouble with CRA if you claim 10%.

If you google IT533 under general, section 7, CRA states the interest rate has to be a reasonable amount.
Consideration will be given to prevailing market rates.

 

[ssimps]

I know the the interest on a loan for investment purposes is tax deductable.

I recall reading an article @ MDJ that may be of interest to you. Found it:

http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm

Based on the article, I think the bottom line for your question is that if you borrow @ 10% interest rate, you better make more than 10% return on investment. Or either the deduction will be questioned, or the interest rate will be questioned; either way, who wants the tax man sniffing around your financial affairs.

 

[Fain]

It doesn't matter who lends you the money, but only what is the current use of borrowed funds.
However you may have trouble with CRA if you claim 10%.

If you google IT533 under general, section 7, CRA states the interest rate has to be a reasonable amount.
Consideration will be given to prevailing market rates.

Oooh, good point. I suppose changing it $5,000 at 5% would seem more reasonable then. Sounds like an easy deduction to me. Thanks

 

[ssimps]

It doesn't matter who lends you the money, but only what is the current use of borrowed funds.
However you may have trouble with CRA if you claim 10%.

If you google IT533 under general, section 7, CRA states the interest rate has to be a reasonable amount.
Consideration will be given to prevailing market rates.

An interest rate that will be offered to someone will depend on the persons credit rating and who the lender is. I know that the guy who 'owns' the building that we rent office space from is paying 8 - 10% from private mortgage lenders because he will not be given a dime from any bank as he has no credit. No idea what the CRA thinks of that.

 

[bean438]

Good point ssimps, I suppose some with bad credit etc may have to pay a higher interest cost, and thus fall under "prevailing market conditions".
Also the bulliten points out that there only has to be a "reasonable expectation of income at the time the investment was made".
Just below that in section 10 CRA points out legal precedent says "income" refers to income in general, NOT just net income.

BUT 533 also uses words like "absent a sham or window dressing" etc so even though you write off interest @10 to buy a GIC @5 technically deduct interest is fine but if CRA thinks it is a sham then you will end up like the sham wow guy, BUSTED! Lol.

I interpret this as you can buy a dividend paying stock that yields lower than your interest costs and claim a deduction because to me (and hopefully CRA) it is reasonable to expect a company with a history of dividend growth to continue to do so, and at some point dividend income would exceed costs.

Seriously at the end of the day you "could" deduct interest costs greater than income, ans not get sham wowed, why would you want to?

Makes no sense to me.

 

[ssimps]

Seriously at the end of the day you "could" deduct interest costs greater than income, ans not get sham wowed, why would you want to?

Makes no sense to me.

If it is all on the table / legal, I agree it makes no sense unless you truely expect to make more than the interest charge after tax adjustment.

But, if of 10% interest paid, 4% is given back under the table, it would make sense even if you lost some $.

Or even worse, if the person borrowing the cash actually gave the cash to the lender, agreeing that the lender' will get 1% of the 10% interest paid for their 'service', it would make sense, as the lender also gives back the paid principal as payments come in.

I know 1 sleezy real-estate person that did this type of thing because the purchaser told me after the fact. In their case the purchaser needed $30K for personal reasons and no one would lend it to them. So they agreed to buy a property the agent owned, financed 100% from private mortgage lenders at 8 - 10% interest rate, but for $60,000 more than the property was really worth. The agent got $30K more than they would have if sold it above board and the buyer got an envelope with $30K in it under the table. I could not believe it, but I guess it does happen

BTW, I believe the examples I gave above are not only sleezy and unethical but also VERY ILLEGAL. I'm not a lawyer though.

People who can't make an honest living, or are very greedy, do bad things I guess. Surprise surprise.

 

[bean438]

Too crazy for me. In addition to interest being disallowed no you have undeclared income plus fraud.

Sham Wow!

 

[leslie]

Fain conclusion "So interest from my margin account is clearly so." may not be correct. As the link given above points out, withdrawing cash will muck up the question of "where the borrowed money was spent".

So IF you are making draws, it is worth having both a margin AND a cash account. Draw from the cash account. Time your transfers between accounts to keep your tax situation kosher.

 

[bean438]

This is where an accountant who specializes in tax law comes in.
Writing off the interest is the easy part, it is drawing from your investments that everything must be structured properly.
Depending on what type of draw you make (ROC, interest, capital gains) you can lose deductibility in some cases of the loan unless things are done properly i.e RCO must be used to pay down loan or deductibility decreases by ROC, and (don't quote me see an accountant) if you borrowed over the years and bought mutual funds and are now systematically withdrawing per month you keep the capital gain portion but have to pay the interest with your original capital to keep deductibility, or something to that effect.
With CRA structure is important.

 

[lb71]

Make sure you keep a paper trail of everything too. Not sure how you are documenting your payments to your friend, but canceled cheques would be good as opposed to cash.