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I have a rental home for a few years so I have some premium that I can take out. I am wondering if the interest incurred is tax deductible against the rental income? Does it matter what I use the line of credit for? I think that if I use the money for renovating or maintaining the rental property then it is. However, what about I pay down the debt on my principle residence? How about if I invest in TFSA? Thanks!
 

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I have a rental home for a few years so I have some premium that I can take out. I am wondering if the interest incurred is tax deductible against the rental income? Does it matter what I use the line of credit for? I think that if I use the money for renovating or maintaining the rental property then it is. However, what about I pay down the debt on my principle residence? How about if I invest in TFSA? Thanks!
Doesn't matter what it was borrowed against (in your case, your rental property). The only thing that matters is what the borrowed funds were used for. Renovating and maintaining the rental property, I believe so. Investing in a Non-registered account (not TFSA or RRSP), yes. Not paying down debt on your principal residence, or buying a personal vehicle, or renovating your home.
 

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Money used for investments are tax deductible. So yes on Reno’s to the rental property. Yes to TFSA. No to paying down to principal residence.
 

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+1 ... the only way I have found that a TFSA can be used is to be the collateral for the loan where the loan was used to buy eligible securities in a taxable account. IOW, the TFSA is functioning the same as the rental property or primary residence.


Cheers
 

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I have a rental home for a few years so I have some premium that I can take out. I am wondering if the interest incurred is tax deductible against the rental income?
Yes.


Does it matter what I use the line of credit for?
No.

re: Interest paid for non-registered investments are tax deductible. Interest paid on money borrowed for TFSA, RRSP ARE NOT tax deductible.

If you cannot fill up your RRSP or TFSA then you really shouldn't borrow to invest. Just me.

Good luck!
 

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... Does it matter what I use the line of credit for?
No ...
The OP does talk about using the HELOC to pay down their principal mortgage debt so do you have some references to confirm the use won't matter?

CRA's bulletin on Interest Deductibity says:
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.
https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-6-interest/income-tax-folio-s3-f6-c1-interest-deductibility.html#p1.25

Unless something provides an exemption to this, it is hard to follow how paying down one's principal residence debt could to argued to be used for earning income.


Later on in the bulletin, the Supreme Court of Canada is quoted as saying the onus is on the taxpayer to trace the borrowed funds to an identifiable use which triggers the deduction. There is also the comment that interest is deductible only if there is a sufficiently direct link between the borrowed money and the current eligible use.


Perhaps you were thinking only of the rental property uses and missed what looks like to me to be ineligible uses (ex. principal residence, contributing to a TFSA)?


Cheers


PS
This seems similar to the recommendation for one to liquidate their investments, pay off the primary residence deb then use the HELOC to borrow to replace the investments instead of using the HELOC funds to pay off the primary residence debt
 

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I have a rental home for a few years so I have some premium that I can take out. I am wondering if the interest incurred is tax deductible against the rental income?
Yes.


Does it matter what I use the line of credit for?
No.

re: Interest paid for non-registered investments are tax deductible. Interest paid on money borrowed for TFSA, RRSP ARE NOT tax deductible.

If you cannot fill up your RRSP or TFSA then you really shouldn't borrow to invest. Just me.

Good luck!
You can’t take out money from a rental’s equity and then write it off against that same rental unless it was used for improvements or maybe a special assessment on that property.

The only way to write off the interest is to invest that money again somewhere else.

It does matter what you use the line of credit for, you can’t buy yourself a car for example or other toys and still write off the interest.

Investing in a non-registered account, or in more real estate is not always a bad situation, even if your RRSPs or TFSA isn’t maxed out. Real estate has had better returns for me than stocks, but I can’t put either into those types of accounts. I also can write off the interest in a non-registered account, and defer taxes by not trading, so there can be benefits to that scenario as well.
 

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It's almost certainly the case that you can't borrow against a rental property, use the money for something unrelated to the property, and claim an interest deduction to reduce rental income. I also expect it wouldn't matter if the money borrowed was a mortgage or a line of credit. However, what would probably alert CRA is a change in returns: if you went from zero interest claimed one year to lots of interest claimed the next, someone might notice and ask questions (if you could prove that you'd used the money to improve the property, no problem). If on the other hand one had borrowed against a property before turning it into a rental, spent the money on a lavish vacation, but consistently claimed interest expenses from day one, CRA probably would not sense that anything was amiss.
 

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It's almost certainly the case that you can't borrow against a rental property, use the money for something unrelated to the property, and claim an interest deduction to reduce rental income ...
Not sure what the problem would be ... if one's total income includes rental income where the interest deduction is allowed, it will be applied to one's total income, no matter what it is made up of.

Or maybe you are thinking of some sort of corporate structure that somehow has the rental borrowing buying something that has to be reported on an individual's tax return while the rental income is on the corporate one?


I also expect it wouldn't matter if the money borrowed was a mortgage or a line of credit. However, what would probably alert CRA is a change in returns: if you went from zero interest claimed one year to lots of interest claimed the next, someone might notice and ask questions (if you could prove that you'd used the money to improve the property, no problem). If on the other hand one had borrowed against a property before turning it into a rental, spent the money on a lavish vacation, but consistently claimed interest expenses from day one, CRA probably would not sense that anything was amiss.
Agreed on both counts ... however, I wouldn't want to risk it as there may be some other issue that gives rise to requests for documentation or random selection for an audit.


Cheers
 

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Not sure what the problem would be ... if one's total income includes rental income where the interest deduction is allowed, it will be applied to one's total income, no matter what it is made up of.

Or maybe you are thinking of some sort of corporate structure that somehow has the rental borrowing buying something that has to be reported on an individual's tax return while the rental income is on the corporate one?
When you file the return for a rental property (I have no idea what the form number is because it's all handled by software) you enter revenue (rent received) and subtract the various expenses (mortgage interest, insurance, property tax, etc.). The net income or net loss is then added to your personal income (divided between spouses in case of joint ownership). So while yes, you effectively write off that interest against total income, it's still associated with the property.

But since CRA doesn't really know what's going on or what the money borrowed was really used for (see example below) the only thing likely to alert them to a potential issue is a sudden change on your returns, for instance claiming interest after years of not doing so.

Example:

1. You inherit a house from a spinster aunt. You put a mortgage on it, use the money for a blow-out weekend in Vegas, then start renting the house. You deduct mortgage interest from rent received.

2. You take out a mortgage to buy a house as an investment, and rent it. You deduct mortgage interest from rent received.

As far as CRA is concerned, those two scenarios look identical. But in the first case, technically, you probably should not be deducting mortgage interest. Not that anyone would know.
 

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It would seem I wasn't clear ... the part I was questioning was the requirement that almost exclusively, funds borrowed against the rental property have to be used in a way that's related to the property for the interest charges to be tax deductible.

Here are a couple of examples that I understand it, the interest would be tax deductible but the use has nothing to do with the rental property.

Example 1 ... use the rental property HELOC funds to buy another rental property. The interest would still be on for T776, with the net transferred to line 126.

Example 2 ... use the rental property HELOC to buy in a brokerage account qualified investments to earn investment income. The rental mortgage interest goes on T776 with the net being transferred to line 126. The HELOC interest for the brokerage portfolio goes on line 221, completely separate from form T776.


In both cases, the only connection to the rental property is that it is collateral to likely get a better rate or to provide stop gap funding until a separate mortgage can be arranged.
Like the CRA interpretation bulletin says ... the traceable use of the funds is what matters to take the interest deduction.


I agreed CRA won't have obvious red flags so the both examples of a lavish vacation or Vegas blowout are a distraction.


Cheers
 

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It would seem I wasn't clear ... the part I was questioning was the requirement that almost exclusively, funds borrowed against the rental property have to be used in a way that's related to the property for the interest charges to be tax deductible.

Here are a couple of examples that I understand it, the interest would be tax deductible but the use has nothing to do with the rental property.

Example 1 ... use the rental property HELOC funds to buy another rental property. The interest would still be on for T776, with the net transferred to line 126.

Example 2 ... use the rental property HELOC to buy in a brokerage account qualified investments to earn investment income. The rental mortgage interest goes on T776 with the net being transferred to line 126. The HELOC interest for the brokerage portfolio goes on line 221, completely separate from form T776.


In both cases, the only connection to the rental property is that it is collateral to likely get a better rate or to provide stop gap funding until a separate mortgage can be arranged.
Like the CRA interpretation bulletin says ... the traceable use of the funds is what matters to take the interest deduction.


I agreed CRA won't have obvious red flags so the both examples of a lavish vacation or Vegas blowout are a distraction.


Cheers
Exactly correct. It is important to report the interest expense to purchase non rental properties in proper category. If this additional interest were shown as rental expense, it could result in not being able claim as much CCA.
 

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I agreed CRA won't have obvious red flags so the both examples of a lavish vacation or Vegas blowout are a distraction.
To keep it simple, my point to the original poster (which I probably meandered away from) is that a sudden change on an existing rental property, from zero interest claimed over several years then mortgage-sized interest claimed, might be a red flag for CRA. Whereas interest consistently claimed year after year (regardless of what the loan was used for) is likely to go unchallenged.
 
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