The deduction follows what the money owns now
Interest on a credit line used to invest is not approved once, on the day of the first purchase, and then left alone. Two tests apply, and one of them never stops running.
The first is the purpose test: when the first investment is made, there needs to be a reasonable expectation of income from it, such as interest, dividends or rent. The second is the use testl: unlike the purpose test, the use test is ongoing, and the onus is on the taxpayer to trace the borrowed money to a specific qualified use. CRA's guidance on the carrying charges line says in general that interest on money borrowed to try to earn investment income can be claimed, and that there is no claim when the only earnings are capital gains.
Put those together and the deduction depends on what the borrowed money owns today, not only on what it bought at the start.
A worked example shows the size of it. Take a $100,000 credit line at 4.95 percent, which is $4,950 of interest a year, or $412.50 a month. With the whole $100,000 sitting in non-registered holdings expected to produce income, that interest may be tax deductible, when set up properly with an accountant. The relief would be about $2,149 at a 43.41 percent marginal rate, or about $1,468 at 29.65 percent.
Now suppose that over several years $40,000 of the portfolio moves into a holding expected to produce only capital gains and no distributions. The interest tied to that slice is $1,980 a year. If the slice no longer qualifies, the relief on it, about $860 at 43.41 percent or about $587 at 29.65 percent, may go with it. Relief on the whole line falls to about $1,289 or $881, while the cash interest stays $4,950. After tax, the yearly cost rises from about $2,801 to about $3,661 at the higher bracket, and from about $3,482 to about $4,069 at the lower one.
Drift like this rarely looks like a decision. It comes from rebalancing, replacing a fund, a distribution being cut, or a switch to a growth-only holding for reasons that have nothing to do with the credit line. Whether any particular holding qualifies is a question for an accountant, and nothing here suggests choosing one holding over another.
Three habits keep the question visible. Ask the accountant before a holding changes, not at filing time. Keep each draw tied to a dated record of what it bought. And re-check what the line funds once a year, on the day the interest statement arrives.
