The fastest way to lose the tax break on this whole strategy has nothing to do with the market. It is which account the borrowed money touches first. When you make your mortgage tax deductible, you are borrowing from a line of credit and investing that money. The rule is simple in spirit: you can deduct the interest only if you can trace that borrowed dollar straight to the investment. The Canada Revenue Agency cares about the direct use of the money, not just that you happen to own investments somewhere. So picture the common mistake. You pull the borrowed money into your everyday chequing account, the same account where your pay lands and your groceries and coffee come out. Now the borrowed dollar and your own money are mixed together in one pile. The clean trail from the credit line to the investment is gone. If you are ever asked to show it, you cannot, and the deduction on that interest can be denied. The fix is boring and it works. Open a second chequing account and use it for nothing else. Borrowed money from the credit line goes in. Investment contributions and the credit line interest come out. That is all it ever does. No pay, no bills, no coffee. Your regular chequing account stays exactly as it always was. Say you have converted $50,000 this way. At about 4.95 percent, that is roughly $2,475 of interest in a year, which at a 43 percent marginal rate is about $1,064 back. That whole refund is riding on a clean paper trail. Lose the trail over a lazy account setup and you can lose the deduction, even though nothing about your actual investment changed. The paper trail is the strategy. Keep the account clean.
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4 Comments
David Shadowpin@shadowpin · 18d
Why would you send the borrowed money into a chequing account in the first place though? It should be sent to a non-registered cash account for buying assets generating investment. Are you saying a chequing account can function an investment account too?
Winfred @jwhinvesting · 18d
Thanks. This topic doesn't get talked about enough
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