by Ron Clarke
From a tax perspective, there may be better methods of acquiring investments than others as there is a risk of entering the world of investment advice and please do not take in anything as such.
Here is the basic requirement. Interest expense related to loans that are used for personal or business purposes are not tax deductible expenses while interest expenses related to loans used to generate taxable income are generally.
To provide details, in addition to the investment that must generate taxable income or tend to qualify an interest as an allowable expense, there must be a clear and direct relationship between the loan and the investment that the loan allegedly earned. a legal obligation to pay interest, although it need not be in writing and the interest rate is reasonable.
Interest that is considered a tax deductible expense is classified as a book expense by the Canada Revenue Agency (CRA) and is claimed on your tax return as per Appendix T1-INV.
With the RRSP investment deadline ahead given the tax season ahead, I can anticipate your thinking. However, before committing to a loan to invest in your RRSP, wait as, as always with CRA, there are exceptions. In this case, the interest on a loan that is used to invest in an RRSP is not tax deductible, although the RRSP growth is ultimately taxed when it is paid out.
Since growth within a TFSA is not taxed, the interest paid on a loan to invest in a TFSA is understandably not tax deductible.
Aside from this detail, credibility resides in the aforementioned premise.
If you are able to have personal loans and also own taxable income generating investments, you may find it beneficial to follow the “Interest Expense Shuffle” for tax purposes.
Pay off investments.
If necessary, pay capital gains tax.
To pay off a debt.
Take out a loan.
Acquire taxable income generating investments.
Request interest expense on investment loans as book costs.
Of course, if the investment brings large capital gains, the tax consequences of the sale must be seriously considered. Clearly there can be no tax benefit when this blending is done.
Notably, if there is a loss of capital on the sale of the investment, CRA will not allow the loss to be recovered if the same investment is purchased within 30 days of the sale or repurchased within 31 days of the date of the sale. During this 61 day period, the special CRA “Superficial Loss” rule applies, which denies entitlement to a loss of capital on the sale of investments.
Given that there can be viable strategic reasons for reinvesting in a lost investment, the typical course of action is generally to dispose of the lost investment, use the money freed up to pay off debts, and then take out new credit in something other invest. This would provide an opportunity to claim the loss of capital and also incur the interest on the new investment loan.
One last word before you take any investment action, seek advice from a licensed financial advisor.
Ron Clarke has an MBA and is the owner of JBS Business Services in Trail, which provides accounting and tax services.
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