Income Tax Q

[shane_c]

I don't feel like calling and waiting on hold for CRA right now so I figure I would ask here.

I received a receipt in the mail from RBC for my car loan. It shows what is owing and how much interest was paid on it. It also says that I may be able to claim this on my income tax. How can I claim it? Is it only if I am using it as part of a business expense and writing it off?

[cSpooge]

the only way to claim is as a business expense... normally interest on loans is only deductible if the loan is for investment purposes.

[Agamemnon]

Originally Posted by cSpooge

the only way to claim is as a business expense... normally interest on loans is only deductible if the loan is for investment purposes.

Is there a specific way to do this? Can I just take money off of my LOC and invest it, deducting the interest? How does that work exactly?

[sixpacked]

Originally Posted by Agamemnon

Is there a specific way to do this? Can I just take money off of my LOC and invest it, deducting the interest? How does that work exactly?

In essence yes. Make sure there is a direct link from the LOC withdrawal and the investment purchase(receipts, etc.). Interest expense calculations will need to be made on that portion of the LOC you invested.

[Agamemnon]

Originally Posted by sixpacked

In essence yes. Make sure there is a direct link from the LOC withdrawal and the investment purchase(receipts, etc.). Interest expense calculations will need to be made on that portion of the LOC you invested.

So, for example, if I pull 1k off my LOC, transferred it to my investment account, and purchased a stock for the same amount, can I use the LOC account history and stock purchase price as 'proof' that I borrowed to invest? Or is it a more formalized process?

[Slava]

Originally Posted by Agamemnon

So, for example, if I pull 1k off my LOC, transferred it to my investment account, and purchased a stock for the same amount, can I use the LOC account history and stock purchase price as 'proof' that I borrowed to invest? Or is it a more formalized process?

As long as there is an obvious paper trail you'll be fine.

[MoneyGuy]

I do this myself. Yes, it'll be okay but don't mix an investment loan and a personal loan in the same account. For example, if you borrow $5,000 for personal use and $10,000 in the same LOC, you've "tainted" the deduction and will lose it if audited. There also has to be an expectation of profit and the potential for income. To determine if there is potential for income, check the prospectus to see if it speaks to income like interest or dividends. If there is no reasonable chance that income may be paid in a year, you may have a problem. I deduct a few thousand dollars a year in interest. Feel free to ask specific questions by PM.

[skins]

Originally Posted by Agamemnon

So, for example, if I pull 1k off my LOC, transferred it to my investment account, and purchased a stock for the same amount, can I use the LOC account history and stock purchase price as 'proof' that I borrowed to invest? Or is it a more formalized process?

That's right, but for a small amount like $1000 it's probably not worth it. You'll get the tax back on your interest payments, so you'll save a bit. But you also now have to make a larger return to cover the interest payments and actually make a decent profit.

Investment firms such as Ernst & Young or The Investment Group can set these kinds of thing up on a much larger scale, like $250,000. They're called leveraged loans and I think they don't require collateral (the investment is the collateral). The idea is, instead of putting $10,000 a year into a savings account or RRSP, you pay $10,000 in interest towards a loan which is invested (at 5% you could borrow $200,000). That way you have a much higher number to start compounding from and you're interest payments are tax deductable. Depending how the investment goes you could owe or own hudreds of thousands of dollars.

Borrowing to invest can either be the smartest or stupidest thing you do financially.

[Slava]

Originally Posted by skins

That's right, but for a small amount like $1000 it's probably not worth it. You'll get the tax back on your interest payments, so you'll save a bit. But you also now have to make a larger return to cover the interest payments and actually make a decent profit.

Investment firms such as Ernst & Young or The Investment Group can set these kinds of thing up on a much larger scale, like $250,000. They're called leveraged loans and I think they don't require collateral (the investment is the collateral). The idea is, instead of putting $10,000 a year into a savings account or RRSP, you pay $10,000 in interest towards a loan which is invested (at 5% you could borrow $200,000). That way you have a much higher number to start compounding from and you're interest payments are tax deductable. Depending how the investment goes you could owe or own hudreds of thousands of dollars.

Borrowing to invest can either be the smartest or stupidest thing you do financially.

Basically anywhere that handles investments can set these up for you actually. Generally the investment is the collateral and you actually don't need huge returns to make this work in your favour, as long as interest rates are low.

Generally you have a break-even point of about 3.5% right now. In other words a return of greater than 3.5% puts you in the black.