If you have a home equity line of credit (HELOC) joint with your spouse and you have used to invest be aware that deducting the interest on your investment loan can be a mine field.
Consider the case of Bill and Judy. They have a joint HELOC secured to their family home. Bill withdrew $50,000 from the line of credit and deposited the funds in his joint brokerage account with Judy.
Since Bill makes considerably more than Judy, he pays all of the family expenses, including the interest payments on the line of credit. When tax time comes around Bill and Judy allocate the investment income and interest deductions 50/50. However, the CRA disagrees with this allocation and taxes all of the investment income to Bill and denies half of the interest deduction.
What Went Wrong?
The only way Bill and Judy could split their investment income and the HELOC interest would have been for them to make equal payments on the HELOC. Because Bill made all of the payments meant that the investment loan was for him and the CRA taxed all of the income in his hands.
Since the account was held joint and the apparent intent was that the investments were equally owned, Bill would not be able to deduct half of the interest because it really belonged to Judy.
Confusing? Yes. But let’s look at this a little closer.
Bill Pays For Judy’s Investment Loan
If Judy had borrowed from the line of credit directly but Bill had made the HELOC payments, the investment income would be taxed in Bills hands and the interest expense would be disallowed.
The CRA looks at this way:
Bill is paying the investment loan and is the real contributor to Judy’s account. Bill is taxed However, the investments belong to Judy so Bill cannot deduct the interest despite paying it.
How To Do It Right
The best way to use a joint HELOC to split income and the interest deduction is to ensure you and your spouse make equal payments to the HELOC.
Separate accounts works better but make sure you still make equal payments to the HELOC!