Deducting Interest And Joint HELOC

by Tax Guy - Burlington Accountant on August 12, 2009 Print This Post Print This Post

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!

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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Dave D August 14, 2009 at 10:35 am

What if the HELOC is paid from itself. eg. Bill takes out the HELOC an amount equal to the monthly interest payment and then puts it back into the HELOC triggering a the interest payment.
I believe it is called capitalizing the interest.

Tax Guy August 14, 2009 at 12:43 pm

@ Dave D:

Bill draws from the HELOC and places it in his account. The interest pays Bill and he pays the HELOC. No attribution and the interest income is offset by the interest expense.

Dave D August 14, 2009 at 2:48 pm

Under which part of the Tax account does this fall?

Tax Guy August 14, 2009 at 3:07 pm

It is on the income account. You may only deduct interest to earn income.

Kyle November 21, 2009 at 12:15 pm

What about a scenerio where a couple has a joint bank account and joint HELOC but seperate investment accounts. Both spouse’s work and have payrolls deposited directly into the joint bank account. The HELOC interest payments are made automotically from the joint bank account so are not really atttributable to either spouse. If the lower income spouse borrows money from the HELOC to make an investment in their seperate investment account, are they allowed to deduct 100% of the interest from the HELOC?

Tax Guy November 21, 2009 at 6:13 pm

@ Kyle,

The Income tax Act requires that each spouse account for each and every dollar earned.

I would assume that in the case where there is a single joint bank account, that the allocation would be based on the proportion of contribution of capital of each spouse to the account.

Andrew December 3, 2009 at 4:22 pm

Here is our plan for a HELOC, would you be able to let me know if it is correct:
Home is owned jointly. Take out HELOC (must go in both names, is this correct?).
Invest HELOC in higher interest/dividend investments than loan rate.
Use interest/dividends to repay all loan interest.
I assume that all gains if investments are sold will be attributable to both spouses equally in this case (and excess dividends).
There is no tax credit here as dividends are paying off the interest?
Can the lower earning spouse take out the HELOC in their name only even though the home is jointly owned?

Tax Guy December 3, 2009 at 8:20 pm

@ Andrew:

The attribution of income and capital gains will be distributed proportionally between both spouses based on the proportion of payment of the HELOC. If he pays $75 and she pays $25 of the HELOC then the split is 75/25.

The income is different from the expenses. Your dividends (if from Canadian companies) are still subject to the gross-up and tax credit.

The names on the HELOC is irrelevant as is the ownership of the home. The Tax Act looks to who is making the payments.

Andrew December 4, 2009 at 12:22 am

Thanks Tax Guy.
If I understand correctly, the HELOC could be in both names, but to avoid problems the investment account drawing funds from the HELOC should be in the name of one spouse. Then if the plan is to use dividends from the investments to pay for the interest on the credit line, they will be drawn from that investment account, keeping all transactions in the one spouse’s name (or any other payments to the HELOC).
In general for this example, does it make sense for the lower income earner to have the investment account?

Tax Guy December 4, 2009 at 10:22 am

@ Andrew:

The “legal” title is irrelevant to tax law. Rather the tax law looks through the legal structure and looks at the beneficial arrangement.

Therefore, it does not matter if the HELOC is in the name of only one spouse. It matters whose money was used to pay the HELOC.

If you want to use your HELOC to invest AND split the income you need to make sure that you and your spouse make equal payments to the HELOC at the same time. You’ll need to be able to prove the source of funds – to do this you need to have separate bank accounts: once where your pay goes into and another where he pay goes into (these can both be joint accounts for convenience).

Dave D January 5, 2010 at 11:21 am

Can you link to the section of the income tax act where it states that allocation is based on percentage of who repays loan if the loan is jointly held?

Tax Guy January 5, 2010 at 11:53 am

@ Dave – It is not specifically in the act. The CRA has indicated in their interpretation bulletins that interest on borrowed funds used to gain or produce income is deductible from income. They have clarified this by stating that the source the funds must be traceable to the use of funds. This indicates that if the proceeds of a loan are used for more than one purpose or shared between spouses, that he interest deduction must be in proportion to the amount used for investment.

Further, with respect to the payments on the HELOC, the payments made should be in similar proportion to its use.

Kevin February 16, 2010 at 7:15 am

I am so glad to land on this blog after searching in google.
We have somewhat of a similar situation and I did not realize it will get this complicated. Don’t know where to go for help before we file for taxes this year. I don’t think the Tax filers/Accountants know all this. I need to find a good Tax lawyer.

Anyways, hoping the TaxGuy can help meanwhile.
We have a condo jointly owned as our principle residence until Aug of 2009. The mortgage was a full HELOC. Husband was the only earner in 2009. We also had a joint chequing account from which the payments to this HELOC Mortgage were being made.
In Jun 2009 we created a sub-account of $15k from this HELOC and put in a stock brokerage account owned by Husband. We were then paying interest only payments into this account and are doing till this date from the joint chequing account.
The stocks were sold in Sep 2009 incuring a loss of $11,000. Proceeds from this sale were then put into the joint chequing account and then into the HELOC sub-account. Remaining loan still continues, with interest only payments being made.
Meanwhile, the condo converted from principle residence to investment property from Sep 2009. The rental income is deposited into the joint chequing account and all expenses(condo fee, property tax, rental insurance etc) are paid from this joint account.
Looks like we are now in trouble for holding this joint account.
My plan was to split the $200 or so per month income from condo rental equally and carry forward the capital loss from investment to offset against future capital gains in husbands name.
I am not clear if we would be denied the interest deduction on the HELOC Sub-account since we sold the investments in Sep 2009. I figured since that loan was for investment and interest is tax deductible, I keep that and instead of pay off the mortage on our current principle residence.

Sorry,this is all too much info to post on a blog comment, but I am now worried and want to do things right, but cannot get straight forward replies from CRA at all and would be directed to go an accountant who might not know the rules.
Any recommendations for a good tax lawyer in Toronto, Pickering, Scarborough area would be appreciated.

Tax Guy February 16, 2010 at 8:27 am

First of all, the situation is not that bad. You will need to prove ownership of the condo (joint or individually owned), who made payments to the HELOC, and where the income came from.

I would not suggest hiring a lawyer simply because there are no “legal issues” here: You do not appear to have attempted to hide income. Whether you hire a lawyer or accountant, they will both end up doing exactly the same thing but the lawyer will cost you a lot more. Find a good accountant to file your taxes this year.

I don’t know of any accountants in Scarborough, but I would contact a few in your area. Ask each of them what their experience is with rental property and with borrowing to invest.

Kevin February 17, 2010 at 7:43 am

Thanks for the reply.

Do you know what the law with regards to deducting interest paid on a loan taken out for investing in stocks, which you have now sold at loss, but the loan is unpaid yet.

Tax Guy February 17, 2010 at 8:18 am

@Kevin – If you have borrowed to invest and then have disposed of the investments for less than the loan, you can continue to deduct the interest on the excess, provided you used the proceeds of the sale to pay down the loan. The excess being the difference between the loan and the proceeds of the sale. This is permitted under s.20.1 of the Income Tax Act – Here is an alternate link. You can also read a better version of this at paragraph 19 of CRA Document IT533.

Javed December 2, 2010 at 12:08 pm

I am trying to do the Smith manoeuvre. I have invested the Heloc amount into stocks. some of them are for long term (dividend) and some are short term trading. I started in Sept. this year. Now I have some taxable capitol gains + losses(after buying and selling) and some dividends. After withdrawing the amount, the book value of my portfolio will still be higher than my Heloc amount. My question is can I withdraw the amount equal to my capitol gains and dividends to pay the mortgage down, while still keeping my Heloc fully tax deductable.

Tax Guy December 4, 2010 at 1:07 pm


When you buy a stock, it’s cost plus any commissions are added to the cost base. When you sell the proceeds, less any commissions are deducted from the cost and the difference is a capital gain or which 1/2 is taxable. You cannot withdraw the “cost” or “book value”.

Second, you can deduct the interest on borrowed money if the investment is used to gain or produce income from property. This includes interest, dividends, rents, royalties. It does not include capital gains. If you are a heave trader and most of your gains are capital, your interest deductibility may be compromised because the CRA may tell you that your investing is only for capital gains.

Finally, the source of funds must be traceable to the use of funds. If you borrow to invest, then cash out some investments and pay the mortgage (not the HELOC) you may taint your structure and face a denial of deductions.

You should hire someone to advise you.

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