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.

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.

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.

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.

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

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).