Margin interest is a type of investment interest expense, in other words any amount of interest that is paid on loan proceeds used to purchase investments or securities. Check out our blog, The Investment Interest Expense Deduction Just like a bank can lend you money if you have equity in your home, a brokerage firm can lend you money against the value of certain stocks, bonds and mutual funds. With a margin loan, you can purchase additional securities to meet short term financial needs.
You can deduct investment interest expense up to the amount of your net taxable investment income. To be eligible, you must be an investor who borrows money to buy investments, and receives interest, dividends, capital gains, royalties, or other investment income.
Also, you must itemize your deductions on schedule A. You can only take the deduction up to the amount of your net investment income. Any disallowed deduction will be carried over for future use. To calculate your net investment income, you can use the following formula:. Correct, margin interest will still be deductible for tax year as an itemized deduction on Schedule A. However, the standard deduction has increased, meaning most taxpayers will not be itemizing deductions since claiming the standard deduction will prove more tax-efficient in many cases.
The rules for investment interest deduction can be complicated—especially if the transactions involved are complicated. If you use the loan proceeds for something other than purchasing investment property such as rental property interest or business property interest , the rules get even more complicated.
If you decide to borrow against investment property you hold—and hope to deduct the interest—you must be careful and completely understand the rules. If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at or experts henssler.
Skip to content. Investment Interest and Margin Interest. May 23 This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed.
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As with all investments, there are associated inherent risks. This case was about a purchase of privately held shares, so is different from a purchase of publicly traded shares, but the same logic could certainly be applied to interest expense on a purchase of publicly traded shares. If the company has no history of paying dividends, do you have a reasonable expectation that dividends will be paid in the future? It is probably best to avoid using borrowed money to purchase these shares.
Deductible interest expense could include mortgage, loan or line of credit interest, margin interest charged on your brokerage account, or interest paid on Canada Savings Bonds CSB payroll savings programs , as long as the interest was incurred to earn investment income.
Deductible interest expense can include interest on funds borrowed by the taxpayer from a joint line of credit held with the spouse, if the funds are used to purchase investments owned by the taxpayer, and the taxpayer makes the payments of princip al and interest.
If the spouse makes the payments, attribution rules will apply, and the interest expense may not be deductible. For more information on this see:. If the interest is paid to a non-resident, it will still be tax deductible, but see interest expense paid to non-residents. Where the interest expense exceeds the income from the investment, the interest expense will normally still be tax deductible.
See Technical Interpretation E5 pdf re interest deductibility. If the interest expense exceeds all other income for the year, this becomes a non-capital loss , which can be carried back to previous tax years, or forward to future tax years. You must be able to trace borrowed money directly to the purchase of the income-producing investments by the taxpayer. It is important to keep a clear paper trail or electronic document trail of the use of borrowed money.
See Disappearing Source Rules below for what happens when a leveraged investment is sold. Borrowing money to purchase securities such as stocks and bonds is one of the factors that is considered by Canada Revenue Agency in determining whether the taxpayer's gains and losses from the sale of securities are to be treated as income or capital.
See our article on the tax treatment of investments for more information on this. Interest and other deductible carrying charges are claimed as a deduction from income on line was line of the personal income tax return, after completion of Schedule 4 federal. These amounts are not used in the calculation of adjusted cost basis for your investments , so are not used in the calculation of capital gains or losses on investments.
In the Canadian Tax Calculator , interest expense would be entered in "Other expenses". If funds have been borrowed to purchase mutual funds or exchange traded funds ETFs and there are subsequent return on capital payments from the mutual fund, these amounts must be used to pay down the borrowed funds, because the interest will no longer be deductible. Van Steenis used most of the return of capital for personal purposes, instead of paying down the debt. The Tax Court ruled that there is no longer a direct link between the borrowed funds and the investment in mutual funds.
Had Van Steenis paid down the debt or reinvested the return of capital amounts in other investments for which interest expense would be deductible, he would not have had a problem. Interest may still be deductible when the securities purchased with the borrowed money are no longer owned.
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