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How to deal with interest expenses from IB margin loans for your Canadian taxes


rukawa
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I use IB to invest in foreign stocks. IB's default is that you just invest directly in the foreign shares and they setup on automatic margin loan. They charge interest on the margin loan and they pay you interest on your cash balance in CAD. When IB send you your tax forms your T5 will automatically have the interest coming from your Canadian cash balance.

 

However the interest you paid on your foreign negative cash balances is something you have to declare as Interest expenses on money borrowed to earn investment income which is line 221 of the federal tax return. As far as I can see the CRA only allow you to claim this interest if you are buying a share that is expected to pay dividends. See here:

https://www.taxtips.ca/personaltax/investing/interestexpense.htm

You can deduct interest and carrying charges incurred to earn income from securities, bonds and other Canadian or foreign investments, if they are earning investment income.

 

I'm curious as to who has done this before and how they normally deal with this?

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I do it every year.  Just grab your total interest expense and plunk it in.  CRA has never questioned me about it.

 

 

SJ

 

Do you examine which margin loans where used to buy stocks that are dividend paying or just take the total interest expense?

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I don't.  I just assume if the quantity I have invested in dividend-paying investments is greater than the amount I have in margin that I'll be fine.  (That said, it's never even close to being an issue, since I rarely use margin and when I do, it's easily less than the 5% of my portfolio range.)

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I do it every year.  Just grab your total interest expense and plunk it in.  CRA has never questioned me about it.

 

 

SJ

 

Do you examine which margin loans where used to buy stocks that are dividend paying or just take the total interest expense?

 

About the only stock that I own which doesn't pay divvies is BRK, and I have not bought that one on margin (it would have been a good idea to do so!).  Pretty much every other security has at least a trivial dividend.

 

But think about it from CRA's perspective.  If you are reporting say $30k or $40k of dividends and then you also report say $4k of interest deductions, why would that raise a red flag on their end?  If I worked at CRA, what that would tell me is that somebody has about $1m of invested assets to generate the divvies and they might have borrowed $100k to trigger the interest.  Nothing too weird with that.  But, I guess in the end, if they get curious and ask for supporting documentation to link the borrowing to a divvy, it would be a pain in the ass.

 

 

SJ

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I use IB to invest in foreign stocks. IB's default is that you just invest directly in the foreign shares and they setup on automatic margin loan. They charge interest on the margin loan and they pay you interest on your cash balance in CAD.

 

Convert CAD to foreign currency. It seems you are not using margin then why keep the margin loan?

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It doesn't matter if dividends exceed or not interest expense. Carrying cost is often negative. It doesn't matter if you earn 1$ and pay 10000$ in interest. Actually it doesn't even matter if the stock does not pay a dividend at all. The rule I believe is IF the stock does not explicitly stated in the 10k or annual report 'we have no intention of paying a dividend ever'. If the legalaze is something like we may pay a dividend in the future or we will consider it it's also ok.

It's a bit of a grey area for Berkshire. They said they never paid one in the past (which does not mean they never will technically). Buffet has recently said at a few annual meetings IF certain conditions are met or after his death management may consider a dividend I believe this also strictly qualifies.

Unless Cra explicitly states NO dividend now, No deduction I believe their intent is to allow almost all deduction except those that explicitly stated in articles of incorporation we will never pay a dividend or plan to ever pay one. This would equalize real estate investor mortgage deduction benefit with stock investors.

 

That's my understanding anyway.

 

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You're likely to have no questions asked, especially if, over time, there is no significant discrepancy between the deduction and income received from securities. Recurrent use of deduction without any material income would probably flash a red light on their algorithms. But rules are rules and when CRA gets into the action, they hold the better hand and then it's all about interpretation (which includes subjective intent).

The idea of buying and holding a security that does not pay income but that may eventually is likely to be sufficient but context matters.

For reference:

https://www.taxtips.ca/personaltax/investing/interestexpense.htm

The safe (and easy) thing to do is to match (in your documentation) the margin amount to a specific security(ies) that does(do) pay a dividend.

 

 

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I use IB to invest in foreign stocks. IB's default is that you just invest directly in the foreign shares and they setup on automatic margin loan. They charge interest on the margin loan and they pay you interest on your cash balance in CAD.

 

Convert CAD to foreign currency. It seems you are not using margin then why keep the margin loan?

 

The margin load essentially has the effect of hedging your fx exposure.

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