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If I borrow cash in my margin trading account which happens to be an RRSP account, does the interest on that money become tax deductible from my income? I know if I put money in my RRSP from my salary income, it becomes tax deductible, but is it the same for money borrowed from margin account?

  • What happens when you have to pay the borrowed money back to the broker providing the margin trading account? Does that count as additional income in the year when you pay it back? Or is repayment of the debt not required? – Dilip Sarwate Jan 26 '14 at 16:57
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    @Dilip: No sarcasm please. – Victor123 Jan 26 '14 at 17:18
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    @Kaushik - understand that asking question to lead one to their own conclusion is the Socratic method. As part of larger problems, I've literally asked high school students 'what's 4 plus 4?' with no sarcasm intended. – JoeTaxpayer Jan 26 '14 at 19:38
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    How can a loan become tax deductible? It doesn't make sense. Can you even have a margin account in RRSP? – littleadv Jan 26 '14 at 20:13
  • @Kaushik No sarcasm was intended; my only motivation was a desire for knowledge that is as fervent as yours (though rarely expressed in the form of questions on this stackexchange). If you are wanting to treat the money borrowed from your broker for the purpose of trading in your RRSP account as personal (and tax-deductible) contributions to RRSP from your current income, what happens when you pay the loan back? Does that money become taxable income to you? If all this happens in the same tax year, is it a wash, but if the repayment is in a different year, you need to report it as income? – Dilip Sarwate Jan 26 '14 at 20:46
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I believe your question is based on a false premise.

First, no broker, that I know of, provides an RRSP account that is a margin account. RRSP accounts follow cash settlement rules. If you don't have the cash available, you can't buy a stock. You can't borrow money from your broker within your RRSP.

If you want to borrow money to invest in your RRSP, you must borrow outside from another source, and make a contribution to your RRSP. And, if you do this, the loan interest is not considered tax deductible.

In order for investment loan interest to be tax deductible, you'd need to invest outside of a registered type of account, e.g. using a regular non-tax-sheltered account. Even then, what you can deduct may be limited.

Refer to CRA - Line 221 - Carrying charges and interest expenses:

You can claim the following carrying charges and interest [...]

  • most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.

[...]

You cannot deduct on line 221 any of the following amounts:

  • the interest you paid on money you borrowed to contribute to a registered retirement savings plan, a specified pension plan, a registered education savings plan, a registered disability savings plan, or a tax-free savings account (TFSA);
  • can you elaborate a bit :'However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.'? It means that if I sell the stocks within a year, I can claim an exemption, but not otherwise? 1 year being the deciding factor whether it is capital gain or not.. – Victor123 Mar 17 '15 at 20:55
  • @Victor123 An investment loan's interest might only be considered tax deductible if the investments purchased could earn investment income other than capital gains. Also, there's no mention of "1 year" anywhere in my answer. Where'd you get that from? I'm wondering if you are mixing up U.S. tax rules with your Canadian income taxes. The U.S. short-/long-term gain classification does not apply to Canadians, even if you invested in U.S. stocks. That holding period would only apply to you if you are also considered a U.S. resident for tax purposes (e.g. a U.S. citizen in Canada.) – Chris W. Rea Mar 17 '15 at 21:18
  • Thank you. Yes, I was of the impression that stocks held for one year qualify as capital gains,and less than one year is taxed as normal income. – Victor123 Mar 18 '15 at 1:24
  • Also, can I use losses incurred on stocks to lower taxes on my rental income? Since both are considered capital gains. – Victor123 Mar 18 '15 at 1:38
  • @Victor123 No. Rental income is not considered a capital gain. The only capital gain likely to arise with respect to an investment property is when the property is sold. Simply renting out the property yields either rental or business income, but no capital gains. – Chris W. Rea Mar 18 '15 at 2:50

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