Jump to content
Premed 101 Forums
rmorelan

Bank of Canada Rises Rates - again!

Recommended Posts

8 minutes ago, shematoma said:

Even at these interest rates, there are those of us taking out our LOC to invest in the stock market. There's a big correction in the market right now and the interest you pay on a line of credit can be deducted off the top of your income in most cases. The exceptions are if you put the money into RRSP or TFSA.

You have to be careful regarding income streaming rules. You need to be very diligent in separating LOC money used for investing versus LOC money used for general life purposes (e.g., tuition, etc.). Some court cases have challenged people using general-purpose loans/LOCs for investing purposes and then going to claim interest. 

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-6-interest/income-tax-folio-s3-f6-c1-interest-deductibility.html#N10425

1.43 The flexible approach to tracing/linking borrowed money to eligible uses cannot be applied to the repayment of borrowed money where a single borrowing account (such as a line of credit, mortgage or loan) is used for eligible and ineligible purposes. In the CRA’s view, any repayment of the principal portion of a borrowing would reduce the portions of the line of credit, mortgage or loan that are used for both eligible and ineligible purposes.

Example 10

Assume an individual has a $100,000 line of credit. The individual uses $60,000 for personal purposes and $40,000 to acquire income-producing property. Accordingly, 40% of the line of credit is used for eligible purposes. Where a repayment of a portion of the borrowed money occurs, it will be necessary to apply this percentage to the remaining balance of the line of credit to calculate how much interest is deductible. If the individual makes a $20,000 payment, the balance on the line of credit will be $80,000. The individual cannot allocate the repayment specifically to the ineligible portion of the borrowing. Instead, applying the original eligible use percentage to the balance, interest on $32,000 of the borrowed money (being 40% of $80,000)will be deductible.

Share this post


Link to post
Share on other sites
3 hours ago, la marzocco said:

You have to be careful regarding income streaming rules. You need to be very diligent in separating LOC money used for investing versus LOC money used for general life purposes (e.g., tuition, etc.). Some court cases have challenged people using general-purpose loans/LOCs for investing purposes and then going to claim interest. 

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-6-interest/income-tax-folio-s3-f6-c1-interest-deductibility.html#N10425

1.43 The flexible approach to tracing/linking borrowed money to eligible uses cannot be applied to the repayment of borrowed money where a single borrowing account (such as a line of credit, mortgage or loan) is used for eligible and ineligible purposes. In the CRA’s view, any repayment of the principal portion of a borrowing would reduce the portions of the line of credit, mortgage or loan that are used for both eligible and ineligible purposes.

Example 10

Assume an individual has a $100,000 line of credit. The individual uses $60,000 for personal purposes and $40,000 to acquire income-producing property. Accordingly, 40% of the line of credit is used for eligible purposes. Where a repayment of a portion of the borrowed money occurs, it will be necessary to apply this percentage to the remaining balance of the line of credit to calculate how much interest is deductible. If the individual makes a $20,000 payment, the balance on the line of credit will be $80,000. The individual cannot allocate the repayment specifically to the ineligible portion of the borrowing. Instead, applying the original eligible use percentage to the balance, interest on $32,000 of the borrowed money (being 40% of $80,000)will be deductible.

I don't use the LOC for any purpose other than investing.

Share this post


Link to post
Share on other sites

Your point is taken though... if someone needed the LOC for personal purposes, perhaps they could ask their bank to split the total LOC limit over 2 separate lines (i.e. 200K + 100K) , so that one account is used only for investing, and the other account for personal purposes, to keep things separate. Kind of complicated but doable.

Share this post


Link to post
Share on other sites
On 10/23/2018 at 10:47 PM, rmorelan said:

assuming we don't spiral into a recession at some point - we haven't had one in a long time actually. That is the one "surprise" factor that is hanging out there. They are raising the rates because at present the economy is doing very well. Shifts when they occur are ha as you know not nearly as predictable as they make them out to. At least with rate rising I suppose their well be some flexibility in things. 

 “Let me conclude by pointing out that, even with last week’s increase in the policy rate to 1.75 per cent, monetary policy remains stimulative. In fact, the policy rate today is still negative in real terms, that is, once you adjust for inflation. Our estimate of neutral is in a range—currently 2 ½ to 3 ½ per cent. The policy rate will need to rise to neutral to achieve our inflation target.” - from Poloz the man himself!

https://www.bankofcanada.ca/2018/10/opening-statement-october-31-2018/

Share this post


Link to post
Share on other sites
2 hours ago, la marzocco said:

 “Let me conclude by pointing out that, even with last week’s increase in the policy rate to 1.75 per cent, monetary policy remains stimulative. In fact, the policy rate today is still negative in real terms, that is, once you adjust for inflation. Our estimate of neutral is in a range—currently 2 ½ to 3 ½ per cent. The policy rate will need to rise to neutral to achieve our inflation target.” - from Poloz the man himself!

https://www.bankofcanada.ca/2018/10/opening-statement-october-31-2018/

Ha certainly points the way they are going to move forward in the future. Not that they really have any idea though when things crash. They were all jumping up and down about how positive things were right up to the melt down in 2008 too. 

Still it is best to plan I think for a much more brutal interest rate going forward. Close to doubling the interest payments of a few years ago when they are done. Coupled with the falling Canadian dollar doesn't make the US nearly as nice an option as it used to be. 

Not all doom and gloom but really you have to be careful with those LOCs to say the least. 

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×