HELOC and Mortgage Interest as a deduction

Hi David,
Even though I have not get any reply to my last few emails (with a few questions) - not sure if I'm not doing something right or may be it just doesn't reach you, I'm still trying to ask you a question (only one this time).
We're living in a condo and we a HELOC against it. I've been using money from this HELOC to buy a few of my rental property (as a downpayment) and do a Smith Manuver. We're planning buy a new condo (a bigger one since we're expectin of expand of our family). The price for the condo will be almost twice as big as the current amount we own to the bank (mortgage & HELOC together)/
The downpayment for the new property will coming out of HELOC.
My wife is thinking to move to a new place right away but I'm proposing to keep it as a rental (and subsidise it from our pocket) and have all interest (on mortgage and downpayment money) as tax deductable; and then a few years later switch the property purpose for CRA (so current will be a rental and a new one will become our residential).
What do you think we should do (and if my approach is good) and what way would you suggest here???
Thanks in advance and looking forward to hear back from you.

david ingram replies:

If your name is not in the Subject Line, it will not likely be replied to.  Even then, it is getting unlikely because of the sheer number of questions.  To date it has been very rare for me to charge for a question unless it is a phone consultation or an "in person".  However, by October 1, 2007, I am going to start a pay in advance PAYPAL account for people who send questions.  It is the only way to separate them out. As it is, my clients are being ignored half the time and people who will never be a client are getting a question answered.
For instance, I have been gone for three days and on my return have 561 emails to try and reply to.  I will answer about 20 and erase the others - No one can answer the email I get so no one should consider email sent to me to be delivered to me.   As I say, if they are not replied to in two or three days, they are gone. I do look for PAYING CLIENT and the Client's name as it suggests in the subject line and will always try and answer another one first for people who have been to see me and have a follow up dealing with the original consultation. 

You are starting over here.

However, in general, if you are taking down payments for rental properties out of a HELOC on your own residence, the interest is clearly deductible.  BUT, if you take a down payment out of the HELOC for a unit you move into, the interest is NOT deductible.

To be deductible the interest must have been paid on money borrowed for investment purposes.

I gave a free seminar on the subject three weeks ago and we had 91 people out. 

James Golombek of Trimark Fund had an interesting article on page FW4 of the Financial Post Weekend.  He suggests that one should say goodbye to the Singleton Shuffle and then proceeds to say that Cash Damming is fine.  In fact, I think is article is positive and the headline writer misread it.

The following is what I handed out at the seminar.  As I have always said, I believe that proper paperwork will still get the mortgage interest as a deduction if a business reason is incorporated into the process

I have no idea what you should do from your question and am not prepared to spend an hour doing what if's with another 400 questions.

The following is what I handed out at the free seminar which lasted from 12 noon to 5:30 at night on August 12th.
David Ingram's US/Canada Services

Mortgage Interest as a Deduction in 2007 – dealing with GAAR

I first conceived of this method in 1975/76 when a client of mine had a rental duplex and had a tenant who was injured in a car accident.  It was at the time of the changeover from private insurance to ICBC and the injured single mother tenant was waiting for an insurance settlement. 

My client allowed his tenant to stay in the half duplex for more than a year and to stay afloat him self, he borrowed money to pay the duplex bills. When doing his 1975 tax return, we deducted the interest paid on the loan because the purpose of the loan was clearly to fund the rental duplex.   

When he finally got his cheque for more than $5,000 from the tenant, it would have been all over if he had just paid the loan off and we had not thought about it. But my client, bless his soul, phoned and asked if he had to pay off the loan (which was deductible) or could he use the money for another non-deductible purpose.

My answer, after thinking about it for a day or so, was that he could us e the $5,000+ for any purpose he could think of.  At the same time, I said this, I was also writing something for the North Shore Credit Union and put my ‘new’ method of making the mortgage interest deductible in this report which they then published as part of an advertisement in the North shore News in (I think) November, 1976. 

I expanded it and it was next published by Hancock House Publishers in my Investment Guide in 1979, 1980 and 1985 and 1991 and BC Business magazine in 1979. Sometime in there, the Ontario Dental Association also ran it in their magazine. It then became part of the internet and can be found in the March 1997 and November 2001 newsletters.

I was pretty heavily involved in the Federal  Conservative Party (ran for the North Shore Nomination in 19780 and am proud to say that we got mortgage interest as a tax deduction on the 1979 federal Income tax return. 

Unfortunately, Joe Clark, the Prime Minister at the time, did not count the number of yes votes and lost a non-confidence motion on Dec 12, 1979, and on Feb 18, 1980, Pierre Trudeau was re-elected as Prime Minister and even though there was a 4-page form and a line on the T-1 General that year, the deduction was killed retroactively by the liberal government and we no longer had this benefit for all without manipulating the paperwork.

In 1981, Fred Snyder was running a series of seminars and teaching my method to a lot of different groups.  In one seminar, he taught it to Realtors, McCauley, Nicolls, Maitland and Company and the manager Fraser Smith wrote Fred a letter thanking him for explaining the methods.  In 1985, Fraser Smith than published the SMITH MANOUVRE which explains the method in great detail and at the time, VANCITY Savings Credit Union was featured in the book and was very good at setting up the method.

Then on Oct 27, 1988 John Singleton had approximately $300,000 in his lawyer’s capital account.  He got permission to take the $300,000 out (it was his but was being used as security in his law practice).  He used it to buy a house and then used the house as security to borrow $300,000 which he then put into his capital account; this was all done in one day.  Of course, since the money in the account was now borrowed for business purposes, he deducted the interest on his 1988 and 1989 returns and the Tax Department turned him down.  He appealed and lost in the Tax Court of Canada but won in the Federal court of Appeals.  The CRA appealed to the Supreme Court and in October 2001, the Supreme Court of Canada found in favour of John Singleton in a 5 to 2 decision.

This case has now been quoted and cited in many other cases.  In OVERS 2006 TCC 26, Mr Overs paid back a shareholder-loan, which would have been included in his income.  By doing what he did, co-incidentally, the interest expense was made deductible. 

Mrs Overs borrowed funds to purchase shares of his holding company at their fair market value.  However, Mr Overs did NOT use a 73(1) rollover as Lipson did.  Therefore, no capital gain was realized but the attribution rules in section 74(1) worked to transfer the interest expense on the wife’s borrowed funds -- back to him.

Judge Little turned down the CRA’s claim that tax benefits arose from this series of transactions.  The taxpayer followed the Income Tax Act in repaying his loan and transferring the shares to his wife. Justice Little ruled that the transactions were NOT avoidance transactions and therefore GAAR did not apply. Judge Little ruled that none of the transactions could be considered “abusive tax avoidance”.

And Judge Bowman ruled in favour of Evans (2005 TCC 684).  JuJudge Bowman found there were no avoidance transactions in what could only be described as a super complicated and very sophisticated series of business restructurings that ended up with a former shareholder receiving cash by using  specific rules in the Act, including sections 85

(rollovers), 110.6 (capital gains exemption), 112 (tax free inter-corporate dividends), 74.5 (attribution) and ss. 84(3) (deemed dividends).

Judge Bowman assumed that there ‘were’ avoidance transactions.  He then dealt with them on an individual basis to decide whether the avoidance transactions were ‘abusive’.  His final decision was that provisions of the Income Tax Act operated as intended and there could not be any abuse.

However, he was not of the same opinion with the LIPSON Family who lost in Lipson v. The Queen, 2006 TCC 148 

Mr Lipson owned a profitable business and:

  1. The Lipsons contracted to buy a home in Forest Hills in Toronto
  2. Mrs Lipson took out a demand loan to buy share in the family business from her husband.
  3. The shares were transferred to Mrs Lipson as a section 73(1)  rollover
  4. Mr Lipson used the funds to buy the house
  5. They “both” took out a mortgage on the house to repay the demand loan

 Judge Bowman used the Section 245 GAAR provisions to rule that the Lipson family was guilty of Gross Abuse of the Tax system.  Perhaps, if they had a business reason for the loan or had not used the Section 73(1) tax free rollover, he would have found in their favour as he did with the EVANS 2005 DTC 1762 case.  In the LIPSON case the wife’s borrowing did not put income in her hands and it was unclea

The following was an excel spreadsheet that was presented and you might be able to figure it out.




  by david Ingram - www.centa.com

(604) 980-0321



 $  100,000.00 3

Let's pretend that you are paying 6%

0.06  times 6000.00 4


How much do you have to earn to pay 


6000.00 6

     At a  0.3 marginal tax rate

you would need  8571.43 7

you would pay tax of

2571.43 8

To Have enough to pay the interest of

6000.00 9




 $  300,000.00 11

Let's pretend that you are paying 6%

0.06  times 18000.00 12


How much do you have to earn to pay 


18000.00 14

     At a  0.35 marginal tax rate

you would need  27692.31 15

you would pay tax of

9692.31 16

To Have enough to pay the interest of

18000.00 17




 $  600,000.00 19

Let's pretend that you are paying 6%

0.06  times 36000.00 20


How much do you have to earn to pay 


36000.00 22

     At a  0.4 marginal tax rate

you would need  60000.00 23

you would pay tax of

24000.00 24

To Have enough to pay the interest of

36000.00 25


You can easily see that the larger the mortgage payment


the more money you have to make and the larger your


marginal tax rate would be - BC runs from 23% up to $35,000


and is 44% over $118,000 or so




But if the last mortgage of 600000 could be deductible

36000.00 32

the interest paid of  36000 would get a tax deduction of

14400.00 33

and you would only need to earn the difference

21600.00 34

instead of the  60000

on line 23 above


Why only  21600


Well, you could earn 21600 , borrow

14400 (line 33)


 for a few days from Fred, and then pay Fred back with the refund



The difference in earnings is  60000

line 23


minus new necessity of 21600

Line 34


for  an earnings savings of 38400


or a monthly difference of 3200



And, if you are self employed as I am, I would have to do


$200,000 of business and pay $140,000 of expenses to have a profit  of


$60,000 left over to pay the tax on the $60,000 on line 23 (Aug 11, 2007) 47

And this will also show the mathematics of paying down a mortgage with the earnings from a Mutual fund.

Using New Securities Account to make mortgage deductible

This is to show the method only

Most, if not all people buy a Mutual fund and have the dividends reinvested

in the fund.  Do NOT DO THAT if you want a deductible mortgage


Deductible Non   HELOC
Assume you  have a borrowed

100,000 to buy funds and they pay  0.06 original  less Deductible interest
C D E F    New G H I J K L M
You pay  0.06 pay your 35% Tax borrow for Invest't Mutual   earnings worth mortgage earnings original  not de-

borrowed interest Refund new funds loan  Fund 0.06


2007 100000 6000 2100 6000 106000 100000 6000 106000 100000 6000 94000 6000
2008 106000 6360 2226 6360 112360 106000 6360 112360 94000 6360 87640 5640
2009 112360 6742 2360 6742 119102 112360 6742 119102 87640 6742 80898 5258
2010 119102 7146 2501 7146 126248 119102 7146 126248 80898 7146 73752 4854
2011 126248 7575 2651 7575 133823 126248 7575 133823 73752 7575 66177 4425
2012 133823 8029 2810 8029 141852 133823 8029 141852 66177 8029 58148 3971
2013 141852 8511 2979 8511 150363 141852 8511 150363 58148 8511 49637 3489
2014 150363 9022 3158 9022 159385 150363 9022 159385 49637 9022 40615 2978
2015 159385 9563 3347 9563 168948 159385 9563 168948 40615 9563 31052 2437
2016 168948 10137 3548 10137 179085 168948 10137 179085 31052 10137 20915 1863
2017 179085 10745 3761 10745 189830 179085 10745 189830 20915 10745 10170 1255
2018 189830 11390 3986 11390 201220 189830 11390 201220 10170 11390 -1220  

Because the earnings from the mutual fund are mostly dividends and capital gains which are very tax efficient

there will be litle tax on the earnings - certainly less than half of the tax savings in column D

In this example, I have assumed an interest only HELOC and assumed that you would have paid your regular non-dedcutible interest
which would decrease each year because of the principal being paid down in column K. column M represents HELOC interest

Every one's situation is different.  YOUR cash flow will be different.  And to escape GARR, you must be making a business decision
If you wish to make your mortgage deductible.  A perceived increase in earnings from a mutual fund loan would likely be sufficient
but there are NO, NONE, NOT ANY Guarantees.

If this situation interests you, you are advised to get a written financial plan from Fred Snyder FIRST - His Number is (604) 731-8900

david ingram,  home office  phone (604) 980-0321 - Please do NOT phone before 10 AM or after 9 PM but you can phone 7 days a week
there are NO message machines - If you do leave a message with a person, If I do not get back in 4 hours, I WILL NOT BE RETURNING 
the call - I leave it to YOU to follow up. I get over 700 emails a day and my record for phone calls on April 30 2006 was over 140.

Not sure if this will help or not.  What you should do is get Fred Snyder to do a written financial plan for you. see the red a couple of lines up.