How to Trace HELOC Interest for the CRA
If you borrow against your home to invest, the interest is only deductible for the part of the borrowing you can show went into an investment. This guide covers what to record, how to handle a draw that is only partly invested, and the mistakes that make the trail hard to follow.
The short answer
For each dollar you borrow, be able to show where it went. Keep a record of every draw (date, amount, what it paid for), the matching purchase (date, amount, confirmation), every repayment, and the interest the lender charged. Interest on the part used to earn investment income is generally deductible; interest on the part spent on anything personal is not. A running ledger turns that into one number at tax time.
What "tracing" means
Interest is generally deductible when the borrowed money is used for the purpose of earning income from a business or property (paragraph 20(1)(c) of the Income Tax Act). What counts is the use of the borrowed money, not the security for the loan: a loan secured by your home can still fund an investment. The Supreme Court of Canada confirmed the use-of-funds approach in Singleton v. Canada (2001), and the CRA describes its position in Folio S3-F6-C1, Interest Deductibility. Tracing is the habit of keeping the evidence that connects the loan to its use.
The investments also need a reasonable expectation of earning income, such as dividends or interest, not only growth. The details depend on your situation, so confirm yours with an accountant. The complete Smith Manoeuver guide covers the mechanics around this.
What to record
| Event | Write down | Keep as proof |
|---|---|---|
| Draw | Date, HELOC account, amount, what it was for | Lender statement |
| Investment | Date, amount actually invested, what you bought | Trade confirmation |
| Personal use | Date and amount of any part spent on something else | Receipt or statement |
| Repayment | Date and amount of principal repaid | Lender statement |
| Interest | Interest charged each month | Lender statement or year-end summary |
When only part of a draw is invested
This is the case most guides skip. Say you draw $1,325 from the HELOC, invest $1,025 and spend the other $300 on a car repair. Only the $1,025 was borrowed to invest. The $300 is personal borrowing, and the interest on it is not deductible, even though it came from the same draw. Writing it down as it happens is far easier than reconstructing it later.
One way to split the interest is by share of the balance. Each month, work out what fraction of the average balance was borrowed to invest, and apply it to that month's interest. If the average balance was $10,000 and $8,000 of it was borrowed to invest, 80% of that month's interest is the deductible part. Add up the twelve months for the year. This is a record-keeping method and not a CRA formula, so ask your accountant whether it suits you.
- Late investing. If the money sat in an account for days or weeks before you invested it, record the gap and the reason.
- Repayments. Record every principal repayment. When one loan is used for both purposes, you cannot choose to repay the personal part first: the CRA treats a repayment as reducing both parts in proportion (Folio S3-F6-C1, paragraph 1.43). Its example: a $100,000 line of credit with $60,000 used personally and $40,000 invested is 40% eligible. After a $20,000 repayment the balance is $80,000, and interest on $32,000 (40% of $80,000) is deductible.
- Timing. A purchase you made before you borrowed cannot be linked to that later borrowing, so invest after the draw and keep the dates.
- Mixed-use draws. Record the personal part openly. Hiding it makes the whole trail harder to defend. Keeping personal borrowing on a separate loan avoids the proportional repayment effect.
Common mistakes
- One shared HELOC for everything. Renovations, groceries and investing on the same sub-account make the split hard to prove. Use a separate sub-account for investing.
- Routing the money through chequing. If a draw passes through your everyday account, the trail gets muddy. Send it straight to the brokerage account.
- No trade confirmations. The statement shows the draw. The confirmation shows the purchase. You want both.
- Reconstructing in April. Records made at the time are easier to trust than a rebuild a year later.
- Assuming growth-only holdings qualify. Check that what you buy can reasonably earn income.
At tax time
Interest you can tie to investing is generally claimed as a carrying charge on line 22100 of your T1 return. Your accountant or tax software handles the forms. What helps most is a one-page summary: total interest charged, the share that is deductible, and the reason for any part that is not, with the supporting statements and confirmations behind it.
Year-end checklist
- Investing sub-account kept separate from personal borrowing
- A draw record with a matching trade confirmation for each investment
- Any personal use written down, with the repayment if you made one
- Monthly interest from the lender, and the deductible share worked out
- A summary your accountant can check against the statements
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
Keep the trail in one spreadsheet
The HELOC Interest Tracing Ledger records draws, investments, personal use and repayments, flags partial or late investing, and works out the deductible interest for a line 22100 summary. Look at a filled-in sample first; it is free.