Skip to main content
investor clinic

I have a portfolio of blue-chip, dividend-paying stocks valued in the mid six figures. My plan is to set up a margin account and use borrowed funds, when necessary, to take advantage of investing opportunities and also to pay for living expenses. For example, I would like to buy a new vehicle but don't want to have to sell any stocks. If I use a margin loan for this purpose, can I still write off the interest?

Unfortunately, no. In order for loan interest to be tax deductible, the borrowed funds must be used for an income-producing purpose.

"Obviously buying a car is for personal use and it is no way producing any income, so the person would not be successful in deducting that interest," said John Waters, head of tax and estate planning at BMO Nesbitt Burns.

One could argue that using a margin loan for personal use allows an investor to maintain stocks that he or she would otherwise have to sell, but the Canada Revenue Agency won't accept that explanation, he said. For the interest to be tax-deductible, there must be a "direct and current" use of borrowed funds for the purpose of earning income from a business or property, Mr. Waters said.

Otherwise, he said, people could borrow money for a vacation, renovation or other personal use and write off the interest on the grounds that the loan allows them to maintain their investment portfolio. But that would be a clear violation of the rules and established case law, he said.

An alternative approach would be to sell securities in your portfolio and use the proceeds to purchase a vehicle (be mindful of any capital gain or loss consequences). After an appropriate amount of time (at least 30 days to avoid the possible application of the "superficial loss" rules), you could then repurchase the dividend-paying shares by borrowing on margin in your non-registered account. This would establish a direct link to an income-producing purpose, which should make the interest on the loan deductible. However, there are some nuances, so be sure to speak to a tax professional before engaging in any strategy designed to achieve interest deductibility, Mr. Waters advises.

Could I ask your opinion on the Vanguard Total Stock Market ETF? I need some more exposure to the U.S. and this one looked pretty good.

VTI is attractive for a few reasons. It's very well diversified, giving you exposure to 3,772 publicly traded companies – virtually the entire U.S. market – including large-caps, mid-caps, small-caps and micro-caps. It's cheap to own, with a management expense ratio (MER) of just 0.05 per cent. And it sports a modest yield of about 1.7 per cent, calculated as dividends paid over the previous 12 months divided by the current share price.

One drawback for Canadian investors is that VTI trades on the New York Stock Exchange and is priced in U.S. dollars. So, unless you have a U.S. dollar account, you'll pay hefty currency conversion costs when you buy the fund and again when you sell it. On a round-trip, this can add about 3 per cent to your cost.

The good news is that you can minimize currency conversion costs by buying the Canadian version of the same fund. Vanguard Canada's U.S. Total Market Index ETF holds units of VTI but trades on the Toronto Stock Exchange and is priced in Canadian dollars. It's important to understand that VUN is not a currency-hedged fund; if the Canadian dollar rises, VUN will fall in price, all else being equal. But the currency conversion costs will be lower because the institutional market maker gets a much more favourable Canada-U.S. exchange rate than a retail investor.

The downside is that VUN has a higher MER of 0.17 per cent, but it might be worth it, given the currency savings. However, there's another thing to consider: If you hold VTI in a registered retirement savings plan or registered retirement income fund, there will be no U.S. withholding tax on the dividend, whereas VUN is subject to 15-per-cent withholding tax inside an RRSP or RRIF. In a TFSA, RESP or non-registered account, both ETFs are subject to the withholding tax.

If you're worried that the Canadian dollar might rebound from its current depressed levels – it closed Friday at 88¢ (U.S.) – Vanguard also offers a currency-hedged version of the ETF. Other ETF providers, including BMO and iShares, also offer a range of currency-hedged (and unhedged) products for the U.S. market.

However, as I've written before here, currency hedging doesn't always work as advertised, and there are costs involved.