Question 1

What is an investment loan and how does it work?

Accepted Answer

An investment loan is money borrowed to buy investments in a non-registered account. You pay the interest every month (and sometimes part of the principal), and the investments are often pledged as collateral for the loan. If the investments' return after fees and tax exceeds the after-tax cost of the loan, the difference works in your favour; if not, or if markets fall, the loss is magnified because it also applies to the borrowed money. The loan and the interest remain owing even if the investments lose value (National Instrument 31-103, s. 13.13).

Question 2

Is investment loan interest deductible in Québec?

Accepted Answer

Federally, interest is deductible on line 22100 when the borrowed money is used directly to earn investment income (Income Tax Act, para. 20(1)(c)), with no cap tied to your investment income. In Québec, investment expenses (line 231) are deductible only up to your investment income for the year: the excess is added back to your income on line 260 (Schedule N), then carried forward. That carry-forward can be deducted on line 252 in a year when your investment income exceeds your expenses, for example the year you realize a capital gain (Taxation Act, ss. 313.10 and 336.5 to 336.7). The simulator applies both rules year by year, with 2026 tax parameters indexed each year to the inflation rate you enter.

Question 3

100%, 1:1, 2:1 or 3:1 loan: what's the difference?

Accepted Answer

The ratio tells you how much you borrow per dollar of your own investments. At 1:1, you borrow $1 for every dollar you invest yourself; at 2:1, $2; at 3:1, $3. A 100% loan finances the whole investment, with none of your own money. The higher the ratio, the larger the amount invested, the more both gains and losses are magnified, and the closer a given drop brings the loan-to-value ratio to the margin-call threshold. Thresholds, rates and terms vary by lender and contract; the simulator uses generic examples that you can change.

Question 4

What is a margin call and how big a drop triggers it?

Accepted Answer

A margin call happens when the loan-to-value ratio (loan balance divided by the value of the investments) exceeds the threshold set in the contract. The lender can then require a deposit, a partial repayment or the sale of investments, which locks in the loss. The drop that triggers the call depends on the starting ratio. For example, a 1:1 loan starts at a 50% loan-to-value ratio: with an 85% threshold, the call comes after a drop of about 41%. At 3:1, the starting ratio is 75%: with a 95% threshold, a drop of about 21% is enough. The simulator shows this cushion based on your numbers.

Question 5

What return do you need for an investment loan to pay off?

Accepted Answer

The investments' return, after fees and after tax, has to exceed the after-tax cost of the loan, over the whole period. That cost depends on your marginal rate and on Québec's limit: at a $100,000 income in 2026 (36.12% combined marginal rate), a 5.20% loan costs about 3.32% after tax if the interest is fully deducted in the same year, and about 4.31% if it is deducted only federally (carried forward in Québec). The simulator calculates the break-even return, the annual return before fees at which the estimated gap with and without the loan is zero. Future returns are hypothetical, not guaranteed.

Question 6

Can you borrow to contribute to a TFSA or RRSP and deduct the interest?

Accepted Answer

No. Interest on money borrowed to contribute to an RRSP, a TFSA, an FHSA or another registered plan is not deductible (Income Tax Act, subs. 18(11)). The deduction only covers money borrowed and used directly to earn investment income in a non-registered account, with a traceable use. That's why this simulator only models a non-registered account.

Question 7

Interest-only or principal and interest?

Accepted Answer

With an interest-only loan, the balance stays the same until the sale: monthly payments are lower, but the whole debt is still owed at the end. With a principal-and-interest loan, each payment repays part of the balance: payments are higher, the debt shrinks and the interest, and therefore the deduction, falls with it. Only the interest is deductible, never the principal repayment. For a fair comparison, the simulator assumes that, without the loan, you invest the same net cash outlay every year.

Question 8

Growth investment with no dividends: is the interest deductible?

Accepted Answer

Federally, the test is a reasonable expectation of income (dividends or interest), not just of a capital gain (Ludco, 2001 SCC 62; CRA Folio S3-F6-C1). The CRA generally accepts the deduction for common shares or funds that may pay dividends, but not for an investment that states it will not pay any (Folio S3-F6-C1, ¶1.70). In Québec, even when the interest is deductible, an investment with no distributions produces little investment income: the deduction is then mostly carried forward until the year you realize capital gains. Check your situation with a CPA or a tax specialist.

Question 9

Return of capital and investment loans: what's the catch?

Accepted Answer

Some funds pay return-of-capital (ROC) distributions. They are not taxed right away, but they reduce the adjusted cost base (ACB), which increases the taxable gain on sale; a negative ACB even triggers an immediate capital gain. More importantly, if you spend those ROC distributions on personal use, the matching share of the loan is no longer used to earn income, and the related interest stops being deductible (Folio S3-F6-C1, ¶1.40; Van Steenis, 2019 FCA 107). Reinvested or applied to the loan balance, ROC distributions generally preserve the deduction.

Question 10

What happens if the market drops 30% in the first year?

Accepted Answer

The loan doesn't shrink with your investments: the loss applies to the full amount invested, including the borrowed money. For example, with $50,000 of your own and $50,000 borrowed, a 30% drop takes the investment from $100,000 to $70,000: after subtracting the loan, your net position falls from $50,000 to $20,000 (−60%), versus $35,000 (−30%) without the loan. At 3:1, the same drop would push past the 95% margin-call threshold used as an example. The AMF suggests estimating the loss from a 30% drop before borrowing; the simulator shows this scenario by default, next to the base scenario.

Question 11

Investment loan, Smith Manoeuvre or refinancing: what are the differences?

Accepted Answer

All three involve borrowing to invest outside an RRSP or TFSA; what changes is where the money comes from. An investment loan is a separate loan, often secured by the investments themselves, with a margin-call risk. Mortgage refinancing uses the equity in your home, which then serves as collateral. The Smith Manoeuvre gradually converts your non-deductible mortgage into investment debt whose interest may be deductible. The same deductibility rules apply in all three cases (traceable use, Québec limit). CalculFinance has a simulator for each: refinancement.calculfinance.ca and smith.calculfinance.ca.

Question 12

Can the AMT reduce my deduction?

Accepted Answer

The alternative minimum tax (AMT) doesn't cancel your deduction, but it is calculated on a broader base: 50% of interest and carrying charges is disallowed and capital gains are included at 100%. In 2026, the exemption is $181,440 federally (20.5% rate) and $183,680 in Québec (19% rate). The risk is mostly concentrated in the year you sell with a large gain and little other income. AMT paid can generally be recovered over the following 7 years, to the extent that your regular tax then exceeds your minimum tax. The simulator shows an alert, with an order of magnitude, when your simulation appears to reach it.