Deductible Interest Tracker

Credit Payment

Use this event when you make a payment to your credit account from external funds.

When to Use

Record this event when you make a payment to your HELOC or line of credit. This includes regular monthly payments, lump sum payments, or any reduction of your credit balance using money from outside your tracked accounts.

Do not use this event for Interest Capitalization (paying interest by borrowing more from the same account). Use "Interest Capitalization" for that scenario.

What You Enter

Date — The date the payment was applied to your credit account.

Amount — The payment amount.

What Happens

Payments are applied in a specific order and allocated proportionally. Understanding this is essential for accurate tracking.

Step 1: Pay Outstanding Interest

If you have any outstanding interest (charged but not yet paid), your payment goes here first. The payment is split proportionally between deductible and non-deductible interest based on their relative amounts.

Credit Account:

  • Outstanding Eligible Interest decreases proportionally
  • Outstanding Non-Eligible Interest decreases proportionally

The interest you pay becomes your deductible interest for tax purposes. This is when interest transitions from "charged" to "paid."

Step 2: Pay Principal

Any payment remaining after settling interest is applied to principal. Here's the crucial rule: principal payments are allocated proportionally across all debt categories based on their current balances.

You cannot choose to pay down only the non-deductible portion first. The CRA requires proportional allocation.

Credit Account:

  • Invested Principal decreases proportionally
  • Capitalized Deductible Interest decreases proportionally
  • Uninvested Principal decreases proportionally
  • Personal-use Principal decreases proportionally
  • Capitalized Non-Deductible Interest decreases proportionally

Impact on Brokerage Cash

When principal payments reduce uninvested principal, the corresponding borrowed cash in your brokerage is reclassified:

Brokerage Account:

  • Borrowed Cash decreases by the amount applied to uninvested principal
  • Personal Cash increases by the same amount

This might seem odd—why does personal cash increase? Because the borrowed cash is being "paid off" by your external payment. The cash that was borrowed is now effectively replaced by cash that's yours.

Impact on Holdings

When principal payments reduce invested principal, the borrowed cost base of your securities is reduced proportionally. Each holding's borrowed allocation decreases by its share of the total invested principal.

Holdings:

  • Borrowed Cost Base decreases proportionally across all holdings
  • Personal Cost Base increases by the same amounts

Again, this reflects that part of what was borrowed is now paid off—the funding of your securities shifts from borrowed to personal.

Example: Payment Applied to Interest Only

You have $50 in outstanding eligible interest and $20 in outstanding non-eligible interest. Your total debt is $10,000. You make a $70 payment.

Event: Credit Payment

  • Amount: $70
  • Date: January 15

Calculation:

  • Total outstanding interest: $70
  • Payment covers interest exactly
  • Eligible portion: $50 / $70 = 71.4%
  • Non-eligible portion: $20 / $70 = 28.6%

After:

  • Outstanding Eligible Interest: $0
  • Outstanding Non-Eligible Interest: $0
  • Deductible Interest Paid YTD increases by $50
  • Principal balances unchanged

Your $70 payment settled all outstanding interest. For tax purposes, you paid $50 of deductible interest.

Example: Payment Applied to Interest and Principal

You have $40 in outstanding interest (all eligible) and $10,000 in principal: $7,000 deductible (70%), $3,000 non-deductible (30%). You make a $540 payment.

Event: Credit Payment

  • Amount: $540
  • Date: January 15

Calculation:

  • First $40 pays outstanding interest
  • Remaining $500 pays principal
  • Principal allocation: 70% to deductible ($350), 30% to non-deductible ($150)

After:

  • Outstanding Eligible Interest: $0
  • Deductible Interest Paid YTD increases by $40
  • Deductible Principal decreases by $350
  • Non-Deductible Principal decreases by $150
  • Total Debt: $9,500

You paid $40 of deductible interest and reduced your debt by $500, split proportionally.

Example: Impact on Holdings

Your debt includes $5,000 invested principal across two holdings:

  • XAW: $3,000 borrowed cost (60% of invested principal)
  • VFV: $2,000 borrowed cost (40% of invested principal)

A $1,000 principal payment reduces invested principal by $700 (assuming 70% of total principal is deductible and invested).

Distribution to holdings:

  • XAW borrowed cost decreases by $420 (60% of $700)
  • VFV borrowed cost decreases by $280 (40% of $700)

The holdings' personal cost bases increase by the same amounts, reflecting that the payment "replaced" borrowed funding with your own funds.

The Proportional Allocation Rule

This rule is not optional—it's how the CRA interprets mixed-use credit accounts.

From Income Tax Folio S3-F6-C1, paragraph 1.43: When a single borrowing account is used for both eligible and ineligible purposes, repayments reduce both portions proportionally. You cannot selectively pay down only the non-deductible debt.

This means if you want to maximize deductible interest, you should:

  1. Avoid borrowing for personal use on the same credit line you use for investing
  2. If you must have mixed debt, understand that payments reduce both portions

Some investors maintain separate credit lines for investing versus personal use to avoid this mixing.

Common Questions

What if I want to pay off only non-deductible debt? You can't—not on a mixed-use account. The CRA requires proportional allocation. To pay down non-deductible debt faster, you'd need a separate credit account for personal borrowing.

How does this affect my cost base for taxes? Paying down borrowed principal reduces the borrowed cost base of your holdings. When you eventually sell, a higher proportion of proceeds will be personal (taxable gain) versus return of borrowed capital. The effect is usually small but tracked accurately.

What if my payment exceeds my total debt? The app prevents payments larger than your outstanding balance. If you're trying to record a payment that exceeds your debt, check that you haven't missed recording some borrowing.

Should I record minimum payments? Yes. Every payment affects your tracking. Even if the payment only covers interest, it establishes when that interest was paid (which matters for tax timing).

CRA Basis

Income Tax Folio S3-F6-C1, paragraph 1.43, explicitly addresses repayment of mixed-use credit:

"The flexible approach described in paragraph 1.42 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."

The app implements this by proportionally allocating all principal payments across deductible and non-deductible debt pools.

Related Events

Interest Charge — Creates the outstanding interest that payments settle.

Interest Capitalization — If you're paying interest by borrowing more, use that event instead.

Borrowing To Invest — After paying down, you might borrow again for new investments.