Example: Buying with Mixed Cash Sources
This walkthrough demonstrates how to handle purchases when your brokerage holds both borrowed cash and personal cash (like dividends). You'll see how the flexible tracing rule works and how it affects your deductible interest.
The Scenario
You've been investing for six months. Your brokerage now contains:
- $3,000 borrowed cash (from a recent advance)
- $800 personal cash (accumulated dividends)
You want to buy $3,500 worth of a new ETF. This is more than your borrowed cash alone, so you'll use a mix of sources.
Starting Balances
| Balance | Amount |
|---|---|
| Invested Principal | $25,000 |
| Uninvested Principal | $3,000 |
| Personal-use Principal | $0 |
| Total Credit Balance | $28,000 |
| Borrowed Cash | $3,000 |
| Personal Cash | $800 |
| Total Brokerage Cash | $3,800 |
Your existing investments have a total cost base of $25,000, all borrowed-funded.
Making the Purchase
On March 15, you buy 140 units of VFV at $25.00 per unit.
Event: Investment Purchase
- Date: March 15
- Symbol: VFV
- Units: 140
- Price per unit: $25.00
- Total: $3,500
- Borrowed amount: $3,000 (you choose to use all borrowed cash first)
What Happens:
- $3,000 comes from borrowed cash → becomes invested principal
- $500 comes from personal cash → funds personal portion of cost base
Balances After:
| Balance | Amount |
|---|---|
| Invested Principal | $28,000 |
| Uninvested Principal | $0 |
| Total Credit Balance | $28,000 |
| Borrowed Cash | $0 |
| Personal Cash | $300 |
| Total Brokerage Cash | $300 |
New VFV Holding:
| Attribute | Value |
|---|---|
| Units | 140 |
| Total Cost Base | $3,500 |
| Borrowed Cost Base | $3,000 (85.7%) |
| Personal Cost Base | $500 (14.3%) |
Why This Allocation?
The CRA's flexible tracing rule (Folio S3-F6-C1, ¶1.42) lets you choose which funds pay for each purchase when cash is commingled. By specifying $3,000 borrowed, you:
- Maximized invested principal — All $3,000 of borrowed cash is now invested
- Preserved some personal cash — You still have $300 for future needs
- Created a mixed-funding holding — VFV is 85.7% borrowed, 14.3% personal
Alternative: Different Allocation
What if you wanted to use only $2,000 of borrowed cash and $1,500 of personal cash?
Event: Investment Purchase
- Same as above, but...
- Borrowed amount: $2,000
Result:
- Uninvested Principal: $1,000 (still borrowed, not yet invested)
- Personal Cash: $0 (you used more personal)
- VFV Borrowed Cost: $2,000 (57.1%)
- VFV Personal Cost: $1,500 (42.9%)
This would leave borrowed cash sitting uninvested, which might make sense if you plan to buy another security soon.
Impact on Future Interest
Let's say you receive a $280 interest charge next month.
With the first allocation (all borrowed invested):
- Invested: $28,000
- Uninvested: $0
- Deductible ratio: 100%
- Deductible interest: ~$280
With the alternative allocation ($1,000 uninvested):
- Invested: $27,000
- Uninvested: $1,000
- Deductible ratio: ~96.4% (if uninvested is treated as non-deductible)
- Deductible interest: ~$270
The difference is small, but over time and larger amounts, maximizing invested principal increases your deductible interest.
Impact on Future Sales
When you eventually sell VFV, the proceeds split based on the borrowed/personal ratio you established at purchase.
Scenario: You sell all 140 units for $4,000 (at a gain).
With 85.7% borrowed allocation:
- Cost base removed: $3,500
- Borrowed cost removed: $3,000
- Gain: $500
- Proceeds split:
- Borrowed cash: $3,000 (return of borrowed capital)
- Personal cash: $1,000 ($500 personal capital + $500 gain)
With 57.1% borrowed allocation:
- Cost base removed: $3,500
- Borrowed cost removed: $2,000
- Gain: $500
- Proceeds split:
- Borrowed cash: $2,000
- Personal cash: $2,000 ($1,500 personal capital + $500 gain)
The first allocation returns more borrowed cash, keeping more capital available for deductible reinvestment.
Adding to the Position Later
Suppose next month you have another $2,000 borrowed cash and want to buy more VFV.
Event: Investment Purchase
- Date: April 20
- Symbol: VFV
- Units: 76
- Total: $2,000
- Borrowed amount: $2,000
Combined VFV Position After:
| Attribute | Value |
|---|---|
| Units | 216 (140 + 76) |
| Total Cost Base | $5,500 ($3,500 + $2,000) |
| Borrowed Cost Base | $5,000 ($3,000 + $2,000) = 90.9% |
| Personal Cost Base | $500 (unchanged) = 9.1% |
Your second purchase was 100% borrowed, so it increased the borrowed percentage of your overall position.
Key Takeaways
- You control the allocation. When cash is commingled, you decide which source funds each purchase.
- Defaulting to borrowed-first usually makes sense. This maximizes invested principal and deductible interest.
- The allocation is locked at purchase. Once you specify the borrowed amount, that's how the position is tracked forever (until sold).
- Mixed positions split proportionally on sale. Gains go to personal; capital returns to its original source (borrowed or personal).
- Adding to positions blends the ratios. Multiple purchases at different borrowed percentages create a weighted average.