Interested in a Home Equity Line of Credit in Ontario?

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If you’ve taken out a Home Equity Line of Credit (HELOC) or are thinking about getting one, you might be wondering if the interest you pay on that loan is tax-deductible in Canada.

The short answer is: sometimes—but not always.

Unlike the U.S., where mortgage interest on your primary home is often tax-deductible, Canada’s rules are a little stricter. The Canada Revenue Agency (CRA) only allows you to deduct interest in specific situations—and it depends on how you use the money you borrow.

This article will walk you through how HELOC interest works, when it’s deductible, and what you need to know if you’re planning to use a HELOC for investing, renovations, or debt consolidation.

What is a HELOC Again?

Just to make sure we’re on the same page—here’s a quick recap.

A HELOC is a revolving line of credit secured by your home. It’s different from a traditional loan because:

You can borrow money, pay it back, and borrow again—like a credit card.

You only pay interest on what you actually use, not your full credit limit.

Interest rates are usually variable and tied to the bank’s prime rate.

Many Canadians use a HELOC to fund renovations, consolidate debt, cover emergencies, or even invest. But just because you use your HELOC doesn’t mean the interest is automatically tax-deductible.

Rule: Interest is Deductible If Used to Earn Income

Here’s the key rule from the Canada Revenue Agency (CRA):

“Interest on borrowed money is tax-deductible if the borrowed funds are used to earn income.”

This means if you use your HELOC to invest in something that generates income, like stocks, mutual funds, or a rental property, then the interest you pay can be written off as a tax deduction.

But if you use the money for personal purposes—like paying off credit cards, buying a car, or doing home upgrades—you can’t deduct the interest.

Let’s look at both situations more closely.

Using a HELOC for Personal Expenses (Not Deductible)

Let’s say you use your HELOC for:

Renovating your kitchen or bathroom

Paying off your high-interest credit cards

Booking a family vacation

Helping your child with tuition

Covering emergency expenses

All of these are personal uses. Even though they may be financially helpful or smart, the CRA doesn’t allow you to deduct the interest on these types of expenses.

Example:

You borrow $40,000 from your HELOC to renovate your home.

Your interest rate is 6.5%, and you pay about $2,600 in interest over the year.

You can’t claim that $2,600 on your tax return—it’s a personal expense.

So, just owning a HELOC doesn’t give you a tax break. It depends entirely on how the borrowed funds are used.

Using a HELOC for Investments (Deductible)

Now let’s say you borrow money from your HELOC to invest in income-generating assets. That could include:

Buying dividend-paying stocks

Purchasing mutual funds or ETFs

Buying a rental property

Investing in a small business (in some cases)

If your goal is to generate income, and the investment is expected to produce interest, dividends, or rental income, then the interest on the borrowed funds is tax-deductible.

Example:

You borrow $50,000 from your HELOC to invest in blue-chip dividend stocks.

You pay $3,250 in interest during the year.

You can deduct that $3,250 from your taxable income as an investment expense.

This strategy is often used by investors to increase their returns after taxes—but it must be done carefully and with a clear paper trail.

The CRA Wants Proof—Keep Your Records Clean

If you want to deduct interest from your HELOC for investment purposes, you must keep good records. The CRA is very specific about this.

You’ll need to clearly show:

Where the money went (e.g. to your investment account or to pay for a rental property)

That it was used for income-producing purposes (not for personal use)

That the borrowed funds and any repayments are tracked separately

One common mistake is mixing personal and investment use within the same HELOC account. If you do that, it becomes very hard (and sometimes impossible) to prove how much interest qualifies for a deduction.

To stay safe:

Use a separate sub-account or portion of your HELOC for investments only.

Avoid using that same portion for personal spending.

Track your withdrawals and repayments with clear labels.

Many people use a dedicated investment HELOC or set up a separate account for this reason.

Investments That Qualify for Interest Deduction

To deduct HELOC interest, your investment must be income-generating. That means it needs to produce:

Interest

Dividends

Rental income

Business income

Qualifying Examples:

Publicly traded stocks or ETFs that pay dividends

Mutual funds that distribute interest or capital gains

Real estate rental properties

Private loans where you charge interest

Equity investments in a small business that generates income

Not Qualifying:

Investments that don’t pay income (e.g. gold bars, cryptocurrency with no yield)

Primary residence or vacation property

Tax-Free Savings Account (TFSA) contributions (interest is not deductible if the income is tax-free)

RESPs and RRSPs (HELOC interest is not deductible when borrowed funds are used for these accounts)

So, even if you’re “investing,” the CRA will not allow the interest deduction if the asset doesn’t produce taxable income.

Common Mistakes That Can Cost You

There are a few ways you could lose your tax deduction, even if you had good intentions:

1. Mixing personal and investment use

If you use the same HELOC for both personal spending and investing, and you don’t separate the transactions clearly, the CRA may deny the entire deduction. Once the line gets blurred, it’s hard to trace which interest is tied to investments.

2. Using borrowed funds for registered accounts

Using your HELOC to contribute to your TFSA or RRSP? That’s not tax-deductible. Even if the investments inside those accounts earn income, you’re not allowed to deduct the interest on borrowed funds used for registered accounts.

3. Investing in something that doesn’t generate income

If you buy stocks that don’t pay dividends (like growth stocks), the CRA may deny the deduction unless you can prove you reasonably expected to earn income.

4. Making principal repayments incorrectly

If you repay your HELOC and then borrow again for personal use from the same account, the investment link is broken. The interest becomes non-deductible. This is why tracking is so important.

Is Using a HELOC to Invest a Good Idea?

That depends on your risk tolerance, financial goals, and ability to repay the borrowed funds—even if your investments drop in value.

Pros:

Potential to grow wealth faster using leverage

Tax-deductible interest can improve your after-tax returns

Flexible access to capital

Cons:

Risk of investment losses while still owing interest

Variable rates mean your costs could rise

Your home is collateral—missed payments could lead to serious consequences

Using a HELOC to invest can be a smart strategy, but it’s not for everyone. Make sure you understand the risks and how it fits into your long-term plan.

Is HELOC Interest Tax-Deductible in Canada?

In Canada, HELOC interest is only tax-deductible when the borrowed funds are used to earn income. That usually means investing in assets that generate dividends, interest, or rental income.

You can’t deduct interest if you use the HELOC for personal spending, renovations, or even contributing to a TFSA.

To qualify for the deduction:

Use the HELOC strictly for income-generating investments

Keep clean records and separate accounts

Avoid mixing personal and investment transactions

If you’re unsure whether your situation qualifies, or if you’re planning to borrow to invest, it’s best to talk to a tax advisor or mortgage professional. They can help you structure things properly and avoid costly mistakes.