So I’m sitting here pondering the purpose of money and how it fits in the world.  My conclusions?  When it all comes down to it, money is meant to be spent, but we should be selective over what we spend it on.

Let me elaborate.  For me,  I’m a fairly frugal person who does not like to waste things…  food, clothes, energy, material things and especially money.  However, I believe that spending money has its place as well.

I believe in using money on things that provide “value”.   I’m not talking about Warren Buffet style investing, or even buying things on sale.  By value, I mean buying things that make your life better, or as Derek Foster would put it, life enhancing purchases.

That’s why I go skimpy on things that don’t bring me long term joy and spend a bit more on things that do.  “Value” will have a different meaning to each and every single one of you.  For me, an example would be my home.  We spent a bit more on our home as it was located in a great neighborhood for family.  For us, it was more important for our kids to grow up in a safe environment zoned for good schools than it was to save the extra money of living in a smaller/less expensive house.

I also put a lot of value in health.  You can’t put a price on eating healthier food along with regular exercise.  Even though the gym costs me money on a monthly basis, I enjoy working out in a gym and the health benefits are a bonus.

I sometimes get caught up in net worth building, whether it’s finding ways to make more money or ways to reduce our expenses.  In the big picture, money is neutral, it’s neither good or bad.  It’s simply the currency or tool used to trade for other things that you want/need.

So the next time your working on your budget, keep the items that make you genuinely happy, but cut back on expenses that don’t enhance your life.

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This is a guest post from The Canadian Tax Blogger who has taken the time to answer common reader questions regarding leveraged investing and filing income taxes.

The process of saving and investing can be a rewarding experience.  However, when it comes to taxes and reporting your savings to the CRA, the experience can be frustrating.

If you have used the Smith Manoeuvre to exchange your mortgage interest for investment interest, you may be wondering how to report the interest expense on your tax return.

Record Keeping

When it comes to personal finance, proper record keeping ensures that you can track progress towards your goals. When it comes to income tax, proper record keeping can help avoid the denial of a deduction and incur interest and penalties.

When you file your tax returns, you are not required to submit any documentation to the CRA to prove your claim for interest expenses. However, you must keep adequate records to support your claim in case the CRA asks to see them.

You must be able to show that the funds withdrawn from your line of credit was used to purchase investments. You can show this link by attaching the cancelled cheque from your line of credit to your brokerage statement or attach your bank statement showing the funds transfer from your line of credit to your brokerage account.

You also need to support your interest expense calculations. Attach copies of your line of credit statements along with a coversheet showing your calculations to your income tax return.

Maintaining proper records will ensure that you can quickly access your records and prove your claim at anytime.

Personal Use of Funds

When you borrow to invest in income producing properties, the interest you pay is tax deductible. However, interest used for personal purposes is not tax deductible.

It is important to ensure that when you use your line of credit to invest, that you avoid using it for personal purchases. Using your line of credit for personal purchases could result in your deduction being denied unless you can conclusively link the proportion of the line of credit to your investments.

It can be difficult to determine the proper proportion if there are a number of personal purchases on your line of credit. There is also a greater possibility for error. It is advisable that you use a second line of credit for personal purchases…or better yet, use cash!

Reporting Your Tax Return

You have assembled your bank statements and calculated your interest expense and now you are ready to claim the deductions on your tax return.

The deduction for interest paid on your investment loan is reported as “Interest Expenses” on Schedule 4 Part IV Line 221. The description should be “Investment Loan.” The total amount reported on Line 221 of
Schedule 4 is then recorded on Line 221 of the T1 Income tax and Benefit Return.

And that is it!

If you are unsure of what you can claim or what you can deduct, it is advisable that you speak with a tax professional.

Be sure to visit Canadian Tax Resource to read more on tax strategies and general information.

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