Deductibility of interest income

Husband and wife have a joint investment portfolio with their bank. They were given a margin loan against the portfolio and reinvested the proceeds with the same bank.

They also have a Holding Company (25% shareholder each with each of the adult children also owning 25%). The HoldCo also has an investment portfolio with the same bank. The HoldCo was also given a margin loan against its investments and used the proceeds to reinvest with the bank.

Taxpayers own their home free and clear. The bank has offered them a Line of Credit against their home at a lower rate so that they could pay off both margin loans.

Am I correct in assuming that only the interest on the portion used to pay off the personal loan will be tax deductible?

Could they not charge their corporation the prescribed rate, report the interest income they receive from their corporation on their personal tax return, and then claim the interest they pay the bank on their line of credit as interest expense? They will certainly lose money, but looking at Folio S3-F6-C1, I can’t find anything saying that the investment has to be profitable, or even that there has to be an expectation of profitability.

Any thoughts (or solutions)?

Thank you.

This is a very classic example, that you will see again and again if you gone through the CPA program. And why attribution, TOSI, those rules come in stronger and stronger.

Also, if they are using a HELOC, they best not intermingle investment funds with borrowing to buy a motorhome or doing home renovations from the same HELOC.