The Canada Revenue Agency allows you to deduct interest only when borrowed money is used to earn "income from business or property." A TFSA earns no taxable income at all. An RRSP shelters income from tax until you withdraw it, and the Income Tax Act, Section 20(1)(c), requires a reasonable expectation of income for the deduction to apply. Neither account meets that test, so the interest on a $30,000 HELOC contribution to either becomes a personal expense.

What the Income Tax Act Actually Requires

Interest deductibility hinges on a direct link between borrowed funds and taxable income. The CRA calls this the "income-producing purpose test." If you borrow $50,000 at 4.95% and invest it in Canadian dividend-paying stocks in a cash account, the dividends are taxable, the purpose is documented, and the interest is deductible. The same $50,000 borrowed and contributed to a TFSA generates returns that are tax-free by design. No taxable income means no deduction.

RRSPs are trickier because they do produce income, but only when you withdraw. The CRA treats the contribution itself as a tax deferral, not an income event. You get a deduction for the contribution, which reduces your current-year tax, but the interest you pay on the loan used to fund that contribution does not qualify. The refund you receive from the RRSP deduction is often large enough to pay down the loan quickly, which is why banks market "RRSP catch-up loans" heavily in January and February. The loan can still be profitable if the refund arrives fast and the rate is low, but the interest itself is not deductible.

The HELOC Trap

Home equity lines of credit are cheap relative to personal loans, prime plus 0.5% is common, which sits around 4.95% in September 2026. That low rate makes them tempting for all kinds of uses, but the flexibility creates a documentation nightmare. If you use the same HELOC to pay for a kitchen reno, a car, and an RRSP contribution, the interest becomes "commingled," and the CRA will deny the portion attributable to non-income-producing uses. Advisors who run the Smith Manoeuvre™ recommend a separate sub-account for investment borrowing to avoid this problem entirely.

How to Make the Interest Deductible

If the goal is tax-efficient investing, the better move is to use cash for the TFSA or RRSP and borrow for a non-registered account instead. The net investment position is identical, you still own the same dollar amount of assets, but the interest on the loan is now deductible because the non-registered account produces taxable dividends, interest, or capital gains.

One warning: the investment must have a reasonable expectation of income. Buying a pure growth stock that has never paid a dividend and states it won't can lead to a denied deduction. The Supreme Court of Canada confirmed this in Ludco Enterprises Ltd. v. Canada. The safer path is a balanced portfolio of dividend-paying equities or income-generating fixed income.

Why People Get This Wrong

The refund illusion is powerful. A client contributing $15,000 to an RRSP at a 43% marginal rate receives a $6,450 refund, which feels like it offsets the loan cost. It does help, but only if the loan is repaid within 12 months. If the balance carries forward, the interest compounds without a tax shield, and the math deteriorates quickly.

The other mistake is assuming that because the Smith Manoeuvre™ exists, all HELOC-funded investment strategies are tax-deductible. The Smith Manoeuvre™ works because it converts non-deductible mortgage debt into deductible investment debt by borrowing against home equity and investing in non-registered accounts. The registered account version of this does not exist. You cannot "convert" mortgage interest into a deduction by routing the money through a TFSA.

If you want the deduction, the borrowed funds must land in a non-registered account, and the account must produce income that shows up on a T3 or T5. Anything else is a personal expense.