Should I borrow to max out my TFSA?

Borrowing at 4.45% to collect 6% inside a tax-free account looks like a clean spread. One rule removes most of the advantage, and three others decide whether what is left is worth the risk.

The pitch is easy to construct. A secured line of credit costs less than a good dividend fund yields, a TFSA taxes none of the income, and the gap is yours. On a $20,000 loan against a 1.5-point spread that is $300 a year of apparently free money.

The idea is not absurd. But there is one rule that changes the arithmetic before you start, and it is the thing most versions of this pitch leave out.

The rule that moves the break-even

Interest on money borrowed to invest inside a TFSA is not tax deductible.

Interest is deductible when it is incurred to earn income that is taxable. A TFSA produces no taxable income, so the deduction does not apply. The same is true of an RRSP.

Borrow to invest in a non-registered account and the interest generally is deductible. That changes everything:

Borrow at 4.45% for a TFSA and your real cost is 4.45%.
Borrow at 4.45% for a taxable account, at a 40% marginal rate, and your after-tax cost is about 2.67%.

So the comparison people run — tax-free income against a nominal borrowing rate — is the wrong one. The right one is tax-free income at full borrowing cost against lightly-taxed eligible dividend income at a discounted borrowing cost. Once you include the dividend tax credit on the non-registered side, the TFSA’s advantage narrows sharply and at some income levels reverses.

That comparison is almost never run, and it is the whole question.

A loan payment is contractual. A distribution is not.

The spread arithmetic treats both sides as fixed. Only one of them is.

Your lender will be paid on schedule regardless of what the fund does. The fund’s distribution is a decision it revisits, and high-yield funds revisit it more often than most. If the payment is cut 20% — an ordinary event in a downturn — the spread can invert, and you are covering the shortfall from your own income at the exact moment your portfolio is down.

A loss inside a TFSA is permanent

This is the asymmetry that makes leverage a poor fit for this particular account.

TFSA contribution room is consumed when you contribute, not when you profit. Put in $20,000, lose half, and you have $10,000 and no way to restore the room. You also cannot claim the capital loss against gains elsewhere, because there are no tax consequences inside a TFSA in either direction.

Do the same in a non-registered account and the capital loss at least offsets other gains.

So leverage — which widens outcomes in both directions — is being applied inside the one account where losses are least recoverable. That is backwards.

Repaying the loan can cost you the room

Sell inside the TFSA to repay the line of credit and you have made a withdrawal. Room comes back, but not until January 1 of the following year.

Re-contribute in the same calendar year and you have over-contributed, at 1% per month on the excess for every month it stays there. This is one of the most common TFSA penalties, and someone unwinding a leveraged position under pressure is exactly the person likely to walk into it.

The rate is not the rate you signed at

A secured line of credit is priced off prime, and prime moves. Prime has moved repeatedly in recent years — it stepped down through 2024 and 2025 and sits at 4.45% as of November 2025. It can step back up just as readily.

Your borrowing cost is variable. Your distribution is variable. A spread built from two variables is not a spread; it is a position with a directional bet inside it.

The loan spread calculator runs both sides against a rate you set, including whether the interest is deductible.

What would have to be true

For this to be a reasonable decision rather than a hopeful one:

The spread survives a 2-point rise in your borrowing rate.
It survives a 20% cut to the distribution.
You can service the loan from employment income, without relying on the distribution at all.
You have already compared it against the same borrowing done in a non-registered account, where the interest is deductible.
You are borrowing against a stable, income-producing holding — not a high-payout fund whose distribution is substantially return of capital, which is your own capital coming back and cannot service a loan indefinitely.

If all five hold, the case is defensible. If the plan depends on the distribution to make the payments, it is not a spread — it is a position that has to keep going up to stay solvent.

Where to go next

General information, not advice. Tax treatment depends on your circumstances and can change. Verify figures against the CRA and issuer documents before acting.