"Consider these ideas to keep your interest deductible: Skim the interest, dividends, or other income from property (but not capital gains) from your leveraged investments before these amounts are reinvested, and spend this income in any way you'd like. This won't jeopardize your interest deduction because you're not dipping into your principal, or invested capital. However, once this income is reinvested in additional units or shares, it forms part of your capital, and you may run into an interest deductibility problem when you make withdrawals later."http://www.theglobeandmail.com/globe-in ... 0/?page=23
The above quote is from Tim Cestnick's 2010 "101 Tax Secrets for Canadians"
If one is using a margin loan to invest in stocks, you can take out the dividends, and still retain the tax deductibility of the interest. But based on the above, if you use the dividends to reinvest in the same margin account, then there may be an interest deductibility problem when you withdraw later on. Is this true? If so, then if you want to reinvest the dividends, you should withdraw the dividends and invest them in a separate account.