First, the interest costs must be payable during the taxation year in
question. Secondly, those costs must be reasonable. Finally, (and most
importantly), the borrowed money must be invested to earn business income
(considered to be “active” in nature) or income from property (considered
to be “passive” in nature).
What interest you can deduct…
The deduction for interest expenses is possible even if the underlying
asset has not produced profits yet. There simply needs to be the potential
to earn qualifying income like interest, dividends, rents, or royalties.
If you dispose of an investment that you borrowed money to invest in and it
has lost significant value, you may continue to write off the interest on
the loan as if the underlying asset still existed. But the original asset
must be traceable to the loan. If you dispose of the asset at a loss, or
the asset no longer exists, you may continue to write off the interest
costs so long as the proceeds were used to pay down the loan amount.
…and what you cannot
What expenses can’t be claimed? The government won’t let you deduct the
interest on loans used to fund registered investments. So, you’re out of
luck if you borrow money to invest in your workplace pension plan, an RRSP
(Registered Retirement Savings Plan), a PRPP (Pooled Retirement Pension
Plan), an RESP (Registered Education Savings Plan), or a RDSP (Registered
Disability Savings Plan).
An exception is interest paid on loans that are used to top up past service
contributions to a registered pension plan, such as your workplace defined
benefit or defined contribution pension plan. These costs may be deducted
as part of the RPP contribution.
Another red flag: Don’t deduct interest on loans you took to acquire assets
that produce tax-exempt income, such as your TFSA (Tax Free Savings
Account) or your principal residence.
Similarly, you generally cannot claim interest on a loan used to make life
insurance premium payments. But an exception exists if the policy is used
as collateral for a business loan and the beneficiary is the lender. Check
this out with a tax services specialist.
Finally, remember this important principle: Investments in assets that
produce only capital gains are excluded from the definition of qualifying
income for the purpose of interest deductibility. For example, if you
acquire common shares from a company that has stated it will not issue
dividends, you may not be able to deduct interest on any money you borrow
to purchase those shares. That’s a trap for many investors in an audit. If,
however, there is a possibility that dividends may be paid in the future,
deductibility of the interest costs on the loan is legitimate.
The bottom line
If you have borrowed to invest, or paid investment counsel fees, chances
are you’ll have a deduction against all other income as a carrying charge
on Line 221. But to make it real, you have to make the loan traceable to
is the founder and President of Knowledge Bureau. This
originally appeared in the
Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All
rights reserved. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Her latest book,
Family Tax Essentials
, is now available.
Notes and Disclaimer
©2017 by Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. No guarantee of investment performance is made or implied.
It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.