relating to the preparation of tax schedules for investment income
Investment counsel fees.
These do not include commissions paid on buying or selling investments.
These commissions form part of the adjusted cost base of the investment or
reduce proceeds of disposition from the investment on Schedule 3.
Taxable benefits reported on the T4 Slip for employer-provided loans
that were used for investment purposes. (Again, these are often missed: Ask
your tax specialist about this if you have been fortunate enough to receive
this perk of employment).
Life insurance policy interest costs if an investment loan
was taken against cash values. To justify the claim, complete form T2210 –
Verification of Policy Loan Interest by Insurer.
Management or safe custody fees
(but not a bank safety deposit box, which is no longer tax deductible after
Interest paid on investment loans
if there is a reasonable expectation of income from the investment, even if
the value of the investment has diminished. For this reason, these
investment expenses are often audited. You must, therefore, be prepared to
trace all interest you have claimed back to a non-registered investment
that has the potential to earn income. It makes sense to make all the right
tax moves, in other words, but to be audit-proof, too.
Diminished value in assets.
Have your assets diminished in value since you acquired them with a loan?
Will your interest still be deductible in that case? The answer is yes. You
can continue to deduct the interest until the loan is fully repaid, even if
you sell the assets. If you did not use the proceeds to pay down the loan,
then you can deduct only the portion of interest that would have been paid
had you done so.
Carrying charges that aren’t deductible
Loans taken to earn capital gains in non-registered investment
Much to the surprise of many investors, these types of loans are
specifically excluded from the list of investments for which interest costs
incurred will be deductible. Interest will not deductible unless you
acquire an income-producing asset with the potential to earn
income from property – interest, dividends, rents or royalties. That’s
right: “potential.” That means it doesn’t have to produce income every
Borrowing to invest in registered accounts.
Interest on loans used for the purposes of investing in a registered asset
– an RRSP, TFSA, RESP, or RDSP – is also not deductible. Nor is interest
paid on a tax-exempt property, like your principal residence, unless there
is an expectation rental income will be earned. This means that you’ll have
to divide up the costs if one loan covers all your investing activities.
Should you leverage your assets to invest more?
Many investors wonder if they should leverage existing capital assets in
order to invest more into the marketplace. Often, they are approached to
consider different leveraged loan arrangements, particularly if they
believe they have not saved enough for retirement.
Be sure to crunch the numbers over the life of the loan. The potential for
investment income must be present, and you will need to make arrangements
to pay off your interest (before tax) and pay back the principal.
This requires cash flow – so where do you find the money? You can turn to
your income tax refund for some of it. However, it’s essential to keep in
mind that the investment must also be able to pay real dollars on a
guaranteed basis before your risk can be properly assessed. Otherwise you
will have to dip into other funds to pay off your loans. Make sure that you
assess these possibilities with your financial advisor, so that you can
sleep at night.
A keen focus on financial planning now will help you ensure that you
incorporate tax-efficient strategies for both borrowing and investing in
2018 and avoid the trap of expensive overdue balances to both CRA and your
bankers. You don’t want recent interest rate increases to have a negative
impact on your financial plans in 2018 and beyond.
© 2018 The Knowledge Bureau, Inc. All rights reserved. Reprinted with
Evelyn Jacks is the founder and President of Knowledge Bureau, which
brings continuing financial education in the multiple areas of
specialization to advisors and their clients. She is the author of 52
books on tax and wealth planning. This article
originally appeared in the
Knowledge Bureau Report. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Evelyn Jacks’ latest book,
NEW ESSENTIAL TAX FACTS: How to Make the Right Tax Moves and Be
Audit-Proof, Too is available for pre-order now.
Notes and Disclaimer
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.