Deductibility of interest expense

If you borrow money to buy an income earning investment, interest expense incurred is deductible. Income for this purpose includes dividends and interest, but not capital gains. Consult your accountant for any tax implications regarding interest deductibility.

Interest on money you borrow to contribute to a registered retirement savings plan (RRSP), registered pension plan (RPP), tax-free savings account or for the purchase of personal assets such as your home or cottage, is not deductible. To deduct interest expense you need to have an income purpose. Any income obtained inside one of the above registered accounts is not taxable, therefore any interest expense incurred is not deductible.

Interest expense on money you borrow to buy common shares is generally deductible whether or not you actually receive any dividends. The reason for this is that common shares have the potential for paying dividends. Your accountant can advise you on tax implications regarding purchase of common shares.

TIPS & TRAPS

  • use your funds to pay down personal debt first (i.e. mortgages) before investment-related debt;
  • consider converting non-deductible interest into deductible interest by paying down personal loans and then borrowing for investment or business purposes. We have blogged in the past about how to make your mortgage tax deductible;
  • to reduce the cost of non-deductible debt, pay off your most expensive debt first. Consider refinancing expensive credit cards with a less expensive personal line of credit. With interest at an all-time low you can consider refinancing your mortgage and include expensive debt balance into your mortgage;

Your accountant provides tax advice regarding deductibility of interest expense and tax strategies to minimize the interest cost of borrowing.