Interest expense on money borrowed to
purchase investments - can I write it off?
ITA S. 20(1)(c)
You can deduct interest and carrying charges incurred to earn
income from securities, bonds
and other investments, if they are earning investment income. The requirement of earning
income generally means that the investments should be paying
interest or dividends. If an
investment will never earn anything except capital gains, then the interest
expense is not deductible. If an investment such as
common shares is
not currently paying dividends, Canada Revenue Agency (CRA)
will still normally allow the deduction of interest expense, if the shareholder has a reasonable expectation of
receiving dividends at some time in the future.
However, if a corporation has a stated policy that it will
not pay dividends, then interest on money borrowed to purchase these shares will not be tax
deductible. Some corporations may not pay dividends
because they prefer to reinvest earnings in the company, or
repurchase their own shares, which would theoretically raise
the market value of the shares. Therefore, the
shareholders would have capital gains instead of dividends.
Where the interest expense exceeds the income from the investment, the interest expense will normally still
be tax deductible.
You must be able to trace borrowed money directly to
the purchase of the income-producing investments. It
is important to keep a clear paper trail of the use of
borrowed money.
Borrowing money to purchase securities such as stocks and
bonds is one of the factors that is considered by
Canada Revenue Agency in determining whether the taxpayer's
gains and losses from the sale of securities are to be
treated as income or capital. See our article on the tax
treatment of investments for more information on this.
If the interest expense exceeds income for the year, this
becomes a non-capital loss,
which can be carried back to previous tax years, or forward to future tax years.
Interest may still be deductible when the securities purchased with the borrowed
money is no longer owned.
Let's use an example of a taxpayer who uses $10,000 of
borrowed money to purchase shares in a corporation.
The shares are subsequently sold at a loss, with
the entire debt still outstanding.
the shares are sold for $6,000, and the proceeds are
used to buy another income-producing property
the interest on the entire $10,000 will still be
deductible
the shares are sold for $6,000, and the proceeds are
used to buy personal property
the interest on $6,000 is no longer deductible,
but the interest on $4,000 is still deductible
the shares are sold for $6,000, and the proceeds are
used to pay down the debt
the interest on the remaining $4,000 of debt is
still deductible
the shares have become worthless due to the bankruptcy
of the corporation
the interest on the entire $10,000 of debt is
still deductible
Tax Tip: Keep good
records of all transactions!
Deductible carrying charges
or investment expenses include the following, if the cost has
been incurred in order to earn income from your investments:
safety deposit box fees incurred for the safe-keeping
of your investments
fees paid for the management of your investments
fees paid to investment counsel (other than
commissions) for advice regarding the purchase or sale
of a particular share or security, or for the management
and administration of your investments.
The fees must be paid to a person whose principal
business:
is advising others on whether to buy or sell
specific shares, or
includes the administration or management of
shares or securities
the cost of having your tax return prepared, only if
you had income from business or property (includes
income from securities),
you did not already use the cost to reduce your business
or property income, and
keeping accounting records was a usual part of
your business or property operations
Non-deductible interest, carrying charges and investment
expenses include
fees paid for general financial planning
administration fees paid for registered accounts
such as RRSPs
interest on money borrowed to contribute to RRSPs or
DPSPs. However, if investments are purchased with
borrowed money in a non-registered account, and
transferred to the RRSP after the loan is repaid, the
interest is tax deductible. If part of the loan is still outstanding
when the investments are transferred to an RRSP, the interest is no longer
deductible.
brokerage fees or commissions paid when buying or
selling securities. These costs either
reduce the proceeds from securities sold, or increase
the cost of securities purchased.
interest on money borrowed to purchase a life insurance
policy
subscription fees paid for financial magazines,
newspapers or newsletters
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